Ind AS 1: Presentation of Financial Statements
It simply said that how to present the financial statement.will it be going concern basis or not going concern basis?
Going concern
Financial statements prepared under Ind AS should be prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. Management is required to assess, at the time of preparing the financial statements, the entity's ability to continue as a going concern, and this assessment should cover the entity's prospects for at least 12 months from the end of the reporting period. The 12-month period for considering the entity's future is a minimum requirement; an entity cannot, for example, prepare its financial statements on a going concern basis if it intends to cease operations 18 months from the end of the reporting period.
The assessment of the entity's status as a going concern will often be straightforward. A profitable entity with no financing problems will almost certainly be a going concern. In other cases, management might need to consider very carefully the entity's ability to meet its liabilities as they fall due. Detailed cash flow and profit forecasts might be required to satisfy management that the entity is a going concern.
If management has significant doubt of the entity’s ability to continue as a going concern, the uncertainties should be disclosed.
In case the financial statements are not prepared on a going concern basis, the entity should disclose the basis of preparation of financial statements and also the reason why the entity is not regarded as a going concern.
Events that occur after the reporting period might indicate that the entity is no longer a going concern. An entity does not prepare its financial statements on a going concern basis if management’s post- year end assessment indicates that it is not a going concern. Any financial statements that are prepared after that assessment (including the financial statements in respect of which management are making the assessment) are not prepared on a going concern basis. This is consistent with IAS 10, which requires a fundamental change to the basis of accounting when the going concern assumption is no longer appropriate.
Illustration 1
Entity XYZ is a large manufacturer of plastic products for the local market. On 1st April, 20X6 the newly elected government unexpectedly abolished all import tariffs, including the 40 per cent tariff on all imported plastic products. Many other economic reforms implemented by the new government contributed to the value of the country’s currency INR appreciating significantly against most other currencies. The currency appreciation severely reduced the competitiveness of the entity’s products.
Before 20X6 entity XYZ was profitable. However, because it was unable to compete with low priced imports, entity XYZ went into losses. As at 31st March, 20X7, entity XYZ’s equity was INR 1,000. During the second quarter of financial year ended 31 March 20X7, the management restructured entity’s operations. That restructuring helped reduce losses for the third and fourth quarters to INR 400 and INR 380, respectively. During the year ended 31st March, 20X7, entity XYZ reported a loss of INR 4,000. In January 20X7, the local plastic industry and labour union lobbied government to reinstate tariffs on plastic. On 15th March, 20X7, the government announced that it would reintroduce limited plastic import tariffs at 10 percent in 20X8. However, it emphasised that those tariffs would not be as protective as the tariffs enacted by the previous government. In its latest economic forecast, the government predicts a stable currency exchange rate in the short term with a gradual weakening of the jurisdiction’s currency in the longer term.
Management of the entity XYZ undertook a going concern assessment at 31st March, 20X7. Management projects/forecasts that imposition of a 10 per cent tariff on the import of plastic products would, at current exchange rates, result in entity XYZ returning to profitability. How should the management of entity XYZ disclose the information about the going concern assessment in entity XYZ’s 31st March, 20X7 annual financial statements?
Solution
Going concern is a general feature to be considered while presenting the financial statements. As per Ind AS 1, when preparing financial statements, management shall make an assessment of an entity’s ability to continue as a going concern. An entity shall prepare financial statements on a going concern basis unless management
either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, the entity shall disclose those
uncertainties. An entity is required to disclose the facts, if the financial statements are not prepared on a going concern basis. Along with the reason, as to why the financial statements are not prepared on a going concern basis.
While assessing the going concern assumption, an entity is required to take into consideration all factors covering atleast but not limited to 12 months from the end of reporting period.
On the basis of Ind AS 1 and the facts and circumstances of this case, the following disclosure is appropriate:
Extracts from the notes to entity XYZ’s 31st March, 20X7 financial statements
| Note 1: Basis of preparation |
| On the basis of management’s assessment at 31 March 20X7, the financial statements have been prepared on the going concern basis. However, management’s assessment assumes that the government will reintroduce limited plastic import tariffs and that the currency exchange rate will remain constant. On 15 March 20X7, the government announced that limited import tariffs will be imposed in 20X8. However, the government emphasised that the tariff would not be as protective as the 40 percent tariff in effect before 20X7. Provided that INR does not strengthen, management projects/forecasts that a 10 percent tariff on all plastic products would result in entity XYZ returning to profitability. As at 31st March, 20X7 entity XYZ had net assets of INR 1,000. If import tariffs are not imposed and currency exchange rates remain unchanged, entity XYZ’s liabilities could exceed its assets by the end of financial year 20X7-X8. On the basis of their assessment of these factors, management believes that entity XYZ is a going concern. |
Accrual basis of accounting
· An entity shall prepare its financial statements, except for cash flow information, using the accrual basis of accounting.
When the accrual basis of accounting is used, an entity recognises items as assets, liabilities, equity, income and expenses (the elements of financial statements) when they satisfy the definitions and recognition criteria for those elements in the Framework
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· An entity shall present separately each material class of similar items. An entity shall present separately items of a dissimilar nature or function unless they are immaterial except when required by law.
· Financial statements result from processing large numbers of transactions or other events that are aggregated into classes according to their nature or function. The final stage in the process of aggregation and classification is the presentation of condensed and classified data, which form line items in the financial statements. If a line item is not individually material, it is aggregated with other items either in those statements or in the notes. An item that is not sufficiently material to warrant separate presentation in those statements may warrant separate presentation in the notes.
