1.

Describe the eight general principles to be applied in the presentation of financial

statements. Which principles are more subjective? Explain your answer.

The eight general principles are:

1. Fair presentation and compliance with IFRSs – that financial statements should be
faithfully represent the transactions, events and conditions of the entity in accordance
with the definitions and recognition criteria specified in the Conceptual Framework, and
that compliance with IFRSs is presumed to result in fair presentation (IAS 1 para. 15).
2. Going concern – that financial statements should be prepared on a going concern basis,
unless management intends to liquidate or cease trading, or has no realistic alternative but
to do so (IAS 1 para. 25).
3. Accrual basis of accounting – applied to financial statements other than the statement of
cash flows, which is prepared on a cash basis.
4. Materiality and aggregation – that each material class of similar items should be
presented separately in the financial statements, with material items being defined as
those items for which omission or misstatement could individually or collectively
influence the economic decisions of users (IAS 1 para. 29). Further, an entity should not
obscure material items by aggregating them with immaterial items (IAS para. 30A).
5. Offsetting – of assets and liabilities, and income and expenses, shall not be offset unless
required or permitted by an IFRS, but income and expenses are presented on a net basis,
when this presentation reflects the substances of the transactions or events (IAS 1 para.
32).
6. Frequency of reporting – that financial statements should be presented at least annually,
with paragraph 36 requiring additional disclosure where the length of the reporting period
is affected by a change of the end of the reporting period.
7. Comparative information – must be presented for all financial statement items unless an
IFRS permits otherwise (IAS 1 para. 38).
8. Consistency of presentation – that the presentation and classification of financial
statements items should be consistent from one period to the next, unless changes are
required by Accounting Standards or in the interests of more reliable and relevant
presentation of financial information as may arise when there is a significant change in

Most of these principles have some degree of subjectivity. IFRS are principles-based standards
and their application often requires the exercise of professional judgment. For instance there is
subjectivity in assessing whether transactions, events and conditions are represented faithfully
because there are numerous ways in which they can be represented. See, for example, the
alternative ways that certain financial instruments could be measured (refer chapter 7). The going
concern assumption involves a subjective assessment of whether the entity is a going concern.
Materiality is defined subjectively, based on judgments about whether it the omission or
misstatement would influence users’ decisions, rather than objectively, such as a quantified test.
2. Why is it important for entities to disclose the measurement bases used in
preparing the financial statements?
It is important for entities to disclose the measurement bases used in preparing the financial
statements because Accounting Standards permit alternatives – such as cost or fair value for
PP&E. Therefore users need to know which alternatives the entity has chosen so as to
understand how items are measured and for purposes of comparison with the financial statements
of other entities.

3. How do the presentation and disclosure requirements of IFRS Standards reflect the
objectives of financial statements? Illustrate your argument with examples from IAS 1, IAS
8 and IAS 10.
As stated in paragraph OB2 of the Conceptual Framework the objective of financial statements
is to provide financial information about the reporting entity that is useful to current and
prospective investors and creditors in making decisions about providing resources to the entity.
IAS 1 requires financial statements to present fairly the financial position, financial performance
and cash flows of the entity because this type of information is considered useful to decision
making. Paragraph 97 of IAS 1 requires separate disclosure of the nature and amount of material
items of income and expense. Material items are defined as those items for which omission or
misstatement could individually or collectively influence the economic decisions of users. The
requirement to present items of income and expense that could influence users’ decisions is
consistent with the decision-usefulness objective of financial statements.
The requirements in IAS 10 to make adjustments or disclosures in relation to events occurring
after the reporting period provide more timely and comprehensive information to users of
financial statements. This is consistent with the decision-useful objective of financial statements
because the timeliness and comprehensiveness of information enhances its usefulness for
decision making.
IAS 8 requires the restatement of comparative information when there has been a change of
accounting policies.
4. What is the purpose of a statement of financial position? What comprises a
complete set of financial statements in accordance with IAS 1?
The purpose of a statement of financial position is to provide information about an entity’s
financial position, by summarising the entity’s assets, liabilities and equity. It thus provides the
basic information for evaluating an entity’s capital structure and analysing its liquidity, solvency
and financial flexibility and also provides a basis for computing rates of return and measures of
solvency and liquidity.

