IAS 1 – Presentation of Financial Statements

Objective:

The main objective of IAS 1 is to prescribe the basis for the presentation of general-purpose financial
statements to ensure comparability both:

With the entity’s own financial statements of previous periods, and

With other entities’ financial statements.

Key Components of Financial Statements:

According to IAS 1, a complete set of financial statements includes:

1. Statement of Financial Position (Balance Sheet)– showing assets, liabilities, and equity at the end of
the reporting period.

2. Statement of Profit or Loss and Other Comprehensive Income (Income Statement) – showing
performance for the period.

3. Statement of Changes in Equity – showing changes in owners’ equity during the period.

4. Statement of Cash Flows – showing cash inflows and outflows.

5. Notes to the Financial Statements– including significant accounting policies and other explanatory
information.

6. Comparative Information– information from the previous period for comparison.

Fundamental Principles:

1. Fair Presentation and Compliance with IFRSs:

Financial statements should present fairly the financial position, performance, and cash flows of an
entity, in accordance with IFRSs.

2. Going Concern:

The entity is assumed to continue its operations for the foreseeable future.

3. Accrual Basis of Accounting:

Except for the cash flow statement, all statements are prepared using the accrual basis.

4. Consistency of Presentation:

The presentation and classification of items should be consistent from one period to another unless a
change is justified.
5. Materiality and Aggregation:

Only material items are presented separately; immaterial amounts are aggregated.

6. Offsetting:

Assets and liabilities or income and expenses should not be offset unless required or permitted by
IFRS.

7. Frequency of Reporting:

Financial statements must be presented at least annually.

8. Comparative Information:

Comparative information must be disclosed for the previous period for all amounts reported.

Structure and Content:

IAS 1 provides detailed guidance on:

Current vs. Non-current classification of assets and liabilities.

Minimum information that must be presented in each financial statement.

Presentation of Other Comprehensive Income (OCI) items.

Disclosure of reclassification adjustments and tax effects related to OCI.

Conclusion:

IAS 1 ensures clarity, consistency, and comparability in financial reporting across different organizations
and periods, enhancing users’ ability to understand and make decisions based on financial statements.

(2) IAS 2 – Inventories

The main objective of IAS 2 is to prescribe the accounting treatment for inventories, including:

* The cost of inventories,

* The cost recognized as an expense (cost of goods sold), and

* Any write-down to net realizable value (NRV).

Definition:
Inventories are assets that are:

1. Held for sale in the ordinary course of business,

2. In the process of production for such sale, or

3. In the form of materials or supplies to be consumed in the production process or in the rendering of
services.

Measurement:

Inventories should be measured at the lower of:

Cost, and

Net Realizable Value (NRV).

1. Cost of Inventories Includes:

a) Cost of Purchase:

* Purchase price

* Import duties and other taxes (except those recoverable)

* Transport, handling, and other directly attributable costs

* Less: trade discounts and rebates

b) Cost of Conversion:

* Direct labor

* Production overheads (both variable and fixed, allocated systematically)

c) Other Costs:

* Only if they are necessary to bring the inventories to their present location and condition.

Excluded Costs:

> * Abnormal wastage

> * Storage costs (unless necessary in production)

> * Administrative overheads not related to production

> * Selling and distribution cost.

NRV = Estimated Selling Price – (Cost of Completion + Selling Expenses)

If NRV < Cost → Inventory is written down to NRV.

Any write-down is recognized as an expense in the period it occurs.

Cost Formulas:

When inventories are interchangeable, IAS 2 allows these cost formulas:

1. FIFO (First-In, First-Out):**

Oldest inventory items are sold first.

2. Weighted Average Cost:

Cost per unit = Total cost of inventory / Total units available.

LIFO (Last-In, First-Out) is not allowed under IAS 2.

Recognition as an Expense:

When inventories are sold, their carrying amount is recognized as an expense (Cost of Goods Sold) in the
same period as the related revenue.

Disclosure Requirements:

Entities must disclose:

* Accounting policies used for inventory valuation

* Total carrying amount by category (raw materials, WIP, finished goods, etc.)

* Amount recognized as expense (COGS)

* Any write-downs or reversals of write-downs

* Circumstances leading to write-downs or reversals

Example:

| Particulars | Amount (Rs) |

| Cost of inventory | 100,000 |

| NRV | 90,000 |

| → Inventory will be valued at **Rs. 90,000** and Rs. 10,000 will be recognized as an **expense
(write-down).** | |

Conclusion:

IAS 2 ensures that inventories are not overstated and reflect realistic values, helping present a true and
fair view of financial position and performance.

(3) IAS 5 – Information to Be Disclosed in Financial Statements

Note:IAS 5 has been superseded (replaced) by IAS 1 – Presentation of Financial Statements,

but its main ideas still help explain the disclosure requirements in financial reporting.

Let’s look at what IAS 5 originally covered

Objective:

The objective of IAS 5 was to specify the minimum information that must be disclosed in the financial
statements of an enterprise to ensure transparency and comparability.

