Indian Accounting Standard (Ind AS) 1 Summary
Indian Accounting Standard (Ind AS) 1, Presentation of Financial Statements prescribes the basis for presentation of general purpose financial statements to ensure comparability both with the entity’s financial statements of previous periods and with the financial statements of other entities. It sets out overall requirements for the presentation of both consolidated and separate financial statements, guidelines for their structure and minimum requirements for their content.
For entities that operate in sectors such as banking, insurance, electricity, etc., specific formats may be prescribed under relevant regulations for presentation of financial statements and Ind AS 1 may not be applicable to that extent.
Any entity claiming that a set of financial statements is in compliance with Ind AS complies with all such standards and related interpretations. The entity is not allowed to claim that its financial statements are, for example, ‘materially’ in compliance with Ind AS, or that it has complied with ‘substantially all’ requirements of Ind AS. Compliance with Ind AS encompasses disclosure as well as recognition and measurement requirements.
For financial information to be useful, it needs to be relevant to users and faithfully represent what it purports to represent. The usefulness of financial information is enhanced by its comparability, verifiability, timeliness and understandability. The overriding requirement of Ind AS is for the financial statements to give a true and fair view. Compliance with Ind AS, including additional disclosure when necessary, is presumed to result in a true and fair view.
The entity shall prepare financial statements on a going concern basis unless management intends to either liquidate the entity or to cease trading, or has no realistic alternative but to do so.
A complete set of financial statements comprises the following:
– A balance sheet,
– A statement of profit and loss,
– A statement of changes in equity,
– A statement of cash flows,
– Notes, including accounting policies,
– Comparative information, and
– A balance sheet as at the beginning of the preceding period in certain circumstances.
The standard requires specific disclosures in the balance sheet, the statement of profit and loss, or the statement of changes in equity and requires disclosure of other line items either in those statements or in the notes.
The standard requires the entity to recognise 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. The standard also requires the entity to consider aspects surrounding materiality, reporting and other presentation considerations.
Financial statements are prepared on a modified historical cost basis, with a growing emphasis on fair value.
A statement of changes in equity (and related notes) reconciles opening to closing amounts for each component of equity.
All owner- related changes in equity are presented in the statement of changes in equity separately from non-owner changes in equity.
Entities that have no equity as defined in Ind AS may need to adopt the financial statement presentation of members ‘or unit holders’ interests.
The entity presents separately in the statements of changes in equity:
– The total adjustment resulting from changes in accounting policies, and
– The total adjustment resulting from the correction of errors.
Generally, the entity presents its balance sheet classified between current and non-current assets and liabilities.
An asset is classified as current if it is expected to be realised in the normal operating cycle or within 12 months, it is held for trading or is cash or a cash equivalent.
A liability is classified as current if it is expected to be settled in the normal operating cycle, it is due within 12 months, or there are no unconditional rights to defer its settlement for at least 12 months.
A liability that is payable on demand because certain conditions are breached is not classified as current if the lender has agreed, after the reporting date but before the financial statements are authorised for issue, not to demand repayment.
The presentation of alternative earnings measures (e.g. Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) in the statement of profit and loss and Other Comprehensive Income (OCI) is not generally prohibited, although national regulators may have more restrictive requirements.
The Schedule III to the Companies Act, 2013 (2013 Act) provides general instructions for preparation of financial statements. Schedule III is divided into three parts, i.e. Division I, II and III1. Division II is applicable to a company whose financial statements are drawn up in compliance with Ind AS and Division III is applicable to a Non-Banking Financial Company (NBFC) whose financial statements are drawn up in compliance with Ind AS.
Division II of Schedule III provides instructions for the preparation of financial statements and additional disclosure requirements for companies.
The provisions of Schedule III also apply when a company is required to prepare consolidated financial statements, in addition to the disclosure requirements specified under Ind AS.
It requires financial statements to disclose all ‘material’ items, i.e. the items if they could, individually or collectively, influence the economic decisions that users make on the basis of financial statements. The definition of what is material is similar to that given in Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors. However, while preparing the statement of profit and loss, it specifies that a company should disclose a note for any item of income or expenditure which exceeds 1 per cent of the revenue from operations or INR1,000,000, whichever is higher, in addition to the consideration of materiality.
Compliance with Ind AS and the 2013 Act
In situations where compliance with the requirements of the 2013 Act including Ind AS requires any change in treatment or disclosure (including addition, amendment, substitution or deletion in the head/sub-head or any changes in the financial statements or statements forming part thereof) in the formats given in Schedule III, then Schedule III permits such changes to be made and the requirements of Schedule III would stand modified accordingly.
The disclosure requirements specified in Schedule III would be in addition to and not in substitution of the disclosure requirements specified in Ind AS. Companies would be required to make additional disclosures specified in Ind AS either in the notes or by way of additional statement(s) unless required to be disclosed on the face of financial statements. Similarly, all other disclosures as required by the 2013 Act should be made in the notes in addition to the requirements of Schedule III.
Other key considerations
Schedule III sets out the minimum requirements for disclosure on the face of the financial statements. Cash flow statement should be prepared, where applicable, in accordance with the requirements of the relevant Ind AS.
Line items, sub-line items and sub-totals should be presented as an addition or substitution on the face of the financial statements when such presentation is relevant to an understanding of the company’s financial performance or position or to cater to industry, or to sector-specific disclosure requirements or when required for compliance with the amendments to the 2013 Act.
It does not permit companies to avail of the option of presenting assets and liabilities in the order of liquidity, as provided by Ind AS 1. However, such information may be presented as additional information in the notes to the financial statements.
It does not permit disclosure of extraordinary items (in line with Ind AS). However, the format for the statement of profit and loss does provide for separate disclosure of exceptional items, if any.
It requires a separate disclosure of the Earning Per Share (EPS) for continuing and discontinued operations.