presentation of financial instruments in financial statements

How to Present Financial Instruments under IAS 32

There are three IFRS covering the area of the most complex IFRS topic – financial instruments:

• IAS 32 Presentation of Financial Statements – this standard contains basic definitions and rules for presenting of financial instruments;
• IFRS 7 Financial Instruments: Disclosures – here, you can find a list of all necessary information that you need to include in the notes to the financial statements about your financial instruments, and
• IFRS 9 Financial Instruments – the newest one and the most famous one because it contains all the rules about the recognition, derecognition, measurement of financial instruments and other topics.

You can find the summary of IFRS 9 here and summary of IFRS 7 here .

Also, I dedicated a fair number of articles and podcasts to the financial instruments, so you can browse them here .

In today’s article, I would like to come back to basics, because financial instruments can be quite confusing and we need to explain clearly what they are and how to present them.  

What is the objective of IAS 32?

International Accounting Standard 32, or IAS 32, establishes principles for presenting the financial instruments and especially:

• It provides definitions of financial instruments,
• It shows us how to distinguish equity from liabilities ,
• It contains the guidance for compound financial instruments ,
• It prescribes the rules for presenting the treasury shares
• It states conditions when you can offset a financial asset and a financial liability in your statement of financial position,

just to name a few main topics.  

What is a financial instrument?

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. (IAS 32.11)

Here, the contract is important.

This is the main difference between the financial instruments and other assets and liabilities: a contract.

While you don’t have to have any contract to recognize a car or a software program as your non-current asset, you DO have to enter into some sort of a contract to recognize a financial instrument.

You can see three main types of financial instruments arising from the definition:

• Financial asset;
• Financial liability; and
• Equity instrument

Let’s break it down.  

Definition of a financial asset

In line with IAS 32.11, a financial asset is any asset that is:

• Cash. This is crystal clear – all petty cash, bank accounts and other cash equivalents are financial assets.
• An equity instrument of another entity. Example: if you buy shares of Apple on the stock exchange, then Apple shares are your financial asset (and equity instrument of Apple).
• Receive cash or another financial asset from another entity. Example: trade receivables, issued loans, purchased bonds. Or,
• To exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity. Example: purchased call options, purchased put options.
• a non-derivative for which the entity is or may be obliged to receive a variable a number of the entity’s own equity instruments, or
• a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments.

Definition of a financial liability

Under IAS 32.11, a financial liability is any liability that is:

• Deliver cash or another financial asset from another entity. Example: trade payables, taken loans, issued bonds. Or,
• To exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity. Example: written call options, written put options.
• a non-derivative for which the entity is or may be obliged to deliver a variable a number of the entity’s own equity instruments, or

There are few exceptions when the instrument meets the definition of a financial liability, but it is still classified as an equity instrument, for example puttable instruments or obligations on liquidation.  

Definition of an equity instrument

In line with IAS 32.11, an equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

So, equity instrument is basically YOUR own equity and it may not include only shares, but also certain warrants, options and other instruments.

You can get more insights into the definitions of financial instruments here .  

How to present financial instruments?

The fundamental rule in IAS 32.15 is to classify the financial instruments on initial recognition as a financial liability, a financial asset or an equity instrument in accordance with:

• The substance of the contract, and
• The definitions of a financial asset, financial liability and an equity instrument.

It not such a big deal to classify financial assets, but sometimes there are challenges to distinguish between financial liabilities and equity instruments.  

Equity or liability?

The main question to respond when classifying an instrument as either a financial liability or an equity instrument is:

Is there a contractual obligation to deliver cash or another financial asset to another entity?

Or alternatively, to exchange financial assets or financial liabilities under potentially unfavorable conditions?

If yes , then the instrument is a financial liability .

If not , then the instrument is an equity instrument .

However, what if there is an obligation to deliver own equity instruments and not cash or another financial asset?

We are getting to back to the difficult part of the definitions – transactions in own equity.  

Transactions in own equity

According to IAS 32.16, an equity instrument is:

• A non-derivative that includes no contractual obligation to deliver a variable number of own equity instruments , or
• A derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial asset for a fixed amount of its own equity instruments .

To make it simple, two most important things to watch out are:

• Are equity instruments own or issued by somebody else?
• Is the amount to deliver or exchange fixed or variable?

Let me show you a few illustrations:

• You sell an option to deliver 100 shares of Apple to your friend. This is a financial liability, because the shares are NOT YOUR OWN shares. They are shares of somebody else (Apple in this case).
• You sell an option to deliver your own shares in total value of CU 100 to your friend. This is a financial liability, too, because although the shares are yours, their number is variable. Why? Because, the exact number of shares will depend on the current price of the share at the delivery. You will calculate it as 100 divided by the market price of one share.
• You sell an option to deliver 100 pieces of your own shares to your friend. This is an equity instrument, because the shares are yours and their amount is fixed – 100.

Compound financial instruments

Some financial instruments have both liability and equity component.

For example, a convertible bond where an issuer issues a bond to a holder and the holder has an option to get the bond repaid by some number of the ordinary shares of issuer instead of taking cash.

There are two components:

• A financial liability: a loan , because the issuer has a liability to settle the loan with transfer of cash; and
• An equity instrument: a call option written to the holder to deliver some number of ordinary shares.

In this case, an issuer needs to classify and present these two elements separately:

• The loan element is presented as a financial liability, and
• The call option element is presented as an equity instrument.

There are more methods to do so and you can learn more about accounting for compound financial instruments in this article .

Also, the IFRS Kit contains loads of examples and illustrations about financial instruments including warrants, compound instruments and more, so if interested, check it out here .  

Treasury shares

Treasury shares are the term used by IAS 32 for own shares .

If you acquire own shares, you need to deduct them from equity and NOT recognize them as financial assets.  

Offsetting a financial asset and a financial liability

Offsetting means presenting a financial asset and a financial liability as one single net amount in the statement of financial position.

IAS 32.42 sets the following rules when you must offset a financial asset with a financial liability:

• When you have a legally enforceable right to set off the recognized amounts, and
• When you intend to settle on a net basis, or realize the asset and the liability simultaneously.

Small illustration:

Imagine you run a supermarket and you buy goods from a local producer.

You purchased some goods and you have a liability of CU 1 000.

But, you charged promotion fees amounting to CU 50 to your supplier, because you issue a leaflet and include his products there.

So, at the same time, you have a receivable of CU 50.

You can present these two items as a net financial liability of CU 950, if there are no legal restrictions to do so and if you agreed with the supplier somewhere in the contract that you would make net payments.  

IAS 32 Video

IAS 32 arranges also other issues, such as puttable financial instruments, classification of rights issues, contingent settlement provisions and others.

You can watch the video with the summary of IAS 32 here:

Any comments or questions? Please leave me a message below. Thank you!

JOIN OUR FREE NEWSLETTER AND GET

report "Top 7 IFRS Mistakes" + free IFRS mini-course

Please check your inbox to confirm your subscription.

37 Comments

Some financial instruments contain elements of both, liability and equity. IAS 32 Financial Instruments presentation requires segregating these two elements and disclosing them separately Explain the reason for separately identifying liability and equity elements of compound financial instruments.

Is that a homework?

I’m interested in the topic of offsetting a financial asset and a financial liability. What does it mean by when you have a legally enforceable right to set off the recognized amounts, and when you intend to settle on a net basis, or realize the asset and the liability simultaneously? I do not understand the sentences behind the rules. Would you be able to provide an examples on this? Really appreciate it. Thank you

Para 37 of IAS 32 states that transaction costs of an equity transaction are accounted for as a deduction from equity and the costs of an equity transaction that is abandoned are recognized as an expense.

the cost incurred with respect to equity related transactions are gradual. For eg. milestone based cost of financial and legal advisors. How to account for such costs ? Do i need to create a reserve in equity and build up the cost there and show it as a negative number and net the same with share premium account once the equity is injected. Further, what if subsequently, the transaction is abandoned, how to i charge the cost incurred to profit and loss that was already shown under equity statement.

hi silivia i just wondering if a company A has a full control on a company B for example and the subsidiary (B) has bought from A shares why this treat as a treasury shares although i can treat this as a non controlling interest on the consolidated financial statement to show the capital of parent deducted the value of treasury shares and show the treasury shares in NCI as a separate account ?? can you justify why this show in consolidated deducted from the capital of parents only ?