Key Disclosures Required by IAS 5:

IAS 5 required that financial statements must disclose at least:

1. Accounting Policies Used

The principles, bases, conventions, and rules applied in preparing and presenting the financial
statements.

2. Information on Major Items of Financial Statements

A clear classification and explanation of the following:

Assets

Liabilities
 Equity (Capital and Reserves)

Income

Expenses

3. Disclosure of Turnover (Revenue)

* Total sales or turnover during the reporting period.

4. Profit or Loss for the Period

Including extraordinary items (now called “exceptional” or “non-recurring” items).

5. Adjustments to Prior Periods

* Any corrections or changes related to previous years.

6. Dividends

Amounts proposed or declared during the period.

7. Auditor’s Report

* Whether the statements are audited and the auditor’s opinion.

General Requirements:

* Financial statements must be clear, understandable, and comparable.

* All material items should be separately disclosed.

* Notes must provide explanations to understand the figures in the main statements.

* The basis of measurement (historical cost, fair value, etc.) must be disclosed.

Replacement by IAS 1:

IAS 5 was withdrawn in 1997 when IAS 1 – Presentation of Financial Statements was introduced.

IAS 1 now combines and expands the disclosure requirements that were originally part of IAS 5.

IAS 1 requires detailed disclosure in the:

Notes to the financial statements

Statement of financial position, and

Conclusion:

IAS 5 (now replaced by IAS 1) aimed to ensure that:

* Users of financial statements receive adequate information,

* The statements are transparent and reliable, and

* Comparisons between different companies and years are meaningful and fair.

(4) IAS 7 – Statement of Cash Flows

The main objective of IAS 7 is to require information about changes in an entity’s cash and cash
equivalents during a period.

It helps users understand:

Where cash came from

How it was used, and

The entity’s ability to generate cash in the future.

Purpose of the Statement of Cash Flows:

The Statement of Cash Flows shows the inflows and outflows of cash and cash equivalents during the
accounting period, classified into:

1. Operating Activities

2. Investing Activities

3. Financing Activities

Definition:

Cash:

Comprises cash on hand and demand deposits.

Cash Equivalents:
 Short-term, highly liquid investments that are readily convertible to known amounts of cash and are
subject to insignificant risk of changes in value.

Example: Treasury bills, short-term bank deposits (with maturity less than 3 months).

Classification of Cash Flows

1 Operating Activities:

These are main revenue-generating activities of the business and other activities that are not investing
or financing.

Examples:

* Cash received from customers

* Cash paid to suppliers and employees

* Cash paid for operating expenses

* Cash paid for income taxes

* Cash received from royalties, fees, commissions, and other income

Methods of Reporting:

IAS 7 allows two methods:

Direct Method

Shows actual cash receipts and payments.

(Preferred method)

Indirect Method:

Starts with net profit and adjusts for non-cash items and working capital changes.

2. Investing Activities

These are cash flows related to the acquisition and disposal of long-term assets and investments.

Examples:

* Purchase or sale of property, plant, and equipment (PPE)

* Purchase or sale of investments (shares, bonds, etc.)

* Loans made to other entities or receipts from loans repaid

3. Financing Activities

These are activities that change the size and composition of equity and borrowings of the entity.

Examples:

* Issue of shares or debentures

* Borrowing or repayment of bank loans

* Payment of dividends

* Repurchase of shares (treasury shares)

Non-Cash Transactions

Transactions that do not involve cash flows are not included in the statement but should be disclosed
separately in the notes.

Examples:

* Conversion of debt to equity

* Acquisition of assets through finance lease

IAS 7 requires:

* Reconciliation of cash and cash equivalents at the beginning and end of the period.

* Disclosure of components of cash and cash equivalents.

* Disclosure of non-cash investing and financing activitie.

* Use of direct or indirect method for operating cash flows.

Conclusion:

IAS 7 enhances transparency and comparability by showing how an organization manages its cash
resources.

It helps users assess:

*iquidity and solvency,

* Financial flexibility, and

* The ability to generate future cash flows.

The objective of IAS 18 is to prescribe when and how revenue should be recognized in the financial
statements.

It ensures that revenue is recorded when it is earned, not just when cash is received.

>Note: IAS 18 has now been replaced by IFRS 15 – Revenue from Contracts with Customers,

> but IAS 18’s concepts are still important for understanding traditional revenue recognition principles.

Definition:

Revenue is the **gross inflow of economic benefits during the period arising in the ordinary course of
activities of an entity, such as:

* Sale of goods

* Rendering of services

* Use of entity’s assets by others (earning interest, royalties, dividends)

Scope of IAS 18:

IAS 18 applies to revenue from:

1. **Sale of goods**

2. **Rendering of services**

3. **Use by others of enterprise assets yielding:

*Interest

* Royalties

*Dividends

Recognition Criteria (When to Record Revenue)

[Link] of Goods

Revenue is recognized when all of the following conditions are met:

* (a) Significant risks and rewards of ownership have been transferred to the buyer.

