Fair Presentation, Because Creative Accounting is Frowned Upon
Financial statements play a crucial role in presenting the financial health of a business. The International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) provides a framework for preparing financial statements that are clear, fair, and useful for decision-making. This article explains Section 3 of IFRS for SMEs in simple terms, covering fair presentation, compliance, going concern, reporting frequency, consistency, materiality, and what constitutes a complete set of financial statements.
Fair Presentation of Financial Statements
The primary goal of financial statements is to fairly present a business’s financial position, performance, and cash flows. Fair presentation means that the financial statements must accurately reflect the business’s transactions, financial activities, and overall condition.
To achieve fair presentation, a company must:
Follow the IFRS for SMEs standard – Applying these rules correctly is assumed to result in a fair presentation.
Provide additional disclosures if needed – If following the standard does not fully explain the impact of certain transactions, the company must include extra notes to help users understand the financial statements.
Ensure transparency – Financial statements should not mislead users or hide important details.
A company with public accountability (such as a bank or listed company) cannot claim fair presentation under IFRS for SMEs, as these rules are designed for private businesses.
Compliance with IFRS for SMEs
If a company fully complies with IFRS for SMEs, it must make an explicit statement in the notes to the financial statements. A company cannot claim compliance if it only follows some parts of the standard.
In extremely rare cases, if following IFRS for SMEs would be misleading and go against the objective of financial statements, management may deviate from the rules—unless local regulations prohibit this. In such cases, the company must:
Explain why it believes the standard would be misleading.
Disclose how it adjusted its financial statements to maintain fair presentation.
If regulations prevent any departure from the standard, the company must still highlight misleading aspects and disclose necessary adjustments.
Going Concern
When preparing financial statements, management must assess whether the company can continue operating for at least the next 12 months. A business is considered a going concern unless:
Management plans to close down or liquidate the business.
There is no realistic alternative but to shut down.
If there are uncertainties about the company’s ability to continue operating, these must be disclosed in the financial statements. If the company is not a going concern, it must state this and explain why.
Frequency of Financial Reporting
Companies must prepare financial statements at least once a year. If a business changes its financial year (for example, switching from a calendar year to a financial year ending in March), it must:
Disclose that the period is longer or shorter than one year.
Explain why the reporting period changed.
Note that previous year’s figures may not be directly comparable.
Consistency in Presentation
To ensure comparability, companies must keep the same format and classification of items in their financial statements from one year to the next. However, changes can be made if:
A new presentation better reflects the company’s financial activities.
The IFRS for SMEs standard requires a change.
If items are reclassified (moved to a different category), the company must:
Explain the nature of the reclassification.
Show the amounts affected.
Provide a reason for the change.
If reclassification is not possible, the company must state why.
Comparative Information
For financial statements to be useful, they must include comparative information from the previous period. This applies to both:
Financial figures (such as revenue, expenses, and assets).
Descriptive information (such as explanations in the notes to financial statements).
Comparisons help users understand trends and assess a company’s financial performance over time.
Materiality and Aggregation
Financial statements must separately present material items (items that are significant enough to influence users’ decisions). Items should only be grouped together if they are similar and not material on their own.
Materiality depends on both size and nature:
A small transaction may still be material if it has a big impact.
A large amount might not be material if it does not affect decision-making.
Omitting or misstating material information can mislead users and should be avoided.
What is a Complete Set of Financial Statements?
A complete set of financial statements includes the following:
Statement of Financial Position (Balance Sheet) – Shows the company’s financial position at the end of the reporting period, listing its assets, liabilities, and equity.
Statement of Comprehensive Income – Shows all income and expenses for the period. Companies can present this as:
A single statement including profit/loss and other comprehensive income.
A separate income statement (showing profit/loss) and a statement of comprehensive income (showing additional income items).
Statement of Changes in Equity – Shows changes in the company’s equity (such as retained earnings, new investments, or dividends paid).
Statement of Cash Flows – Shows how cash was generated and used during the period.
Notes to the Financial Statements – Provides explanations of accounting policies and additional details about the figures reported.
If the only equity changes are profit/loss, dividends, prior period corrections, and policy changes, a company may replace the statement of changes in equity with a statement of income and retained earnings.
If a company has no other comprehensive income, it can present just an income statement instead of a full statement of comprehensive income.
A complete set of financial statements must always include comparative figures from the previous period.
Identification of Financial Statements
To avoid confusion, companies must clearly label each financial statement and include key details, such as:
The company’s name.
Whether the statements cover a single company or a group (consolidated statements).
The reporting period’s end date.
The currency used.
Any rounding applied to figures.
Additionally, the notes to the financial statements must disclose:
The company’s legal form and country of incorporation.
The nature of its business activities.
Other Information Not Covered by IFRS for SMEs
IFRS for SMEs does not specifically address the presentation of:
Segment information (financial details for different parts of the business).
Earnings per share calculations.
Interim financial reports (reports for part of the year, such as quarterly reports).
If a company includes such information, it must explain the basis on which it was prepared.
Conclusion
Understanding financial statement presentation under IFRS for SMEs ensures businesses prepare reliable and useful financial reports. By following the principles of fair presentation, consistency, materiality, and completeness, companies can provide clear financial information that helps investors, creditors, and other stakeholders make informed decisions.
Whether you are an accountant, business owner, or financial professional, applying these guidelines correctly can improve financial transparency and credibility.
Access CIBA’s IFRS for SME Annual Financial Statements CPD here
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