Hi Silvia thanks a lot for making IFRS easy and understandable for normal people. I have question on the definitions of Financial assets and Financial liabilities. in the definition of both there is one common point is there that is “a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments” . Its confusing me why the same sentence is included in both the definitions with out using the words “obliged receive” in Financial Assets’s and “obliged to deliver” for Financial liabilities. Please help me to understand this.

The company has invested below 10% in CCPS of the company and simultaneous given a loan too that company. The loan entitles the investor company to have seat in board as an observor. The investment will be be treated and recognized under IFRS 9 at fair value and subsequently measurement will be done through FVOCI or FVTP&L.

Please correct my understanding.

Hi Silvia, I find your teaching is so effective and I thank you for the same, I want you to pls clear my doubt here when you mentioned financial asset are also fa that is arising from contracts which will be settled in own equity shares, I am very confused what is this, is it an investment in own convertible debenture, if so how?? Pls reply

hello silvia, can you please explain the puttable instruments under IAS 32 and its exception. Thanks in advance

Hi, A company deposits annual amount in accordance to a tripartite escrow agreement with a bank. The annual deposit amount will earn interest. After six years, the deposit amount can be refunded only after examination of fulfillment of certain conditions by government authority. If the government authority does not approve after sixth year because the company has failed in fulfilling those conditions then the whole amount deposited with bank along with interest thereon will be forfeited. During these six year periods, the company can not deal with the deposits and interest in any manner. Whether the deposit will be a financial assets for the company though it has no control over it during these six years? Whether the company can account for annual interest on deposits as its own interest income during these years?

Hi Siliva! nice to get u. I really love the way u are discussing the issues in IFRS. It is very simple and clear.but i have one concern. i intend to have ur complete packages but no means to effect payment here from Ethiopia.So is there any ways to that?Or can i have it free of payment? With kind regards!

Hi Sylvia, Can you please help me with an example to understand a financial asset which is a non-derivative for which the entity is or may be obliged to receive a variable a number of the entity’s own equity instruments.

I got lot of example for derivative, but not a single one on non-derivative.

Please help

I’m confused by this category of financial asset too. I have just come up with an example. Com A provides a service to Com B for $50,000. In return, Com A will receive a variable amount of its shares from Com B that is worth $50,000. So if Com A share is at market value $10, Com A will receive 5,000 own shares. IF the Com A share is at market value $20, Com A will receive 2,500 own shares from Com B.

Thank you , Silvia

Hello,,, I want to contact with you via E-mail . what is your email , please ?

You can contact us here . S.

hi sylvia IAS 32 and IFRSB 9, IFRS 7 .there is different concept which explain financial instrument.

Hi Bernard, what is the question, please? S.

Good Day Mrs Sylvia I Trust that this email serves you well. Thank you for your kind and easy information as set out in your kit, i hope to pass my exam in weeks time. I would like to ask what is the easy way of identifying whether one is dealing with a FA/FL especially when it is classified through the Amortization table. I am looking forward to hear from you soon. Kind Regards

Hi Silvia, I have contracted a Forward contract between 2 currencies ( the local currency and the USD), Please advise if I will need to have a revaluation at year end for this Forward contract.

Yes, you will. It is still a derivative.

Hi Silvia, I have a situation linked to IFRS15, if you could find some time to answer me it will be great. In case the incentive costs offered to customers are linked to trip abroad. According to IFRS15 I need to treat this as loyalty program and deferred my revenue until the moment of performance obligation linked to points gain to get the trip is satisfied. My question is linked to the cost of trip itself, where should this be shown in marketing (OPEX) or discount (affecting gross margin of the product incentive’s with the points)? Thank you very much for your time and nice presentation of your site!

Dear Irina, this comment is out of topic. Please post it under the relevant topic to keep it tidy.Thank you! S.

my employer company is erecting a building on land lease holding. The lease period is for 50 years the amount is Ethiopian birr four million. Can I capitalized land lease amortization until the building construction is completed? when the building commences a service can be recorded as period expense every year? Please help me for the question. Thanks

Dear sileshi, this comment is out of topic. Please post it under the relevant topic to keep it tidy.Thank you! S.

I wonder whether accrued liabilities, e.g. payroll accrual, invoice accrual are financial instruments as well? thanks!

Hi Maggie, no, because accruals do not meet the definition of a financial instrument.

Thank you Silvia-for invoice accrual,it’s techincally AP,why it does’nt meet the definition？

Hi Silvia, Can you please advise why shares bought by an investment company (the investor) are treated as Trading stock through profit or loss (as financial assets)? What’s the obligation to delivery ‘cash’ by the investee companies? I do not understand why Cryto currencies are often treated as Intangible assets but some of those currencies that are tradeable could also be treated as Inventories. Thank you. Brian

Hi Brian, shares do not necessarily contain obligation to deliver cash by the investees. Instead, it is an equity instrument in another entity (see the definition of a financial asset). As for Crypto currencies, I see I need to make an article about it. Crypto currencies simply do not meet the definition of financial assets, because there is no contract (no counterparty). That’s the main reason why they are treated as intangibles. UPDATE 2020: Here is the article.

Thanks for all this stuff, it really helps us in passing ACCA exams. Can you please explain, explain the Financial asset & liability with prospective of Investor and Investee separately?

Hi slvia, thank you for your effort and dependable contribution to wards the awareness of this new reporting requirement. Keep it up

Hi Silvia, Thank you for your informative guidance on the “Financial Instruments”. In this regard, while it is understood that for the trade receivables and issued loans, there is a contractual right to receive cash from another equity, under what circumstances will there be a contractual right to receive another FINANCIAL ASSETS from another entity?

Hi Edmund, thank you! Just to make up some example quickly – when, for example, you agree to accept short-term government treasury notes in return for the delivery of your goods, not cash.

Hi Silvia Really great article I have a question what the difference between Compound financial instruments and Embedded derivatives ?

Hi Othman, compound financial instrument = equity component + liability component, for example convertible bond. hybrid financial instrument = underlying instrument (non-derivative) + embedded derivative, for example contract between German and Norwegian company to buy some goods and pay in Swiss francs. Here, underlying is a commodity contract, embedded derivative is a foreign currency forward contract.

Convertible bond can be used to explain these 2 concepts of compound financial instrument and embedded derivatives. Compound instrument = Equity component (Option to convert to equity) + Liability component (Bond) Hybrid instrument = Embedded derivative (Option to convert to equity) + Non derivative (Bond)

Leave a Reply Cancel reply

Recent Comments

• Shubham Shah on Foreign currency rates to use when they are not available
• Alkhaldi on What are directly attributable costs?
• Asif on How to account for intercompany loans under IFRS
• Silvia on IFRS 15 vs. IAS 18: Huge Change Is Here!
• Mo on IFRS 15 vs. IAS 18: Huge Change Is Here!
• Accounting Policies and Estimates (14)
• Consolidation and Groups (24)
• Current Assets (21)
• Financial Instruments (54)
• Financial Statements (48)
• Foreign Currency (9)
• IFRS Videos (65)
• Insurance (3)
• Most popular (6)
• Non-current Assets (54)
• Other Topics (15)
• Provisions and Other Liabilities (44)
• Revenue Recognition (26)

JOIN OUR FREE NEWSLETTER

report “Top 7 IFRS Mistakes” + free IFRS mini-course

1514305265169 -->

We use cookies to offer useful features and measure performance to improve your experience. By clicking "Accept" you agree to the categories of cookies you have selected. You can find further information here .

IFRScommunity.com

IFRS Forums and IFRS Knowledge Base

Presentation of Financial Statements (IAS 1)

Last updated: 17 May 2024

IAS 1 serves as the main standard that outlines the general requirements for presenting financial statements. It is applicable to ‘general purpose financial statements’, which are designed to meet the informational needs of users who cannot demand customised reports from an entity. Documents like management commentary or sustainability reports, which are often included in annual reports, fall outside the scope of IFRS, as indicated in IAS 1.13-14. Similarly, financial statements submitted to a court registry are not considered general purpose financial statements (see IAS 1.BC11-13).

The standard primarily focuses on annual financial statements, but its guidelines in IAS 1.15-35 also extend to interim financial reports (IAS 1.4). These guidelines address key elements such as fair presentation, compliance with IFRS, the going concern principle, the accrual basis of accounting, offsetting, materiality, and aggregation. For comprehensive guidance on interim reporting, please refer to IAS 34 .

Note that IAS 1 will be superseded by the upcoming IFRS 18 Presentation and Disclosure in Financial Statements .