* (b) The seller no longer has control over the goods.

* (d) It is probable that economic benefits will flow to the entity.

* (e) The costs incurred or to be incurred can be measured reliably.

Example:

A company sells machinery on 20 Dec 2024 but delivers it on 5 Jan 2025.

→ Revenue recognized in Jan 2025 (when ownership and risk are transferred).

2. Rendering of Services

Revenue is recognized by reference to the stage of completion (percentage of completion method)

* The amount of revenue can be measured reliably.

* It is probable that economic benefits will flow to the entity.

* The stage of completion and costs can be measured reliably.

Example:

If 60% of a service contract is completed by year-end → recognize 60% of total contract revenue.

[Link] by Others of Enterprise Assets

Revenue arises from:

*Interest: Recognized on a time proportion basis using the effective interest method.

*Royalties: Recognized on an accrual basic according to the substance of the agreement.

*Dividends: Recognized when the right to receive payment is established.

Example:

If a company owns shares in another company and that company declares a dividend → record revenue
when the dividend is declared.

Measurement of Revenue:

Revenue should be measured at the fair value of the consideration received or receivable,

after deducting:

* Trade discounts
* Volume rebates

* Returns or allowances

Special Situations:

1. Deferred payment:

If payment is delayed, interest should be recognized separately.

[Link] of goods/services:

* Exchange of similar goods → **No revenue recognized.**

* Exchange of dissimilar goods → **Revenue recognized at fair value.**

Disclosure Requirements:

Entities must disclose:

* Accounting policies for recognizing revenue

* Amounts of each significant category of revenue (goods, services, interest, etc.)

* Amount of revenue from exchanges of goods/services

Conclusion:

IAS 18 ensures that revenue is recognized:

* At the right time,

*In the correct amount, and

*With proper disclosure.

This helps financial statements present a true and fair view of a company’s performance and
profitability.

Note: There is no IAS 37 for Research & Development — it is actually IAS 38,
titled "Intangible Assets".
> IAS 37 deals with *Provisions, Contingent Liabilities, and Contingent Assets.*

> So, R&D accounting = IAS 38 topic.

IAS 38 – Intangible Assets (Research & Development

The objective of IAS 38 is to prescribe the accounting treatment for intangible assets, especially those
arising from research and development activities, to ensure consistent recognition and valuation.

Definition:

An Intangible Asset is:

> “An identifiable non-monetary asset without physical substance.”

Examples:

* Patents

* Trademarks

* Software

* Copyrights

* Brand names

* Research & development (R&D) results

Research and Development (R&D) Activities

1. Research Phase

Definition:

> Original and planned investigation undertaken to gain new scientific or technical knowledge and
understanding.

Examples:

* Searching for nw materials or products

* Investigating alternatives for processes

* Laboratory research

Accounting Treatment:

> All research costs are expensed immediately as incurred.

> Because at this stage, no future economic benefit can be demonstrated.

A company spends Rs. 200,000 exploring a new formula —

→ Expense the full Rs. 200,000 in the current year.

2. Development Phase

Definition:

> The application of research findings or knowledge to a plan or design for producing new or improved
products or processes before commercial production or use begins.

Examples:

* Designing prototypes

* Testing new models

* Construction of pilot plants

Accounting Treatment:

Development costs are **recognized as an intangible asset if, and only if, the company can demonstrate
all six IAS 38 conditions

Six Recognition Criteria for Development Costs:

An intangible asset from development is recognized only if the entity can demonstrate that:

1. Technical feasibility of completing the asset exists.

2. The company intends to complete and use or sell it.

3. The company has the ability to use or sell the asset.

4. The asset will generate probable future economic benefits.

5. There are adequate resources to complete the development.

6. The expenditure can be measured reliably.

Example:

If a company develops new software that meets all 6 conditions → the costs (coding, testing, design) can
be capitalized as an intangible asset.

If not → expense them as incurred.

Once recognized as an intangible asset, it can be measured by:

1. Cost Model:

Carry at cost less accumulated amortization and impairment.

2. Revaluation Model:

Carry at fair value (if active market exists) less amortization.

Amortization:

* Intangible assets with a finite useful life → amortized over that life (e.g., 5–10 years).

* Intangible assets with an indefinite life → not amortized, but tested annually for impairment.

If Recognition Criteria Not Met:

All research and development costs must be expensed immediately in the profit and loss statement.

Disclosure Requirements:

IAS 38 requires entities to disclose:

* Useful lives (finite or indefinite)

* Amortization methods used

* Carrying amount and accumulated amortization

* Reconciliation of carrying amount at the beginning and end of the period

* Details of **R&D expenditure** during the period

Conclusion:

Under IAS 38,

Research costs → Always expensed

Development costs → Capitalized only if six strict conditions are met

This ensures that only genuine, value-creating intangible assets are recorded on the balance sheet.