· An entity need not provide a specific disclosure required by an Ind AS if the information is not material except when required by law.
Example
1. Entity A has done a wrong classification of assets between 2 categories of plant and machinery. Such a classification would not be material in amount if it affected two categories of plant or equipment, however, it might be material if it changed the classification between a non-current and a current asset category.
2. Losses from bad debts or pilferage that could be shrugged off as routine by a large business may threaten the continued existence of a small business.
3. An error in inventory valuation may be material in a small enterprise for which it may cut earnings by half but could be immaterial in an enterprise for which it might make a barely perceptible ripple in the earnings.
Offsetting
· An entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an Ind AS.
· An entity reports separately both assets and liabilities, and income and expenses. Measuring assets net of valuation allowances — for example, obsolescence allowances on inventories and doubtful debts allowances on receivables — is not offsetting.
· Ind AS 115, ‘Revenue from Contracts with Customers’, requires an entity to measure revenue from contracts with customers at the amount of consideration to which the entity expects to be entitled in exchange for transferring promised goods or services. For example, the amount of revenue recognized reflects any trade discounts and volume rebates the entity allows. An entity undertakes, in the course of its ordinary activities, other transactions that do not generate
revenue but are incidental to the main revenue-generating activities. An entity presents the results of such transactions, when this presentation reflects the substance of the transaction or other event, by netting any income with related expenses
Example:
(A) an entity presents gains and losses on the disposal of non-current assets including investments and operating assets, by deducting from the amount of consideration on disposal the carrying amount of the asset and related selling expenses; and
(B) an entity may net expenditure related to a provision that is recognised in accordance with Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, and reimbursed under a contractual arrangement with a third party (for example, a supplier’s warranty agreement) against the related reimbursement.’’;
· In addition, an entity presents on a net basis gains and losses arising from a group of similar transactions, for example, foreign exchange gains and losses or gains and losses arising on financial instruments held for trading. However, an entity presents such gains and losses separately if they are material.
Illustration 3
Is offsetting of revenue against expenses, permissible in case of a company acting as an agent and having sub-agents, where commission is paid to sub-agents from the commission received as an agent?
Solution
On the basis of the guidance regarding offsetting, net presentation in the given case would not be appropriate, as it would not reflect substance of the transaction and would detract from the ability of users to understand the transaction.
Accordingly, the commission received by the company as an agent is the gross revenue of the company. The amount of commission paid by it to the sub-agent should be considered as an expense and should not be offset against commission earned by it.
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Frequency of reporting
· An entity shall present a complete set of financial statements (including comparative information) at least annually.
· When an entity changes the end of its reporting period and presents financial statements for a period longer or shorter than one year, an entity shall disclose, in addition to the period covered by the financial statements:
¨ the reason for using a longer or shorter period, and
¨ the fact that amounts presented in the financial statements are not entirely comparable.
Example
In 20X8 entity ‘Superb’ was acquired by entity ‘Happy go lucky’. To align its reporting date with that of its parent, Superb changed the end of its annual reporting period from 31st January to 31st March. Consequently, entity Superb’s reporting period for the year ended 31st March, 20X8 is 14 months. On the basis of these facts, the following disclosure would be appropriate:-
| Note 1 |
| Basis of preparation and accounting policies |
| Reporting period |
| To align the entity’s reporting period with that of its parent (Happy Go Luck), the entity changed the end of its reporting period from 31st January to 31st March. Amounts presented for the period ended 31st March, 20X8 are for 14 months. Comparative figures are for a 12 months period. Consequently, comparative amounts for the statement of comprehensive income, statement of changes in equity, statement of cash flows and related notes are not entirely comparable. |
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Comparative information
Minimum comparative information
· An entity should present comparative information in respect of the preceding period for all amounts reported in the current period’s financial statements except when Ind AS permit or require otherwise.
- Comparative information for narrative and descriptive information should be included if it is relevant to understand the current period’s financial statement.
For example,
in the current period an entity discloses details of a legal dispute whose outcome was uncertain at the end of the immediately preceding reporting period and that is yet to be resolved.
· An entity shall present, as a minimum:
¨ 2 Balance Sheets
¨ 2 Statement of Profit and Loss
¨ 2 Statement of Cash Flows
¨ 2 Statement of Changes in Equity and
¨ Related Notes.
Additional comparative information
An entity may present comparative information in addition to the minimum comparative financial statements required by Ind ASs, as long as that information is prepared in accordance with Ind AS. This comparative information may consist of one or more statements referred to in ‘Complete set of financial statements’ but need not comprise a complete set of financial statements. When this is the case, the entity shall present related note information for those additional statements.
Example
An entity may present a third statement of profit or loss (thereby presenting the current period, the preceding period and one additional comparative period). However, the entity is not required to present a third balance sheet, a third statement of cash flows or a third statement of changes in equity (ie an additional financial statement comparative). The entity is required to present, in the notes to the financial statements, the comparative information related to that additional statement of profit or loss and other comprehensive income.
Illustration 4
A retail chain acquired a competitor in March, 20X1 and accounted for the business combination under Ind AS 103 on a provisional basis in its 31st March, 20X1 annual financial statements. The business combination accounting was finalised in 20X1-20X2 and the provisional fair values were updated. As a result, the 20X0-20X1 comparatives were adjusted in the 20X1-X2 annual financial statements. Does the restatement require an opening statement of financial position (that is, an additional statement of financial position) as of 1st April, 20X0?
Solution
An additional statement of financial position is not required, because the acquisition had no impact on the entity’s financial position at 1st April, 20X0.
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