Now, let’s explore the general requirements for presenting financial statements in greater detail.

Financial statements

Components of a complete set of financial statements.

Paragraph IAS 1.10 outlines the elements that make up a complete set of financial statements. Companies have the flexibility to use different titles for these documents, but each statement must be presented with equal prominence (IAS 1.11). The terminology used in IAS 1 is tailored for profit-oriented entities. However, not-for-profit organisations or entities without equity (as defined in IAS 32), may use alternative terminology for specific items in their financial statements (IAS 1.5-6).

Are you tired of the constant stream of IFRS updates? I know it's tough! That's why I created Reporting Period – a once-a-month summary for professional accountants. It consolidates all essential IFRS developments and Big 4 insights into one readable email. I personally curate every issue to ensure it's packed with the most relevant information, delivered straight to your inbox. It's free, with no spam, and if it turns out not to be right for you, you can unsubscribe with just one click.

Compliance with IFRS

Financial statements must include an explicit and unreserved statement of compliance with IFRS in the accompanying notes. This statement is only valid if the entity adheres to all the requirements of every IFRS standard (IAS 1.16). In many jurisdictions, such as the European Union, laws mandate compliance with a locally adopted version of IFRS.

IAS 1 does consider extremely rare situations where an entity might diverge from a specific IFRS requirement. Such a departure is permissible only if it prevents the presentation of misleading information that would conflict with the objectives of general-purpose financial reporting (IAS 1.20-22). Alternatively, entities can disclose the impact of such a departure in the notes, explaining how the statements would appear if the exception were made (IAS 1.23).

Identification of financial statements

The guidelines for identifying financial statements outlined in IAS 1.49-53 are straightforward and rarely cause issues in practice.

Going concern

The ‘going concern’ principle is a cornerstone of IFRS and other major GAAP. It assumes that an entity will continue to operate for the foreseeable future (at least 12 months). IAS 1 mandates management to assess whether the entity is a ‘going concern’. Should there be any material uncertainties regarding the entity’s future, these must be disclosed (IAS 1.25-26). IFRSs do not provide specific accounting principles for entities that are not going concerns, other than requiring disclosure of the accounting policies used. One of the possible approaches is to measure all assets and liabilities using their liquidation value.

See also this educational material at IFRS.org.

Materiality and aggregation

IAS 1.29-31 emphasise the importance of materiality in preparing user-friendly financial statements. While IFRS mandates numerous disclosures, entities should only include information that is material. This concept should be at the forefront when preparing financial statements, as reminders about materiality are seldom provided in other IFRS standards or publications.

Generally, entities should not offset assets against liabilities or income against expenses unless a specific IFRS standard allows or requires it. IAS 1.32-35 offer guidance on what can and cannot be offset. Offsetting of financial instruments is discussed further in IAS 32 .

Frequency of reporting

Entities are required to present a complete set of financial statements at least annually (IAS 1.36). However, some Public Interest Entities (PIEs) may be obliged to release financial statements more frequently, depending on local regulations. However, these are typically interim financial statements compiled under IAS 34 .

IAS 1 also allows for a 52-week reporting period instead of a calendar year (IAS 1.37). This excerpt from Tesco’s annual report serves to demonstrate this point, showing that the group uses 52-week periods for their financial year, even when some subsidiaries operate on a calendar-year basis:

If an entity changes its reporting period, it must clearly disclose this modification and provide the rationale for the change (IAS 1.36). It is advisable to include an explanatory note with comparative data that aligns with the new reporting period for clarity.

Comparative information

As a general guideline, entities should present comparative data for the prior period alongside all amounts reported for the current period, even when specific guidelines in a given IFRS do not require it. However, there’s no obligation to include narrative or descriptive information about the preceding period if it isn’t pertinent for understanding the current period (IAS 1.38).

If an entity opts to provide comparative data for more than the immediately preceding period, this additional information can be included in selected primary financial statements only. However, these additional comparative periods should also be detailed in the relevant accompanying notes (IAS 1.38C-38D).

IAS 1.40A-46 outlines how to present the statement of financial position when there are changes in accounting policies, retrospective restatements, or reclassifications. This entails producing a ‘third balance sheet’ at the start of the preceding period (which may differ from the earliest comparative period, if more than one is presented). Key points to note are:

• The third balance sheet is required only if there’s a material impact on the opening balance of the preceding period (IAS 1.40A(b)).
• If a third balance sheet is included, there’s no requirement to add a corresponding third column in the notes, although this could be useful where numbers have been altered by the change (IAS 1.40C).
• Interim financial statements do not require a third balance sheet (IAS 1.BC33).

IAS 8 also requires comprehensive disclosures concerning changes in accounting policies and corrections of errors .

Statement of financial position

IAS 1.54 enumerates the line items that must, at a minimum, appear in the statement of financial position. Entities should note that separate lines are not required for immaterial items (IAS 1.31). Additional line items can be added for entity-specific or industry-specific matters. IAS 1 permits the inclusion of subtotals, provided the criteria set out in IAS 1.55A are met.

Additional disclosure requirements are set out in IAS 1.77-80A. Of particular interest are the requirements pertaining to equity (IAS 1.79), which begin with the number of shares and extend to include details such as ‘rights, preferences, and restrictions relating to share capital, including restrictions on the distribution of dividends and the repayment of capital.’ While these kinds of limitations are common across various legal jurisdictions (for example, not all retained earnings can be distributed as dividends), many companies neglect to disclose such limitations in their financial statements.

For guidance on classifying assets and liabilities as either current or non-current, please refer to the separate page dedicated to this topic.

Statement of profit or loss and other comprehensive income

IAS 1 provides two methods for presenting profit or loss (P/L) and other comprehensive income (OCI). Entities can either combine both P/L and OCI into a single statement or present them in separate statements (IAS 1.81A-B). Additionally, the P/L and total comprehensive income for a given period should be allocated between the owners of the parent company and non-controlling interests (IAS 1.81B).

Minimum contents in P/L and OCI

IAS 1.82-82A specifies the minimum items that must appear in the P/L and OCI statements. These items are required only if they materially impact the financial statements (IAS 1.31).

Entities are permitted to add subtotals to the P/L statement if they meet the criteria specified in IAS 1.85A. Operating income is often the most commonly used subtotal in P/L. This practice may be attributed to the 1997 version of IAS 1, which mandated the inclusion of this subtotal—although this is no longer the case. IAS 1.BC56 clarifies that an operating profit subtotal should not exclude items commonly considered operational, such as inventory write-downs, restructuring costs, or depreciation/amortisation expenses.

Profit or loss (P/L)

All items of income and expense must be recognised in P/L (or OCI). This means that no income or expenses should be recognised directly in the statement of changes in equity, unless another IFRS specifically mandates it (IAS 1.88). Direct recognition in equity may also result from intra-group transactions . IAS 1.97-98 require separate disclosure of material items of income and expense, either directly in the income statement or in the notes.

Expenses in P/L can be presented in one of two ways (IAS 1.99-105):

• By their nature (e.g., depreciation, employee benefits); or
• By their function within the entity (e.g., cost of sales, distribution costs, administrative expenses).

When opting for the latter, entities must provide additional details on the nature of the expenses in the accompanying notes (IAS 1.104).

Other comprehensive income (OCI)

OCI encompasses income and expenses that other IFRS specifically exclude from P/L. There is no conceptual basis for deciding which items should appear in OCI rather than in P/L. Most companies present P/L and OCI as separate statements, partly because OCI is generally overlooked by investors and those outside of accounting and financial reporting circles. The concern is that combining the two could reduce net profit to merely a subtotal within total comprehensive income.

All elements that constitute OCI are specifically outlined in IAS 1.7, as part of its definitions.

Reclassification adjustments

A reclassification adjustment refers to the amount reclassified to P/L in the current period that was recognised in OCI in the current or previous periods (IAS 1.7). All items in OCI must be grouped into one of two categories: those that will or will not be subsequently reclassified to P/L (IAS 1.82A). Reclassification adjustments must be disclosed either within the OCI statement or in the accompanying notes (IAS 1.92-96).

To illustrate, foreign exchange differences arising on translation of foreign operations and gains or losses from certain cash flow hedges are examples of items that will be reclassified to P/L. In contrast, remeasurement gains and losses on defined benefit employee plans or revaluation gains on properties will not be reclassified to P/L.

The practice of transferring items from OCI to P/L, commonly known as ‘recycling’, lacks a concrete conceptual basis and the criteria for allowing such transfers in IFRS are often considered arbitrary.

