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In this, the first of a two-part article, John McDonnell, IFRS Services Partner, PricewaterhouseCoopers outlines what you can expect to see in IFRS financial statements. [Accompanying illustrations have been omitted from the online version of this article.]

Over the past couple of years much has been written about the key differences between Irish/UK GAAP and IFRS and the impact that these differences will have on a company’s processes and systems on transition to IFRS. Since 1 January this year, IFRS is now a reality. Many Irish companies are in the process of finalising their transition projects and are beginning to consider what an IFRS compliant set of financial statements might look like. So how different will IFRS financial statements be?

Under Irish GAAP, there is no specific accounting standard dealing with overall accounts presentation. Instead, the required format of company financial statements is laid down in the Companies Act, 1986, which in addition to prescribing the line items that must be disclosed in the balance sheet and profit and loss account, also requires that they be presented in a certain order. IFRS (IAS 1) also requires individual line items to be presented but contains considerable flexibility. Most Irish companies will wish to minimise the presentational changes on first adoption of IFRS and the flexibility within IAS 1 means that many of them will have few changes to make in the presentation of their financial statements on implementing IFRS.

IFRS does not prescribe a particular balance sheet format, except separate presentation of total assets and total liabilities and the presentation of some specific items on the face of the balance sheet. Figure 1 is an illustrative IFRS compliant balance sheet. It is imperative that management are aware that IFRS allows them to use their own judgement regarding the form of the presentation. The good news is that companies may, to a large extent, continue to use their existing Companies Act formats, by presenting the IFRS line items in a similar order to the Companies Act format, and inserting certain additional line items required under IAS. So, if IFRS allows management to keep the presentation of their financial statements broadly similar, where do the challenges arise for company management teams?

Balance Sheet There are two key areas that should be considered by management when it comes to the presentation of the balance sheet:

1. The distinction between current and non-current assets and current and non-current liabilities. IFRS requires a company to present current and non-current assets and liabilities as separate classifications on the face of the balance sheet, except when a presentation based on liquidity provides information that is reliable and more relevant. When that exception applies, all assets and liabilities should be presented broadly in order of liquidity; and

2. The determination of what, if any, additional line items are required to present a clear understanding of the company’s financial position. Companies must insert additional line items when required to do so by other international standards or when the size, nature or function of an item is such that separate presentation is relevant to an understanding of the company’s financial position. The descriptions of the line items and the order in which they are shown may be adapted according to the nature of the company and its transactions. Company management must therefore, to a large extent, exercise judgement in determining the most appropriate format and whether additional line items are required to provide a fair presentation of the company’s financial position.

Profit & Loss Account The minimum disclosures required on the face of the income statement or profit and loss account in financial statements complying with IFRS are not too dissimilar from existing practice under Irish GAAP. Indeed if you look at Figure 2, which provides an example of an IFRS compliant profit and loss account, you might be forgiven for not noticing any major difference to the presentation format. Again, the key challenge for company management teams will be determining the extent to which they include additional line items, sub-totals or disclosures over and above the minimum IFRS requirements.

For example, under IFRS, unlike Irish GAAP, it is not mandatory to disclose results from operating activities. However, companies are not prohibited from disclosing operating profit, or a similar line item. Where the disclosure is made voluntarily, the standard makes it clear that this sub-total must be representative of all operating activities, because it would be misleading and impair the comparability of financial statements if items of an operating nature were excluded from the results of operating activities, even if that treatment had been industry practice. Super exceptional items are a thing of the past. The three super exceptional items reported below operating profit under FRS 3 would be within operating profit under IFRS. However profits relating to discontinued operations under IFRS are presented separately from continuing operations.

Clearly, the inclusion of additional line items, headings and sub-totals must be subject to some restrictions. A purist approach would be that companies should give only ‘pure IFRS’ information and that users of financial statements should learn to interpret that information in isolation. In practice, however, this would be unworkable because, in some instances there is a mismatch between the presentation and disclosure requirements of accounting standard-setters and the message that companies need to deliver or the information that analysts and other users wish to receive.

In determining what additional line items, headings and sub-totals are appropriate management teams should ensure:

• The line items required by IFRS should be given at least equal prominence to any additional line items or sub-totals included; • Additional line items, sub-totals and columns may be used, but only if they do not detract from the IFRS numbers by overcrowding the profit and loss account; • Items may be separated out, but only where they are different in nature or function from other items in the profit and loss account; • Additional line items and columns should only be used for material items; and • The presentation method adopted should be consistent from year to year unless there is a significant change in the company’s operations.

At the end of the day the management team must bear in mind the impression that a reader will form of the company’s performance and ensure that the presentation style they adopt presents a true and fair view.

Statement of Changes in Equity Under IAS 1 companies must present either a statement showing changes in equity except those arising from transactions with equity holders acting in their capacity as equity holders (such as share issues and dividend payments) or a statement showing all changes in equity. The IASB has indicated recently that the statement that excludes transactions with equity holders is to be known as a ‘statement of recognised income and expense’, equivalent to the ‘statement of total recognised gains and losses’ required by FRS 3, ‘Reporting financial performance’. Whichever statement a company chooses to present, it must be shown as a primary statement, that is, a statement having prominence equal to that of the profit and loss account, balance sheet and cash flow statement. Where the company presents a statement of recognised income and expense, the other changes in equity must be disclosed in the notes. It is likely that many Irish companies, on conversion to IFRS, may choose to present a statement of recognised income and expense, as this is the statement that has been shown in Irish financial statements since the implementation of FRS 3.

It is worth noting that in the future the IASB may consider proposing a single comprehensive statement of income, which would replace the current income statement and statement of changes in equity.

Cash Flow Statements Unlike Irish GAAP, there are no exemptions from the requirement to prepare a cash flow statement, in financial statements prepared to comply with IFRS. However, IAS 7 prescribes no specific layout. IFRS allows cash flows to be reported in the manner most appropriate to the company. However in practice most companies keep to the standard IAS 7 categories, operating, investing and financing.

The key difference from Irish GAAP is that, under IFRS, cash flow statements must report inflows and outflows of cash and cash equivalents, whereas under Irish GAAP cash flow statements were only based on the inflows and outflows of cash. This means that Irish companies converting to IFRS will have to revert to a cash flow statement that focuses on the movements in cash and cash equivalents.

IFRS – Choices and Challenges Abound The transition to IFRS is only the beginning of the choices, challenges and decisions facing company management teams on the IFRS front. In relation to their financial statements they now need to consider and decide on an appropriate IFRS compliant presentation format. They need to take into account the needs of their stakeholders and the relevant regulatory and statutory requirements and determine what additional line items or sub-totals are necessary to provide relevant, reliable, comparable and understandable information. Different management teams will, no doubt, take different views on the best way to present information. There may be several methods of presentation that are equally valid. However, once a format is selected it should be applied consistently.

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