Preparation of single-entity financial statements under IFRS
What the exam tests
Single-entity reporting underpins group work: IAS 1 presentation, IAS 7 cash flows, IAS 8 changes and errors, IAS 10 events after the reporting period, and measurement standards (IAS 16, IAS 38, IAS 36, IAS 2, IAS 23). Questions usually combine a measurement adjustment with a presentation or disclosure consequence.
Core presentation rules
- IAS 1 requires fair presentation, going concern, accrual accounting, materiality and no offsetting unless a standard requires or permits it.
- Present current/non-current unless a liquidity presentation is more relevant. OCI is split between items that may and may not be reclassified to profit or loss.
- The statement of changes in equity reconciles opening and closing equity, showing total comprehensive income, owner transactions and retrospective adjustments.
- IAS 7 starts from profit before tax and adjusts for non-cash items and working capital. Interest paid may be operating or financing; interest and dividends received operating or investing; dividends paid financing or operating, applied consistently.
Measurement interactions
IAS 16 requires component depreciation and, on revaluation, a surplus to OCI. IAS 36 impairment goes to profit or loss unless it reverses a revaluation surplus on the same asset. IAS 2 uses lower of cost and net realisable value, item by item. IAS 8 treats a change in depreciation method as a change in estimate, applied prospectively.
Worked example
A building costing 1,000,000 with accumulated depreciation of 200,000 is revalued to 900,000. Carrying amount is 800,000, so 100,000 goes to OCI. Deferred tax at 25% (25,000) also goes to OCI, leaving a net reserve of 75,000. With 20 years remaining, annual depreciation is 45,000. A transfer of 3,750 net per year to retained earnings is permitted as the asset is used; it is not profit or loss.
Traps
- Running the revaluation surplus through profit or loss.
- Forgetting deferred tax on the revaluation.
- Treating a depreciation method change as a prior period error.
- Excluding a bank overdraft from cash equivalents when it is repayable on demand and integral to cash management.