Tax effects

OCI items can be presented either net of tax effects or before tax, with the overall tax impact disclosed separately. In either case, entities must specify the tax amount related to each item in OCI, including any reclassification adjustments (IAS 1.90-91). Interestingly, there is no such requirement to disclose tax effects for individual items in the income statement.

Statement of changes in equity

IAS 1.106 outlines the minimum line items that must be included in the statement of changes in equity. Subsequent paragraphs specify the disclosure requirements, which can be addressed either within the statement itself or in the accompanying notes. It’s crucial to note that changes in equity during a reporting period can arise either from income and expense items or from transactions involving owners acting in their capacity as owners (IAS 1.109). This means that entities cannot adjust equity directly based on changes in assets or liabilities unless these adjustments result from transactions with owners, such as capital contributions or dividend payments, or are otherwise mandated by other IFRSs.

Statement of cash flows

The statement of cash flows is governed by IAS 7 .

• Explanatory notes

Structure of explanatory notes

The structure for explanatory notes is detailed in IAS 1.112-116. In practice, there are several commonly adopted approaches to organising these notes:

Approach #1:

• Primary financial statements (P/L, OCI, etc.)
• Statement of compliance and basis of preparation
• Accounting policies

Approach #1 is logically coherent, as understanding accounting policies is crucial before delving into the financial data. However, in reality, few people read the accounting policies in their entirety. Consequently, users often have to navigate past several pages of accounting policies to reach the explanatory notes.

Approach #2:

• Primary financial statements (P/L, OCI, etc)

In Approach #2, accounting policies are treated as an appendix and positioned at the end of the financial statements. The advantage here is that all numerical data is clustered together, uninterrupted by extensive descriptions of accounting policies.

Approach #3:

• Explanatory notes integrated with relevant accounting policies

Approach #3 pairs accounting policies directly with the associated explanatory notes. For example, accounting policies relating to inventory would appear alongside the explanatory note that breaks down inventory components.

Management of capital

IAS 1.134-136 outline the disclosures related to capital management. These provisions apply to all entities, whether or not they are subject to external capital requirements. An important note here is that entities are not obligated to disclose specific values or ratios concerning capital objectives or requirements.

IAS 1.137 mandates disclosure of dividends proposed or declared before the financial statements were authorised for issue but not recognised as a distribution to owners during the period. Furthermore, entities are required to disclose the amount of any cumulative preference dividends not recognised.

Disclosure of accounting policies

IAS 1 specifies the requirements for disclosing accounting policy information which are discussed here .

Disclosing judgements and sources of estimation uncertainty

IAS 1 mandates disclosing judgements and sources of estimation uncertainty .

Other disclosures

Additional miscellaneous disclosure requirements are detailed in paragraphs IAS 1.138.

IFRS 18 Presentation and Disclosure in Financial Statements

On 9 April 2024, the IASB issued IFRS 18 Presentation and Disclosure in Financial Statements , which replaces IAS 1 and amends IAS 7. This new standard will be effective from 2027 with early application permitted.

Here are the key changes under IFRS 18:

• Two new subtotals have been added to the income statement: ‘Operating Profit’ and ‘Profit Before Financing and Income Taxes’. This change requires companies to categorise income and expenses into operating, investing, and financing activities.
• A new requirement mandates the reconciliation of non-GAAP measures with IFRS-specified subtotals, but this only applies to P/L measures such as adjusted profit. Other metrics like free/organic cash flow or net debt are not included.
• The statement of cash flows will start with operating profit for the indirect method, and the classification of cash flows related to interest and dividends has been standardised. Typically, dividends and interest paid will fall under financing activities, while those received will be recorded under investing activities.

While many IAS 1 provisions remain under IFRS 18, others, including the basis of financial statement preparation and disclosure of accounting policies, have moved to IAS 8, which will be retitled Basis of Preparation of Financial Statements . For further insights, see the IASB Project Summary .

© 2018-2024 Marek Muc

The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Excerpts from IFRS Standards come from the Official Journal of the European Union (© European Union, https://eur-lex.europa.eu). You can access full versions of IFRS Standards at shop.ifrs.org. IFRScommunity.com is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org.

Questions or comments? Join our Forums

The global body for professional accountants

• Search jobs
• Find an accountant
• Technical activities
• Help & support

Can't find your location/region listed? Please visit our global website instead

• Middle East
• Cayman Islands
• Trinidad & Tobago
• Virgin Islands (British)
• United Kingdom
• Czech Republic
• United Arab Emirates
• Saudi Arabia
• State of Palestine
• Syrian Arab Republic
• South Africa
• Africa (other)
• Hong Kong SAR of China
• New Zealand
• Our qualifications
• Getting started
• Your career
• Apply to become an ACCA student
• Why choose to study ACCA?
• ACCA accountancy qualifications
• Getting started with ACCA
• ACCA Learning
• Register your interest in ACCA
• Learn why you should hire ACCA members
• Why train your staff with ACCA?
• Recruit finance staff
• Train and develop finance talent
• Approved Employer programme
• Employer support
• Resources to help your organisation stay one step ahead
• Support for Approved Learning Partners
• Becoming an ACCA Approved Learning Partner
• Tutor support
• Computer-Based Exam (CBE) centres
• Content providers
• Registered Learning Partner
• Exemption accreditation
• University partnerships
• Find tuition
• Virtual classroom support for learning partners
• Find CPD resources
• Your membership
• Member networks
• AB magazine
• Sectors and industries
• Regulation and standards
• Advocacy and mentoring
• Council, elections and AGM
• Tuition and study options
• Study support resources
• Practical experience
• Our ethics modules
• Student Accountant
• Regulation and standards for students
• Your 2024 subscription
• Completing your EPSM
• Completing your PER
• Apply for membership
• Skills webinars
• Finding a great supervisor
• Choosing the right objectives for you
• Regularly recording your PER
• The next phase of your journey
• Your future once qualified
• Mentoring and networks
• Advance e-magazine
• Affiliate video support
• An introduction to professional insights
• Meet the team
• Global economics
• Professional accountants - the future
• Supporting the global profession
• Download the insights app

Can't find your location listed? Please visit our global website instead

• Financial instruments
• Study resources
• Financial Reporting (FR)
• Technical articles and topic explainers

International Financial Reporting Standard (IFRS®) 9 Financial Instruments and International Accounting Standard (IAS®) 32 Financial Instruments: Presentation are complex standards, especially for users and preparers of financial statements. It is therefore no surprise that ACCA candidates also find them complex.

Both of these standards are relevant when accounting for financial instruments and they are both examinable in the  Financial Reporting (FR)  exam. This article provides a high-level overview of the following financial instrument topics which these standards relate to:

• Financial assets
• Financial liabilities
• Convertible instruments

1.  Financial assets

There are two types of financial asset which we will consider in this article – investments in equity and investments in debt instruments.

(a) Equity instruments Equity instruments are likely to be shares that have been purchased in a company, but not enough to give the investee significant influence (associate), control (subsidiary) or joint control (joint venture).

There are two options here, depending on the business model of the entity and the characteristics of the financial asset. The default category is fair value through profit or loss (FVPL).

Equity instruments: fair value through profit or loss (FVPL) FVPL is the default treatment for equity investments where transaction costs such as broker fees are expensed and not capitalised within the initial cost of the asset. Subsequently, the investment is revalued to fair value at each year end, with the gain or loss being taken to the statement of profit or loss.

Alternatively, equity instruments can be classified as fair value through other comprehensive income (FVOCI) if an election is made. It is important to note that this election must be made on acquisition and is irrevocable so the equity investments cannot retrospectively be treated as FVPL. This is only an option if the equity investment is intended to be a long-term investment (ie it is not held for trading).

Equity instruments: fair value through other comprehensive income (FVOCI) Using FVOCI, the alternative elected treatment, transaction costs must be capitalised as part of the initial cost of the investment. Similar to FVPL, the instrument would then be revalued to fair value at the year end. The big difference is where the gain or loss is recorded – the gain or loss is recognised within other comprehensive income and included as part of other components of equity in the statement of financial position. This might be referred to as an investment revaluation reserve or similar. In many ways it is like accounting for property, plant and equipment (PPE) using the revaluation model. However, unlike the treatment for a revaluation surplus related to PPE, there can be a negative (debit) balance on the investment revaluation reserve.

When the FVOCI instrument is sold, the reserve can be left in the investment revaluation reserve or transferred into retained earnings.

