The principal assumptions of preparation
Financial statements are presented fairly when they
are based on the following assumptions [IAS1R.23-35]:
| a) |
going concern; |
|
| b) |
consistency; and |
|
| c) |
accruals. |
There are two more assumptions of secondary importance
which should also be followed. These are:
| d) |
materiality and aggregation; |
|
| e) |
offsetting. |
Provided all five assumptions have been followed,
no specific disclosure to this effect is required.
Going concern
An entity is a going concern if it has neither the
intention nor the need to liquidate or to cease its
operations within at least 12 months from the balance
sheet date [IAS1R.24]. At each balance sheet date,
management should assess the entity's ability to continue
as a going concern. Material uncertainties concerning
the entity's ability to continue as a going concern
should be disclosed [IAS1R.23] .
Where the entity ceases to be a going concern,
management should prepare the financial statements
on a different basis [F.23]. Where the financial
statements are not prepared on a going concern basis,
that fact should be disclosed and the basis of preparation
followed should be described. The reasons why the
entity is no longer considered a going concern should
be given [IAS1R.23].
An entity should not prepare its financial statements
on a going concern basis if management determines
after the balance sheet date either that it intends
to liquidate the entity or cease trading, or that
it has no realistic alternative to doing so [IAS10R.14].
Accrual basis of accounting
Revenues and costs are recognised as they are earned
or incurred under the accrual basis of accounting
[IAS1R.26]. The net profit for each
period should reflect that period's transactions,
events and circumstances . This aids the assessment of
the entity's performance and financial position.
The cash basis of accounting should only be used
for cash flow information [IAS1R.25].
Specific provisions regarding the appropriate timing
of recognition and measurement on the accrual basis
are provided in relevant standards.
The matching principle, which is often associated
with the accrual basis of accounting, is not an
underlying assumption. Expenses are recorded in
the accounting records and the financial statements
as incurred. An expense should be recognised in
the income statement in the period to which it relates
or in direct association with the earning of specific
items of income, and hence when the related income
is recognised [IAS1R.26].
The matching of costs to future revenues should
not be used as a basis to defer costs on the balance
sheet. Costs can only be recognised as an asset
if they meet the asset recognition criteria [F.95].
For example, start-up costs should not be capitalised,
or deferred, because management expects that revenues
will be generated in the future.
Consistency of preparation
A change in presentation and classification of items
from one period to the next is permitted only when
it is a result of [IAS1R.27];
| a) |
a significant change in the nature of
the entity's operations; |
|
| b) |
identification of a more appropriate presentation;
or |
|
| c) |
the requirements of a new IFRS or SIC. |
Where such changes are made, the corresponding
figures for prior periods should also conform to
the new presentation. The nature, amounts and reasons
for the amendments should also be disclosed [IAS1R.28].
An entity should disclose the reason for not reclassifying
comparative information if it is impossible or economically
unreasonable to determine comparable amounts for
previous periods. The nature of changes that would
have been made if the amendments had been practicable
should also be given [IAS1R.39].
Changes on the basis of a more appropriate presentation
should only be made where the benefit of the alternative
presentation is clear [IAS1R.28]. Such changes will
therefore be infrequent.
When an entity presents summary financial information
(such as five and ten year summaries), the presentation
should be consistent with the most recent presentation
adopted in the financial statements. Management
should disclose the fact where a consistent presentation
is not feasible.
Materiality and aggregation
Each material item or group of items should be
presented separately in the financial statements.
Immaterial items, however, should be aggregated
with amounts of similar nature and function [IAS1R.29].
Information is material if it might reasonably
affect evaluations and decisions in respect of the
reporting entity, or if its omission or misstatement
could influence user's economic decisions. Information
will also be material where the nature and circumstances
of the transaction or event are such that users
of the financial statements should be made aware
of them .
When evaluating whether an item is material, each
case must be judged by its size and nature. The
assessment should be made in the context of the
financial statements as a whole and in relation
to relevant financial statement components . Qualitative as well as quantitative factors
should be assessed. The sensitivity of an item to
adjustment should be considered.
Offsetting
Offsetting, or netting, of assets with liabilities
or income with expenses is prohibited unless it
is explicitly permitted or required by another standard
[IAS1R.32].
Offsetting does not include the deduction of amounts
representing an impairment of assets. Similarly,
reporting the carrying amount of assets net of accumulated
depreciation and amortisation is not an instance
of offsetting [IAS1R.33].
There is no requirement to disclose the gross amount
of accounts receivable and the related provision
for bad and doubtful accounts. However, the valuation
allowance against such accounts should be included
in the carrying amount.
Transactions that are in the ordinary course of
business which do not generate revenue, but which
are incidental to the main revenue-generating activities,
may be presented on a net basis o this presentation
reflects the substance of the transaction [F.75]
. However, where the transactions
are of such size or significance, separate disclosure
should be given in order to give a fair presentation
[IAS1R.86].
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