Why IFRS and IAS 1
WHY IFRS
IFRS aim: provide a set of internationally recognized accounting standards to make the preparation and sharing of financial information reliable, efficient, and transparent with financial markets.
Comparability across borders: IFRS facilitates comparability of financial reporting for companies in the same sector on an international level.
Efficiency and risk assessment: Helps in listing on regulated markets, facilitates entry of new investors, and provides more transparent reporting to international investors for better risk assessment.
Tax considerations: In Italy, accounting records kept under IFRS can be used as the basis for calculating income taxes.
Convergence with US GAAP: IFRS supports convergence efforts to improve internal reporting efficiency.
Practical implications: Adoption supports transparency and reliability of financial information shared with markets.
WHY IFRS AND IAS 1 – SUMMARY OF KEY POINTS
IFRS supports the goal of reliable, efficient, and transparent financial reporting for international markets.
IAS 1 provides the overarching framework for presenting financial statements (structure, minimum content, classification, and disclosure).
The content on this deck emphasizes the importance of IAS 1 as the foundation for financial statements prepared under IFRS.
STANDARD SETTING PROCESS
An overview of how IFRS standards are developed and issued.
Stages include: Programme consultation, Information request, Research programme, Discussion Paper, Research (3-5 years), Accounting Standard Programme Proposal, Draft Proposal, Definitive IFRS, Implementation, Interpretation/Modification, Post-implementation review.
The process emphasizes thorough research and stakeholder input before finalizing standards.
IASB AND ENDORSEMENT PROCESS
IASB (International Accounting Standards Board): independent standard-setting body of the IFRS Foundation; holds public meetings.
When a new standard is issued, the EU must endorse it for use in the EU.
Endorsement process is overseen by Regulation (EC) No 1606/2002 with involvement from:
European Commission (EC): responsible for endorsement and drafting regulations.
European Financial Reporting Advisory Group (EFRAG): provides advice to the EC.
Accounting Regulatory Committee (ARC): composed of EU-member representatives and chaired by the EC.
Endorsement steps (simplified):
1) IASB adopts a new standard or amendment; 2) EFRAG provides advice to the EC; 3) EC drafts a regulation; 4) ARC opinion obtained; 5) European Parliament and Council scrutiny; 6) If positive, the Commission adopts the regulation; 7) An amending regulation is published for all EU countries.
ENDORSEMENT PROCESS – DETAILED STEPS
The EC adopts the endorsed regulation only if there are no objections from the European Parliament or the Council.
Endorsement requires ARC positive opinion before submission to Parliament and Council for scrutiny.
Each new standard endorsed at the EU level triggers an amending regulation applicable across the EU.
IFRS AREA OF APPLICATION IN ITALY
Based on Decree 38/2005 and amendments:
Entity vs Consolidated FS vs Statutory FS distinctions.
Listed entities, banks, SIM, SGR, and supervised financial institutions have mandatory IFRS.
Listed Insurance companies: Mandatory IFRS only if consolidated FS are required; otherwise IFRS is forbidden if not required.
Subsidiaries and associates of the above entities: Optional IFRS.
Other entities (with some exceptions): Optional IFRS.
This demonstrates how local regulation interacts with IFRS adoption in different entity types.
PURPOSE OF IAS 1
Objective: The financial statements are intended to provide information about the entity’s financial position, financial performance, and cash flows that is useful to a wide range of users for economic decisions.
IAS 1 sets the overall structure and minimum content for financial statements to ensure comparability and understandability.
IAS 1 – SCOPE AND APPLICATION (TEMPERATURE TEST)
IAS 1 applies to all types of entities.
It applies to consolidated financial statements (IFRS 10) and to separate financial statements (IAS 27).
COMPLETE SET OF FINANCIAL STATEMENTS (IAS 1 CONTENT)
A complete set comprises:
A statement of financial position (balance sheet) as at the end of the period.
A statement of profit or loss and other comprehensive income for the period.
A statement of changes in equity for the period.
A statement of cash flows for the period.
Notes comprising significant accounting policies and other explanatory information.
Comparative information for the preceding period, including narrative disclosures where relevant to understanding the current period statements.
A balance sheet as at the beginning of the preceding period in limited circumstances (see IAS 8 and IFRS 1).
IAS 1 provides guidance on the overall structure and minimum requirements for every primary financial statement and notes; other standards supplement these requirements.
FIRST THINGS FIRST: SCOPE OF IAS 1 APPLICATION
IAS 1 applies to all types of entities, including:
Consolidated FS as per IFRS 10.