(b) Debt instruments These are usually bonds or loan notes, or other instruments which are likely to carry interest and a capital element of repayment. There are three possible classifications for categorising debt instruments – amortised cost, FVOCI or FVPL.

The classification of an investment in debt instruments should be based on both:

(a)  the entity’s business model for managing financial assets; and

(b)  the contractual cash flow characteristics of the financial asset.

Debt instruments: amortised cost To apply this treatment, the instrument must pass two tests; first the business model test and secondly the contractual cash flow characteristics test.

• Business model test  – the entity must intend to hold the financial assets in order to collect the interest payments and receive repayment on maturity (ie the contractual cash flows).
• Contractual cash flow characteristics test  – the contractual terms give rise to cash flows which are solely repayments of the interest and principal amount.

In the FR exam, it will only be the first test which may (or may not) be met, so management must decide on their intention for holding the debt instrument. This treatment requires candidates to demonstrate the principles of amortised cost accounting.

The principles of amortised cost accounting mean that interest must be recorded on the amount outstanding. This is relatively straight forward for many instruments. For example, on a $10m 5% loan, with $10m repayable at the end of a three-year term, interest would simply be recorded as $500,000 a year.

The issues arise when the balance may be repaid at a premium or initial transaction costs were incurred. For example, the terms of the $10m loan, issued on 1 January 20X1, may be that the holder receives interest of 5% a year, but then receives $11m back at the end of the three-year term, on 31 December 20X3. This means that the holder is now earning finance income in two different ways. Firstly, they are earning the 5% payment each year. Secondly, they are earning another $1m over three years in the form of receiving more money back than they invested.

IFRS 9 requires that a constant rate of interest is applied to this balance to better reflect the reality of the situation. This rate takes into account both the annual payment and the premium payable on redemption. In the FR exam, this rate will be provided in the question and is known as the effective interest rate. Let’s say that in this example, the effective interest rate is 8.08%. This rate is applied to the outstanding balance each year in order to calculate the interest earned (finance income) on the investment, which is the amount to be recorded in finance income in the statement of profit or loss.

The easiest way to do this is often to use a table showing the movement of the asset.  

* Note that the effective interest for 20X3 has been rounded slightly to arrive at the correct closing balance – remember that the initial principal of $10m plus an additional $1m at the end of the three-year loan period is being repaid.

The figures in the effective interest column would be the amounts recorded as finance income in the statement of profit or loss each year. This is increasing to reflect the fact that the amount owed is increasing as it gets closer to redemption.

The balance in the final column reflects the amount owed to the entity at each year end and shows how the balance outstanding increases from $10m to $11m over the three-year period.

The double entries for the asset in year one would be as follows:

1 January 20X1 – The $10m loan is given to the third party. This reduces the entity’s cash balance, but creates a long-term receivable of $10m, meaning the entry is Dr Loan receivable $10m, Cr Cash $10m.

The interest then accrues over the year at the effective interest rate of 8.08%. This increases the amount of the loan receivable and is recorded in finance income, so the entry is Dr Loan receivable $808k, Cr Finance income $808k.

31 December 20X1 – The entity receives a payment of $500,000, being 5% of the original $10m loaned. This figure will be the same each year. This reduces the value owed to the entity, so the entry is Dr Cash $500k, Cr Loan receivable $500k.

The result of these entries is that the entity has a closing loan receivable of $10.308m. This will all be held as a non-current asset, as the amount is not receivable until 31 December 20X3.

This would carry on for the next two years, until the full amount is repaid at 31 December 20X3 with the entry Dr Cash $11m, Cr Loan receivable $11m.

The total finance income to be recorded in the statement of profit or loss over the three years is $2.5m, being the $808k + $833k + $859k. This $2.5m represents all the annual interest earned by the entity over the three years. This consists of the $1.5m annual payments ($500k a year), and the additional $1m received (the difference between loaning the $10m and receiving the $11m).

Debt instruments: fair value through other comprehensive income (FVOCI) Another possible treatment for a debt instrument is to hold it at fair value through other comprehensive income (FVOCI). Similar to holding the instrument at amortised cost, two tests must be passed in order to hold a debt instrument in this manner.

• Business model test  – the objective of the entity’s business model is both to hold the financial assets in order to collect the contractual cash flows and also to sell the assets. This might include sales to manage liquidity needs or in order to maintain particular interest yields.
• Contractual cash flow characteristics test  – the contractual terms give rise to cash flows which are solely repayments of the interest and principle amount.

Again, it is only the first of these that candidates will need to consider in the FR exam, highlighting that the choice of category will depend on the intention of management.

If the entity holds the debt instrument under the FVOCI category, they will still produce the amortised cost table as above, taking the same figure to finance income. At the year end, the asset would then be revalued to fair value, with the gain or loss being recorded in other comprehensive income and presented as an item that may be reclassified subsequently to profit or loss.

Debt instruments: fair value through profit or loss (FVPL) Financial assets should be measured at FVPL unless they are measured at amortised cost or FVOCI. For example, an investment in debt instruments which is held for trading and therefore fails the business model test for amortised cost and FVOCI.

Financial assets measured at FVPL should be revalued at each year end with any revaluation gains or losses being recognised in the statement of profit or loss.

2. Financial liabilities

In the FR exam, financial liabilities will be held at amortised cost. This will be similar to the measurement treatment shown earlier for assets held under amortised cost. Instead of having finance income and an asset, there will be a finance cost and a liability. The major difference in the accounting treatment relates to the initial treatment upon issue of the financial liability. Initially these are recognised at NET PROCEEDS, being the cash received less any issue costs.

Therefore, if an entity looks to raise $10m of funding, but pays a broker $200,000 for raising the finance, the initial double entry is to Dr Cash $9.8m and Cr Liability with the $9.8m. Taking the $200,000 immediately to the statement of profit or loss is incorrect because this fee must be spread over the life of the instrument. This is effectively done by applying the effective interest rate to the outstanding liability. As noted earlier, the effective interest rate will be given to candidates in the exam.

Here, the effective interest rate on the liability now incorporates up to three elements. It would incorporate the annual interest payable, any premium repayable on redemption/repayment, and any issue costs. This is shown in the example below.

EXAMPLE Oviedo Co issued $10m 5% loan notes on 1 January 20X1, incurring $200,000 issue costs. These loan notes are repayable at a premium of $1m on 31 December 20X3, giving them an effective interest rate of 8.85%.

In the above example, the 5% relates to the coupon rate, which is the amount required as an annual payment each year. This is always based on the face value (ie ‘nominal’ or ‘par’ value) of the instrument, so means that $500,000 will be payable annually (being 5% of $10m). Using the wrong figure here is a common mistake in the FR exam – the amount paid each year will remain the same throughout the life of the instrument and should not be calculated based on the carrying amount of the liability each year.

As seen in the earlier example relating to financial assets held at amortised cost, the effective interest rate will be applied to the outstanding balance in each period. Again, a table is the easiest way to calculate this, as shown below.  

* Note that the effective interest for 20X3 has been rounded slightly to arrive at the correct closing balance.

The entries in 20X1 will be as follows:

1 January 20X1 – The loan note is issued, meaning that Oviedo Co receives $9.8m, being the $10m less the issue costs. Therefore, the entries are Dr Cash $9.8m, Cr Loan payable $9.8m.

Over the year, interest on the liability is accrued at the effective interest rate of 8.85%, giving the entry Dr Finance cost $867k, Cr Loan payable $867k.

31 December 20X1 – The payment of $500k is made, giving the entry Dr Loan payable $500k, Cr Cash $500k.

This leaves a closing liability of $10.167m. This will all be presented as a non-current liability, as none of it will be repayable until 31 December 20X3. It would be incorrect to split between a current and non-current component as you would do with a lease. In this example, at 31 December 20X2, £10.567m would be presented as a current liability as it will be repaid in the next 12 months.

If we look at the effective interest column, we will see that the total is $2.7m ($867k + $900k + $933k). This is the total which will be expensed to the statement of profit or loss over the three-year period. This amount consists of three elements:

• $1.5m in annual payments ($500k a year)
• $1m premium repaid (issued $10m loan, but repaid $11m)
• $200k issue costs

As we can see, the issue costs have been expensed over three years, rather than being expensed immediately in 20X1. In other words, they have been amortised (spread) over the life of the liability.