The statement of financial position should be used in conjunction with other financial statements
to obtain a more comprehensive understanding of the liquidity, solvency and financial flexibility.
A complete set of financial statements comprises:
a statement of financial position
a statement of profit or loss and other comprehensive income for the period
a statement of changes in equity
a statement of cash flows
notes, comprising significant accounting policies and other explanatory information
comparative informatio
5. What are the major limitations of a statement of financial position as a source of
information for users of general purpose financial statements?
The major limitations of a statement of financial position as a source of information about an
entity’s financial position are:
(a) The optional measurement of certain assets, such as property, plant and equipment at
historical cost or depreciated historical cost (where the asset has a limited useful life) rather
than a current value. Hence there may be a lack of comparability between the statement of
financial position of one entity with the statement of financial position of another. Further,
the use of cost/depreciated cost as the basis of measurement leads to the statement of
financial position not giving a view of a current value of recognised assets.
(b) The mandatory omission of intangible self-generated assets (such as brand names and
mastheads and goodwill) from the statement of financial position as required by IAS 38
Intangible Assets.
(c) The omission of various rights and obligations (such as non-cancelable operating leases)
from the statement of financial position. This is particularly important as their omission
results in off-balance sheet liabilities and assets that distort the reported leverage of the entity.
As a consequence of these limitations, the statement of financial position of an entity does not
purport to present a total picture of the real worth of the entity, nor does it purport to report all
assets controlled by the entity and all the obligations of the entity.
6. Under what circumstances are assets and liabilities ordinarily classified broadly in
order of liquidity rather than on a current/non-current classification?
The presentation of the statement of financial position based on liquidity, rather than on a
current/non-current basis is adopted when a presentation based on liquidity is considered to
provide more relevant and reliable information. This situation is largely confined to entities such
as financial institutions which do not have a clearly identifiable operating cycle, as does a
manufacturer or a retailer

7. Can an asset that is not realisable within 12 months ever be classified as a current
asset? If so, under what circumstances?
One of the criteria for classifying an asset as current under IAS 1 is that it is expected to be
realised, or is intended for sale or consumption, in the entity’s normal operating cycle. Thus, if
an entity’s operating cycle is longer than 12 months it is possible for an asset that is not
realisable
within 12 months to be classified as a current asset. Examples of operating cycles that may
extend beyond 12 months include property development, construction, wine and cheese making.
8. What is the objective of a statement of changes in equity?
The main purpose of a statement of changes in equity is to report transactions with equity
holders, such as new share issues and the payment of dividends, and any retrospective
adjustments to the opening balances of components of equity.
9. Why is a summary of accounting policies important to ensuring the
understandability of financial statements to users of general purpose financial
statements?
A summary of accounting policies is important to ensuring the understandability of financial
statements to general users of financial statements for the following reasons:
Various options exist in certain IFRSs (such as the option to revalue property, plant and
equipment as an alternative to using historical costs) and therefore it is essential that the
summary of accounting policies identify which options have been adopted (where relevant).
Under IFRSs various assets of an entity (such as internally generally brand names and self-
generated goodwill) and rights and obligations (such as non-cancelable operating leases) are
not recognised in an entity’s statement of financial position. The summary of accounting
policies helps ensure users of financial statements are aware of these omissions.
10. Provide an example of a judgement made in preparing the financial statements that
can lead to estimation uncertainty at the end of the reporting period. Describe the
disclosures that would be required in the notes.
Some of the more important judgements that can lead to uncertainty required in the preparation
of financial statements concern:
Useful life of plant and equipment for depreciation purposes;
Residual value of plant and equipment;
Useful life of intangible assets, including whether the assets have an indefinite life or a finite
life;
Assessment as to whether there is any indication that an asset is impaired and, if so, the
measurement of the recoverable amount of the asset, including estimating future cash flows
and the appropriate discount rate for value in use measures;
Estimation of the fair value of assets and liabilities acquired in a business combination

11. What disclosures are required in the notes in regard to accounting policy
judgements?

An entity is required by paragraph 122 of IAS 1 to disclose judgements that management has
made in the process of applying accounting policies that have the most significant effect on the
amounts recognised in the financial statements, e.g.:
Assessment of the business model employed for managing financial assets (refer IFRS 9);
Whether certain transactions are sales of goods or are in substance financing arrangements;
Whether an active market exists for certain intangible assets to support the adoption of the
fair value basis of measurement (refer IAS 38);
Determining the functional currency of net investments in foreign operations, as required by
IAS 21;
Whether the actions of management and the Board in relation to a restructuring have been
such as to constitute a constructive obligation and therefore justify the recognition of a
provision for the costs of the restructuring (refer IAS 37).

12. What is the difference between an accounting policy and an accounting estimate?
Provide an example of each.
An accounting policy is a principle or conventions applied in preparing financial statements,
typically in recognising and measuring the financial effects of transactions and events. For
example, recognising assets at the lower of cost and recoverable amount is an accounting policy.
An accounting estimate is an estimation used in the application of accounting policies. For
example, the measurement of the value-in-use of an asset requires estimation of the future cash
flows to be derived from using the asset. The estimation of the depreciable amount of an asset
requires an estimation of the residual value of the asset at the end of its useful life.