Separate FS as per IAS 27.
The standard governs the presentation of financial statements, not the measurement rules (these come from other IFRS standards).
ASSETS AND LIABILITIES – BALANCE SHEET STRUCTURE (MINIMUM CONTENT)
Balance sheet should present at minimum:
Assets: e.g., Property, plant and equipment; Investment properties; Intangible assets; Financial assets; Equity-method investments; Inventories; Biological assets; Trade and other receivables; Cash and cash equivalents; Held-for-sale assets under IFRS 5.
Liabilities: e.g., Trade and other payables; Provisions; Financial liabilities; Current and deferred tax assets/liabilities; Liabilities in disposal groups held for sale under IFRS 5; Non-controlling interests within equity; Issued capital and reserves attributable to owners of the parent.
Totals: TOTAL ASSETS and TOTAL LIABILITIES.
Entities may add line items where IFRS requires or when the size, nature, or function of an item necessitates separate presentation for clarity.
Illustrative balance sheet layout emphasizes the need for clear integration of assets and liabilities with equity at the bottom.
EXPENSES CLASSIFICATION: BY NATURE AND BY FUNCTION
By nature (examples):
Revenues; Changes in inventories of finished goods and work in progress; Raw materials and consumables used; Employee benefit costs; Depreciation and amortization; Impairment losses; Share of P/L of investments accounted for using the equity method; Financial costs and interest revenues; Gains/losses from remeasurement or derecognition of financial assets; Results from discontinued operations; PROFIT BEFORE TAX; Income tax expense; PROFIT FOR THE PERIOD.
By function (examples):
Revenues; Cost of sales; Gross profit; Other income; Distribution costs; Administrative expenses; Other expenses; Financial costs; Profit before tax; Income tax expense; PROFIT FOR THE PERIOD.
The note highlights two common presentations of expenses: by nature and by function, with an illustrative profit or loss format.
The illustrative headings end with an illustrative income statement.
OTHER COMPREHENSIVE INCOME (OCI)
OCI includes items not recognised in profit or loss but in equity, e.g.:
Revaluation gains/losses on PPE and intangible assets.
Gains/losses on investments in equity instruments measured at fair value through OCI.
Gains/losses on financial assets measured at fair value through OCI.
Changes in fair value attributable to changes in the credit risk of liabilities measured at FVTPL.
Portion of gains/losses on hedging instruments that are effective cash flow hedges.
Changes in the time value of options when designated for hedge accounting (only the intrinsic value is designated as hedging instrument when separating intrinsic vs time value).
Foreign currency translation differences arising on translating a foreign operation's net assets to the presentation currency (consolidated statements).
Foreign currency exchange gains/losses on translation of the results and financial position from functional currency to presentation currency if different.
Remeasurements of defined benefit plans.
Current and deferred tax charges/credits related to items taken to OCI.
Note: OCI items are presented in a separate section of the equity and/or the statement of comprehensive income in accordance with IAS 1 para 7.
Important reminder: OCI items are not part of PROFIT FOR THE PERIOD unless reclassified to profit or loss later.
CURRENT/NON-CURRENT CLASSIFICATION – LIABILITIES
Criteria for classification:
A liability is current if it is expected to be settled within the entity's normal operating cycle, held primarily for trading, expected to be settled within 12 months, or there is no unconditional right to defer settlement for at least 12 months after the reporting period.
Otherwise, the liability is non-current.
Practical implication: classification is important for users’ understanding of liquidity and capital management.
CURRENT/NON-CURRENT CLASSIFICATION – ASSETS
Criteria for classification:
An asset is current if it is expected to be cashed or realized within the entity's normal operating cycle, held for trading, or expected to be settled within 12 months; cash and cash equivalents are included if not restricted from being exchanged or used to settle a liability for at least 12 months after the balance sheet date.
Otherwise, the asset is non-current.
The rule emphasizes liquidity and timing considerations for presentation purposes.
TEMPERATURE TEST – KEY APPLICATION NOTES
IAS 1 applies to all entity types and structures, including consolidated and separate FS.
The standard emphasizes that a complete set comprises primary statements plus notes and comparative information where relevant.
It highlights the requirements for: structure, minimum content, classification, and OCI disclosures.
CURRENT/NON-CURRENT – ILLUSTRATIVE EXAMPLES
Example 1: Inventory with mixed operating cycles (some items cycle 12 months, some 18 months). If the cycles vary and the difference is material to users, inventories should be classified as current/non-current by aggregating similar items as per IAS 1.