3. Convertible instruments

Convertible instruments are financial instruments which give the holder the right to either demand repayment of the principal amount or alternatively convert the balance into shares. In the FR exam, you will only have to deal with convertible instruments from the perspective of the issuer, being the person who has received the cash on issue of a convertible instrument. They will usually take the form of convertible loan notes or convertible debentures (debt instruments).

Convertible instruments present a special challenge, as these could ultimately result in the issue of shares or the repayment of the loan note/debenture, but the choice will be in the hand of the loan note/debenture holder. As we do not know whether the holder will choose to receive the cash or convert the instrument into shares, we must reflect an element of both within the financial statements. Therefore, these are accounted for by initially separating the instrument into equity and liability components and presenting each component on the statement of financial position accordingly.

The liability component is the first thing to calculate. We work this out by calculating the present value of the payments at the  market rate  of interest (using the interest on an equivalent debt instrument without the conversion option). The discount rates required to do this will be given to you in the exam.

In reality, the market rate of interest will be higher than the coupon rate, being the annual amount payable to the holder of the debt instrument. This is because the holder of the debt instrument is willing to accept a lower rate of annual interest compared to the market, in exchange for the option to convert the debt instrument into shares.

Once the liability component has been calculated, the equity component is then worked out. This is simply a balancing figure and represents the difference between the total cash received on issue and the calculated liability component.

EXAMPLE Oviedo Co issued $10m 5% convertible loan notes on 1 January 20X1. These will either be repaid at par ($10m) on 31 December 20X3 or converted into 10 million ordinary $0.25 shares on that date. Equivalent loan notes without the conversion rights carry an interest rate of 8%. Relevant discount rates are shown below.  

It is important to note that the 5% discount rates are a red herring. It is the discount rates for the market rate of interest that are important – ie 8%. The only thing we need the 5% for is to work out the annual interest payment. As these are $10m 5% loan notes, this simply means that Oviedo Co will need to make an annual payment of $500k in relation to these.

Therefore, we can work out the value that the market would place on these loan notes by looking at the present value of all the payments, discounted at the market rate of interest. If this was a normal loan, ignoring the conversion, Oviedo Co would pay $500k in years 20X1 to 20X3, and then make a final repayment of $10m on 31 December 20X3.

As the market rate of interest is 8%, the present value of these payments can be calculated. These are calculated in the table below.  

The present value of all of the payments can be seen as $9.229m. This means that Oviedo Co received $10m, but the present value of the payments have an initial present value of only $9.229m. As a result, the holders of the loan notes are effectively losing $771k compared to if they had simply given Oviedo Co a normal loan at the market rate of interest.

This $771k is the amount of interest the holders are willing to lose in order to have the option to convert the loan into shares. This is taken as the initial value of the equity element.

On 1 January 20X1, the double entry to record the transaction in the records of Oviedo Co is as follows:

Dr Cash $10m – reflecting the full cash received from the issue of the convertible instrument

   Cr Convertible debt $9.229m – reflecting the present value of the liability component on 1 January 20X1

   Cr Reserve for convertible debt $0.771m – reflecting the value of the equity component

The equity balance would be held as a reserve for convertible debt within other components of equity. It would be incorrect to include it within share capital – this is a common error in the FR exam. Subsequently, this equity amount remains fixed until conversion, but the liability component must be held at amortised cost. This must be $10m by the end of the three-year loan note period, to reflect the amount which the holder would require if they demand repayment rather than conversion of the loan notes.

As with the non-convertible financial liability noted earlier, the effective interest rate column is taken to the statement of profit or loss each year as a finance cost.

At the end of the three years, Oviedo Co will either repay the $10m liability, or this will be converted into 10 million $0.25 shares in accordance with the terms of the instrument, with the $10m balance and the reserve for convertible debt balance of $771k transferred to share capital and share premium/other components of equity as required.

This article has considered the key issues relating to financial instruments that are potentially examinable in the FR exam. To perform well at FR, it is essential that candidates are able to identify the potential treatments for financial assets and liabilities, produce amortised cost calculations and understand the accounting entries required for a convertible instrument. This is one of the most technical areas of the syllabus, but also one of the central areas which will be further developed in   Strategic Business Reporting.

Written by a member of the Financial Reporting examining team

Related Links

• Student Accountant hub page

Advertisement

• ACCA Careers
• ACCA Career Navigator
• ACCA Learning Community

Useful links

• Make a payment
• ACCA-X online courses
• ACCA Rulebook
• Work for us

Most popular

• Professional insights
• ACCA Qualification
• Member events and CPD
• Supporting Ukraine
• Past exam papers

Connect with us

Planned system updates.

• Accessibility
• Legal policies
• Data protection & cookies
• Advertising

The IFRS Foundation is a not-for-profit, public interest organisation established to develop high-quality, understandable, enforceable and globally accepted accounting and sustainability disclosure standards.

Our Standards are developed by our two standard-setting boards, the International Accounting Standards Board (IASB) and International Sustainability Standards Board (ISSB). 

About the IFRS Foundation

Ifrs foundation governance, stay updated.

IFRS Accounting Standards are developed by the International Accounting Standards Board (IASB). The IASB is an independent standard-setting body within the IFRS Foundation.

IFRS Accounting Standards are, in effect, a global accounting language—companies in more than 140 jurisdictions are required to use them when reporting on their financial health. The IASB is supported by technical staff and a range of advisory bodies.

IFRS Accounting

Standards and frameworks, using the standards, project work, products and services.

IFRS Sustainability Disclosure Standards are developed by the International Sustainability Standards Board (ISSB). The ISSB is an independent standard-setting body within the IFRS Foundation.

IFRS Sustainability Standards are developed to enhance investor-company dialogue so that investors receive decision-useful, globally comparable sustainability-related disclosures that meet their information needs. The ISSB is supported by technical staff and a range of advisory bodies.

IFRS Sustainability

Education, membership and licensing.

IAS 1 Presentation of Financial Statements

You need to Sign in to use this feature

IAS 1 sets out overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. It requires an entity to present a complete set of financial statements at least annually, with comparative amounts for the preceding year (including comparative amounts in the notes). A complete set of financial statements comprises:

• a statement of financial position as at the end of the period;
• a statement of profit and loss and other comprehensive income for the period.  Other comprehensive income is those items of income and expense that are not recognised in profit or loss in accordance with IFRS Standards.  IAS 1 allows an entity to present a single combined statement of profit and loss and other comprehensive income or two separate statements;
• a statement of changes in equity for the period;
• a statement of cash flows for the period;
• notes, comprising a summary of significant accounting policies and other explanatory information; and
• a statement of financial position as at the beginning of the preceding comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements.

An entity whose financial statements comply with IFRS Standards must make an explicit and unreserved statement of such compliance in the notes. An entity must not describe financial statements as complying with IFRS Standards unless they comply with all the requirements of the Standards. The application of IFRS Standards, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation. IAS 1 also deals with going concern issues, offsetting and changes in presentation or classification.

Standard history

In April 2001 the International Accounting Standards Board (IASB) adopted IAS 1 Presentation of Financial Statements , which had originally been issued by the International Accounting Standards Committee in September 1997. IAS 1 Presentation of Financial Statements replaced IAS 1 Disclosure of Accounting Policies (issued in 1975), IAS 5 Information to be Disclosed in Financial Statements (originally approved in 1977) and IAS 13 Presentation of Current Assets and Current Liabilities (approved in 1979).

In December 2003 the IASB issued a revised IAS 1 as part of its initial agenda of technical projects. The IASB issued an amended IAS 1 in September 2007, which included an amendment to the presentation of owner changes in equity and comprehensive income and a change in terminology in the titles of financial statements. In June 2011 the IASB amended IAS 1 to improve how items of other income comprehensive income should be presented.

In December 2014 IAS 1 was amended by Disclosure Initiative (Amendments to IAS 1), which addressed concerns expressed about some of the existing presentation and disclosure requirements in IAS 1 and ensured that entities are able to use judgement when applying those requirements. In addition, the amendments clarified the requirements in paragraph 82A of IAS 1.

In October 2018 the IASB issued Definition of Material (Amendments to IAS 1 and IAS 8). This amendment clarified the definition of material and how it should be applied by (a) including in the definition guidance that until now has featured elsewhere in IFRS Standards; (b) improving the explanations accompanying the definition; and (c) ensuring that the definition of material is consistent across all IFRS Standards.

In February 2021 the IASB issued Disclosure of Accounting Policies which amended IAS 1 and IFRS Practice Statement 2 Making Materiality Judgements . The amendment amended IAS 1 to replace the requirement for entities to disclose their significant accounting policies with the requirement to disclose their material accounting policy information.

