3.5 Overriding concepts of financial statements

Question 1

Financial statements are usually prepared on a going concern basis, but when should this not be the case (IAS1)?

Answer 1

When there are material uncertainties over the entity’s ability to continue to operate in the foreseeable future as a going concern.

Question 2

What is the “accruals” concept?

Answer 2

The basis for asset and liability recognition that results in accurate reporting of the company’s financial performance and position over different periods. i.e. revenue is reported at the time that it is earned (rather than when cash actually changes hands).

Question 3

According to IAS1, which information must be prepared on the accrual basis?

Answer 3

All information in the financial statements other than cash flow information.

Question 4

What is meant by “matching principle”?

Answer 4

A concept in accrual accounting, whereby expenses and the corresponding revenue are recorded in the same period (wherever it is logical to do so).

Question 5

What does IAS1 require with regard to materiality?

Answer 5

Each material class of similar items should be presented separately within the statements, and items that are dissimilar in terms of nature or function should be presented separately unless immaterial.

Question 6

What are the most common material items reported in financial statements?

Answer 6

Directors remuneration and related parties’ disclosures. These are often small but material due to the impact on stakeholders.

Question 7

How frequently must entities prepare financial statements according to IAS1?

Answer 7

At least annually

Question 8

If an entities’ reporting period is changed to less or more than one year, what disclosure should be made under IAS1?

Answer 8

1 The reason for the change

2 The fact that the comparative figures given are not entirely comparable.

Question 9

Under what circumstances may an item be offset under IAS1?

Answer 9

Only where required or permitted by a standard or an interpretation.