Example 2: Long-term receivable where the borrower might breach a covenant soon after year-end, enabling accelerated repayment. Classification: Non-Current, because the entity currently has no right to demand repayment within 12 months.
Example 3: Bank loan repayable in 3 months, with a possibility to extend for 12 more months and the entity does not intend to exercise the extension. Classification: Non-Current, because there is a right to defer repayment for at least 12 months, even though the original due date is soon.
These examples illustrate practical application of current/non-current criteria.
KEY LEARNING POINTS (RECAP)
General structure: Balance sheet, Income statement, and OCI considerations.
Classification: Distinctions between current and non-current assets and liabilities.
IAS 1 scope: Applies to all entity types; minimum content and structure requirements.
Content areas: Elements of the financial statements, including notes, policies, and comparatives.
OCI reminder: Do not forget to present OCI components separately from net income.
SUMMARY OF REGIMENTED CONTENT (RELEVANT NUMBERS AND ITEMS)
Time references: 12 months as a threshold for current/non-current classification.
Multi-part processes: Recognition of endorsement steps and several committees involved (EC, ARC, EFRAG).
Structural content: The complete set of financial statements includes items listed under IAS 1 and conforming to IFRS standards.
CONNECTIONS TO FOUNDATIONAL PRINCIPLES
The IASB’s role aligns with the broader goal of global financial reporting consistency.
Endorsement by the EU ensures that IFRS standards are compatible with European regulatory frameworks.
The classification and OCI disclosures support decision-useful reporting for investors and stakeholders.
PRACTICAL IMPLICATIONS
IFRS adoption supports access to capital markets and investor confidence across jurisdictions.
The IAS 1 framework guides preparers on how to present financial information clearly and consistently, improving comparability and usefulness.
OCI disclosures enable users to see items affecting equity outside of net income, aiding assessments of risks and future earnings potential.
ADDITIONAL REMINDERS
IFRS area of application can vary by jurisdiction (Italy example) and may affect mandatory vs optional IFRS adoption for different entity types.
When presenting in exams or notes, clearly distinguish between:
Primary statements (balance sheet, income statement, cash flows, changes in equity).
Notes and policies.
OCI vs profit or loss.
END OF NOTES
IFRS aims to provide internationally recognized accounting standards for reliable, efficient, and transparent financial information, enhancing comparability across borders and aiding investor risk assessment. In Italy, IFRS records can inform tax calculations.
The standard-setting process involves stages from program consultation and research (3-5 years) to final IFRS adoption, implementation, and post-implementation review, emphasizing thorough research and stakeholder input.
The IASB (International Accounting Standards Board) is the independent body developing IFRS. EU endorsement is required for IFRS use in the EU, overseen by Regulation (EC) No 1606/2002 and involving the European Commission (EC), European Financial Reporting Advisory Group (EFRAG), and Accounting Regulatory Committee (ARC). The endorsement process includes IASB adoption, EFRAG advice, EC drafting, ARC opinion, and scrutiny by the European Parliament and Council.
In Italy, Decree 38/2005 dictates IFRS application: it's mandatory for listed entities, banks, and supervised financial institutions (for both entity and consolidated financial statements). Listed insurance companies must use IFRS only if consolidated financial statements are required. Subsidiaries and associates of these entities may use IFRS optionally.
IAS 1 sets the overarching framework for presenting financial statements, providing information on an entity's financial position, performance, and cash flows to aid economic decisions. It applies to all entity types, including consolidated (IFRS 10) and separate (IAS 27) financial statements.
A complete set of financial statements under IAS 1 includes:
Statement of financial position.
Statement of profit or loss and other comprehensive income.
Statement of changes in equity.
Statement of cash flows.
Notes (comprising significant accounting policies and other explanatory information).
Comparative information for the preceding period.
A balance sheet at the beginning of the preceding period in specific cases.
The balance sheet must present minimum line items for assets (e.g., PPE, inventories, cash) and liabilities (e.g., trade payables, financial liabilities, provisions), with non-controlling interests and equity. Entities can add more items for clarity.
Expenses can be classified either by nature (e.g., employee benefit costs, depreciation) or by function (e.g., cost of sales, distribution costs).
Other Comprehensive Income (OCI) includes items not recognized in profit or loss but directly in equity, such as revaluation gains/losses on PPE, certain gains/losses on financial assets, and foreign currency translation differences. OCI items are presented separately from net income.
Current/non-current classification for assets and liabilities is based on whether they are expected to be settled, realized, or held for trading within the entity's normal operating cycle or within 12 months after the reporting period. Cash not restricted for 12 months is current.