In October 2022, the IASB issued  Non-current Liabilities with Covenants . The amendments improved the information an entity provides when its right to defer settlement of a liability for at least twelve months is subject to compliance with covenants. The amendments also responded to stakeholders’ concerns about the classification of such a liability as current or non-current.

Other Standards have made minor consequential amendments to IAS 1. They include Improvement to IFRSs (issued April 2009), Improvement to IFRSs (issued May 2010), IFRS 10 Consolidated Financial Statements (issued May 2011), IFRS 12 Disclosures of Interests in Other Entities (issued May 2011), IFRS 13 Fair Value Measurement (issued May 2011), IAS 19 Employee Benefits (issued June 2011), Annual Improvements to IFRSs 2009–2011 Cycle (issued May 2012), IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013), IFRS 15 Revenue from Contracts with Customers (issued May 2014), Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41) (issued June 2014), IFRS 9 Financial Instruments (issued July 2014), IFRS 16 Leases (issued January 2016), Disclosure Initiative (Amendments to IAS 7) (issued January 2016), IFRS 17 Insurance Contracts (issued May 2017), Amendments to References to the Conceptual Framework in IFRS Standards (issued March 2018) and Amendments to IFRS 17 (issued June 2020).

Related active projects

IFRS Accounting Taxonomy Update—Primary Financial Statements

Related completed projects

Clarification of the Requirements for Comparative Information (Amendments to IAS 1)

Classification of Liabilities as Current or Non-current (Amendments to IAS 1)

Definition of Accounting Estimates (Amendments to IAS 8)

Disclosure Initiative (Amendments to IAS 1)

Disclosure Initiative (Amendments to IAS 7)

Disclosure Initiative—Accounting Policies

Disclosure Initiative—Definition of Material (Amendments to IAS 1 and IAS 8)

Disclosure Initiative—Principles of Disclosure

Disclosure Initiative—Targeted Standards-level Review of Disclosures

IFRS Accounting Taxonomy Update—Amendments to IAS 1, IAS 8 and IFRS Practice Statement 2

IFRS Accounting Taxonomy Update—Amendments to IFRS 16 and IAS 1

Joint Financial Statement Presentation (Replacement of IAS 1)

Non-current Liabilities with Covenants (Amendments to IAS 1)

Presentation of Items of Other Comprehensive Income (Amendments to IAS 1)

Presentation of Liabilities or Assets Related to Uncertain Tax Treatments (IAS 1)

Presentation of interest revenue for particular financial instruments (IFRS 9 and IAS 1)

Puttable Financial Instruments and Obligations Arising on Liquidation (Amendments to IAS 32 and IAS 1)

Revised IAS 1 Presentation of Financial Statements: Phase A

Supply Chain Financing Arrangements—Reverse Factoring

Related IFRS Standards

Related ifric interpretations.

IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities

Unconsolidated amendments

Implementation support, your privacy.

IFRS Foundation cookies

We use cookies on ifrs.org to ensure the best user experience possible. For example, cookies allow us to manage registrations, meaning you can watch meetings and submit comment letters. Cookies that tell us how often certain content is accessed help us create better, more informative content for users.

We do not use cookies for advertising, and do not pass any individual data to third parties.

Some cookies are essential to the functioning of the site. Other cookies are optional. If you accept all cookies now you can always revisit your choice on our  privacy policy  page.

Cookie preferences

Essential cookies, always active.

Essential cookies are required for the website to function, and therefore cannot be switched off. They include managing registrations.

Analytics cookies

We use analytics cookies to generate aggregated information about the usage of our website. This helps guide our content strategy to provide better, more informative content for our users. It also helps us ensure that the website is functioning correctly and that it is available as widely as possible. None of this information can be tracked to individual users.

Preference cookies

Preference cookies allow us to offer additional functionality to improve the user experience on the site. Examples include choosing to stay logged in for longer than one session, or following specific content.

Share this page

From Hong Kong to Singapore: Incorporation Services with Spring Discounts! Explore Today!

Hong Kong Business Account

International and local payments

Payment Cards

Foreign Exchange

Get rewarded

Business Guides

Business Account Reviews

Comparisons

Company Secretary Reviews

Whitepapers & E-Books

Industry Newsletters

PayPal Fee Calculator

Stripe Fee Calculator

Invoice Generator

About Statrys

Customer reviews

Partner Programs

What Is a Financial Statement: 4 Types With Examples

6 minute read

Key Takeaways

Financial statements summarise a company's financial activities, presenting comprehensive details about its financial position, performance, and cash flows at a specific time.

There are 4 primary types of financial statements, including the balance sheet, the income statement, the cash flow statement, and the statement of retained earnings.

Whether you're just starting a business or have been operating for a while, having transparent financial reports is crucial. Eventually, you will need to clarify your financial situation, whether for a loan application, investor pitches, or strategic decisions like pricing and revenue projections. In these situations, you will likely need "financial statements."

This article will cover the basics of financial statements, why they're necessary, the various types and examples, and the differences between audited and unaudited statements.

What Is a Financial Statement?

Financial statements are a compilation of written records that display a company's financial activities and performance at a specific time, usually annually, quarterly, or monthly. The purpose is to provide the company's financial position information to internal and external stakeholders.

Financial statements are typically prepared by bookkeepers and accountants who adhere to Generally Accepted Accounting Principles (GAAP) or industry-specific best practices.

Why You Need Financial Statements

Financial statements are crucial for monitoring a company's financial health, obtaining funding, and reducing tax complexities.

Companies often prepare these statements quarterly to assess business profitability, financial stability, and resource allocation. This aids in making informed key decisions, such as pricing strategies, cost reduction, and growth planning.  

When seeking outside investment or loans, these statements offer shareholders and creditors crucial details to assess the company's creditworthiness, risks, and potential returns on investment or loans. Properly prepared financial statements could make securing necessary funding more attainable.

Lastly, annual financial statements are crucial for tax reporting and tax return filing.  Documenting income, expenses, assets, and liabilities in the statements simplifies completing the paperwork required by tax authorities each year.

Get A Multi-currency Business Account

100% online, with applicable payment cards and support from an account manager.

4 Types of Financial Statements

The primary types of financial statements are the balance sheet, income statement, cash flow statement, and statement of retained earnings. 

Each offers a different perspective on a company's financial status. Combined, they provide a complete picture for owners, stakeholders, and investors. 

Let's look into each of these statements to understand their significance and components.

Balance Sheet

A balance sheet is a summary of a company's assets (what the company owns), liabilities (what the company owes), and shareholders' equity (the net worth of shareholders) at the end of a specific period in time, most commonly a year. 

This statement is alternatively known as a statement of financial position or a statement of financial condition.

Components of a Balance Sheet

The 3 main components of a balance sheet consist of assets, liabilities, and shareholders' equity. The table below breaks down the key details. 

This statement is called a balance sheet because the total assets must equal the total liabilities and shareholders' equity, ensuring the balance between what a company owns and what it owes. Therefore, the balance sheet follows the equation: 

Total Assets = Total Liabilities + Total Shareholders' Equity.

 Income Statement

An income statement is a financial record that presents a company's revenue and expenses over a specific period, most commonly a year, indicating whether the company is making a profit or loss. This statement helps business owners determine profit-generating strategies, such as increasing revenues or reducing costs.

An income statement is also referred to as a profit and loss (P&L) statement or an earnings statement.

Components of an Income Statement

The main components of the income statement include revenue, expenses, and net profit or loss. 

These may be broken down into

• Revenue: The total income earned by a business within a specific period.
• Costs of goods sold (COGS): The total expense of making the products, covering the cost of materials and labor.
• Gross profit: The total revenue deducts COGS.
• Total expenses: The total amount of money spent to make, sell, or promote the products.
• Operating income: The total profits minus operating expenses, such as equipment and labor costs.
• Depreciation: The reduction in value of a company's assets over time.
• Pretax income or income before taxes: Income minus costs but before taxes are subtracted.
• Net income: The total income after deducting all costs.

The income statement formula can be written as:

Net income = Revenues – Expenses

Cash Flow Statement

A cash flow statement, also known as a statement of cash flows, aggregates data regarding all cash and cash equivalents, inflows, and outflows that a company experiences in a given period. 

This statement shows where cash is being generated and used and whether the business has enough liquid cash to meet its obligations and invest in assets.

Tip: Explore our articles to find everything you need to know about cash flow management and cash flow analysis.

Components of a Cash Flow Statement

A cash flow statement includes operating activities, investing activities, and financing activities. 

• Operating activities: the cash flow generated or used in regular business operations, including revenue and expenses from goods and services provided.
• Investing activities: The cash flow from buying or selling assets, such as real estate and vehicles, or intangible assets like patents and licenses.
• Financing activities: The cash flow resulting from the acquisition of debt or equity.

Example of Cash Flow Statement

Statement of Retained Earnings 

The retained earnings statement is a financial report that shows the net income a company has retained after distributing dividends to shareholders. It also outlines the changes in this balance during a particular accounting period.

These earnings are usually used to pay off debts or reinvest. When retained earnings gather over time, they can be referred to as accumulated profits.

Some company's financial statements may not feature a separate statement of retained earnings. Instead, this information is included or provided as an addendum to either the income statement or balance sheet.

A statement of retained earnings is also called a statement of change in equity.

Components of a Statement of Retained Earnings 

The retained earnings consist of three main elements: the initial retained earnings at the beginning of the period, the net profit incurred during the accounting period, and the dividends distributed in both cash and stock during the accounting period.

• Beginning Retained Earnings: This is the equity balance from the end of the previous period, which carries forward to the start of the current period.
• Net Income: The profits generated from operations, automatically adding to the company's equity and transferring to retained earnings at the end of the year.
• Dividends: This represents the portion of profits distributed to shareholders rather than being retained by the company.

Retained earnings are calculated by combining the beginning retained earnings with the net income for the current period and then subtracting any dividends paid out to shareholders. 

In other words, the formula is:

Retained Earnings = Beginning Retained Earnings + Net Income − Dividends

Example of Statement of Retained Earnings

How Different Types of Financial Statements Interact

Essentially, a company’s operations, investments, and financing activities are interrelated, resulting in the connection between various types of financial statements.

For instance, the net income detailed in the company's income statement initiates the cash flow statement and contributes to retained earnings on the balance sheet, retained earnings on the statement of retained earnings will be stated on the balance sheet, and depreciation recorded in the income statement affects asset values on the balance sheet. 

Changes in working capital, asset purchases, borrowing, debt repayment, dividends, or stock repurchases affect both the cash and equity balances on the balance sheet and the cash flow statement.

Do Financial Statements Need to Be Audited?

Unaudited financial statements are reports prepared by accountants but have not undergone examination and verification by an external independent auditor. 

In contrast, audited financial statements are reviewed by a certified public accountant (CPA) to ensure compliance with standard accounting rules. Naturally, audited financial statements are more credible, but they require additional time and cost to prepare.

Whether financial statements require auditing depends on the entity and jurisdictions. For instance, in the US, publicly traded companies must file audited financial statements . Similarly, in New Zealand, financial statements submitted to the Companies Office must be audited . In Hong Kong, the Hong Kong Companies Registry mandates auditing for all companies. 

When securing a loan or funding, most potential funders and creditors prefer audited financial statements over unaudited ones.

Get a Good Business Account

Keeping good financial records is essential for a successful business. However, bookkeeping can easily get complicated if you combine personal and business finances in a single account. Hence, having a dedicated business account is the vital first step.

A business account that can be integrated with accounting software and allows you to connect and download transactions directly from your linked business bank account will be a significant plus. This will simplify not only your financial statement preparation but also your overall financial management.

If your business is registered in Hong Kong, Singapore, or the BVI, Statrys offers a multi-currency business account integrated with Xero accounting software and a comprehensive reporting dashboard. 

Here is a quick look at our key services:

What is a simple explanation for financial statements?

Financial statements are summaries that outline a company's financial activities, including its income, expenses, assets, liabilities, equity, and cash flow at a particular point in time.

What are the types of financial statements?

The four basic financial statements include: 1. Balance Sheet: Shows the company's assets, liabilities, and shareholders' equity at a specific period. 2. Income Statement: Outlines the company's revenues and expenses over a period, resulting in net profit or loss. 3. Cash Flow Statement: Details the inflows and outflows of cash and cash equivalents, indicating the company's liquidity. 4. Statement of Retained Earnings: Displays changes in retained earnings over a period, including profits retained in the business after dividends.

What is the objective of financial statements?

The objective of financial statements is to provide stakeholders with a clear and accurate overview of the company's financial status and performance. This information helps in making strategic decisions, securing funding, and complying with regulatory requirements.

When do you need financial statements?

You often need financial statements for annual tax reporting, quarterly company finance assessments, and when asking for loans.  In cases of significant corporate events like changes in ownership, sales, or mergers, up-to-date financial statements are also necessary. They provide a transparent financial snapshot of the company.

Can I prepare financial statements myself?

Depending on the size and needs of your business, you may be able to prepare the unaudited financial statements yourself. However, it's not generally recommended, as errors can lead to fines and more complications. It's often better to work with a professional who is familiar with accounting principles to ensure accuracy and compliance with relevant standards. Additionally, if an audited financial statement is required, it must be prepared by a Certified Public Accountant (CPA) or an equivalent professional.

In this article

Related articles

Bookkeeping vs Accounting: What They Do & Key Differences

Accounting Tips

What is Accounts Receivable (AR)? How Businesses Use Them

What is Bookkeeping? How It Works & Why You Need Them

Browse Accounting Tips

Looking for a business account.

100% online application

No account opening fee, no initial deposit

Physical and virtual cards

The IFRS Foundation is a not-for-profit, public interest organisation established to develop high-quality, understandable, enforceable and globally accepted accounting and sustainability disclosure standards.

Our Standards are developed by our two standard-setting boards, the International Accounting Standards Board (IASB) and International Sustainability Standards Board (ISSB). 

About the IFRS Foundation

Ifrs foundation governance, stay updated.

IFRS Accounting Standards are developed by the International Accounting Standards Board (IASB). The IASB is an independent standard-setting body within the IFRS Foundation.

IFRS Accounting Standards are, in effect, a global accounting language—companies in more than 140 jurisdictions are required to use them when reporting on their financial health. The IASB is supported by technical staff and a range of advisory bodies.

IFRS Accounting

Standards and frameworks, using the standards, project work, products and services.

IFRS Sustainability Disclosure Standards are developed by the International Sustainability Standards Board (ISSB). The ISSB is an independent standard-setting body within the IFRS Foundation.

IFRS Sustainability Standards are developed to enhance investor-company dialogue so that investors receive decision-useful, globally comparable sustainability-related disclosures that meet their information needs. The ISSB is supported by technical staff and a range of advisory bodies.

IFRS Sustainability

Education, membership and licensing, proposed ifrs taxonomy update 2024 and comment letters: ifrs 18 presentation and disclosure in financial statements.

You need to Sign in to use this feature

• CONSULTATION
• VIEW THE COMMENT LETTERS

On 23 May 2024, the IASB published for public comment IFRS Accounting Taxonomy 2024—Proposed Update 1 IFRS 18 Presentation and Disclosure in Financial Statements.

The proposed changes reflect the presentation and disclosure requirements introduced by IFRS 18, published in April 2024.

The deadline for submitting comments is 3 September 2024 .

Stakeholders can respond to the Proposed Taxonomy Update by submitting:

• a comment letter; or

Before submitting the survey, stakeholders can view a PDF of the survey in its entirety . The purpose of this document is to provide stakeholders with an overview of the survey only; please do not submit this document in response to the Proposed Taxonomy Update.

Comment Letter

Your privacy.

IFRS Foundation cookies

We use cookies on ifrs.org to ensure the best user experience possible. For example, cookies allow us to manage registrations, meaning you can watch meetings and submit comment letters. Cookies that tell us how often certain content is accessed help us create better, more informative content for users.

We do not use cookies for advertising, and do not pass any individual data to third parties.

Some cookies are essential to the functioning of the site. Other cookies are optional. If you accept all cookies now you can always revisit your choice on our  privacy policy  page.

Cookie preferences

Essential cookies, always active.

Essential cookies are required for the website to function, and therefore cannot be switched off. They include managing registrations.

Analytics cookies

We use analytics cookies to generate aggregated information about the usage of our website. This helps guide our content strategy to provide better, more informative content for our users. It also helps us ensure that the website is functioning correctly and that it is available as widely as possible. None of this information can be tracked to individual users.

Preference cookies

Preference cookies allow us to offer additional functionality to improve the user experience on the site. Examples include choosing to stay logged in for longer than one session, or following specific content.

Share this page