15. In virtually all circumstances, a fair presentation is achieved by compliance in all material respects with applicable Statements of Standard Accounting Practice. A fair presentation requires:

(a) selecting and applying accounting policies in accordance with paragraph 20;

(b) presenting information, including accounting policies, in a manner which provides relevant, reliable, comparable and understandable information; and

(c) providing additional disclosures when the requirements in Statements of Standard Accounting Practice are insufficient to enable users to understand the impact of particular transactions or events on the enterprise’s financial position and financial performance.

17. When assessing whether a departure from a specific requirement in a Statement of Standard Accounting Practice is necessary, consideration is given to:

(i) represent faithfully the results and financial position of the enterprise;

(ii) reflect the economic substance of events and transactions and not merely the legal form;

(iii) are neutral, that is free from bias;

(iv) are prudent; and

(v) are complete in all material respects

 

21. Accounting policies are the specific principles, bases, conventions, rules and practices adopted by an enterprise in preparing and presenting financial statements.

24. In assessing whether the going concern assumption ‘is appropriate, management takes into account all available information for the foreseeable future, which should be at least, but is not limited to, twelve months from the balance sheet date. The degree of consideration depends on the facts in each case. When an enterprise has a history of profitable operations and ready access to financial resources, a conclusion that the going concern basis of accounting is appropriate may be reached without detailed analysis. In other cases, management may need to consider a wide range of factors surrounding current and expected profitability, debt repayment schedules and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate.

28. A significant acquisition or disposal, or a review of the financial statement presentation, might suggest that the financial statements should be presented differently. Only if the revised structure is likely to continue, or if the benefit of an alternative presentation is clear, should an enterprise change the presentation of its financial statements. When such changes in presentation are made, an enterprise reclassifies its comparative information in accordance with paragraph 38.

32. Materiality provides that the specific disclosure requirements of Statements of Standard Accounting Practice need not be met if the resulting information is not material.

35. It is important that both assets and liabilities, and income and expenses, when material, are reported separately. Offsetting in either the income statement or the balance sheet, except when offsetting reflects the substance of the transaction or event, detracts from the ability of users to understand the transactions undertaken and to assess the future cash flows of the enterprise. The reporting of assets net of valuation allowances, for example obsolescence allowances on inventories and doubtful debts allowances on receivables, is not offsetting.

36. SSAP 3.15, Revenue Recognition, defines the term revenue and requires it to be measured at the fair value of consideration received or receivable, taking into account the amount of any trade discounts and volume rebates allowed by the enterprise. An enterprise undertakes, in the course of its ordinary activities, other transactions which do not generate revenue but which are incidental to the main revenue generating activities. The results of such transactions are presented, when this presentation reflects the substance of the transaction or event, by netting any income with related expenses arising on the same transaction. For example:

(a) gains and losses on the disposal of non-current assets, including investments and operating assets, are reported by deducting from the proceeds on disposal the carrying amount of the asset and related selling expenses;

(b) expenditure that is reimbursed under a contractual arrangement with a third party (a sub-letting agreement, for example) is netted against the related reimbursement; and

(c) extraordinary items may be presented net of related taxation and minority interest with the gross amounts shown in the notes.

37. In addition, gains and losses arising from a group of similar transactions are reported on a net basis, for example foreign exchange gains and losses or gains and losses arising on financial instruments held for trading purposes. Such gains and losses are, however, reported separately if their size, nature or incidence is such that separate disclosure is required by SSAP 3.3, Extraordinary Items and Prior Year Adjustments.

39. In some cases narrative information provided in the financial statements for the previous period(s) continues to be relevant in the current period. For example, details of a legal dispute, the outcome of which was uncertain at the last balance sheet date and is yet to be resolved, are disclosed in the current period. Users benefit from information that the uncertainty existed at the last balance sheet date, and the steps that have been taken during the period to resolve the uncertainty.

41. Circumstances may exist when it is impracticable to reclassify comparative information to achieve comparability with the current period. For example, data may not have been collected in the previous period(s) in a way which allows reclassification, and it may not be practicable to recreate the information. In such circumstances, the nature of the adjustments to comparative amounts that would have been made are disclosed. SSAP 3.3 deals with the adjustments required to comparative information following a change in accounting policy that is applied retrospectively.

42. This Standard requires certain disclosures on the face of the financial statements, requires other line items to be disclosed either on the face of the financial statements or in the notes, and sets out recommended formats as an appendix to the Standard which an enterprise may follow as appropriate in its own circumstances. SSAP 3.22 provides a structure for the presentation of the cash flow statement.

43. This Standard uses the term disclosure in a broad sense, encompassing items presented on the face of each financial statement as well as in the notes to the financial statements. Disclosures required by other Statements of Standard Accounting Practice are made in accordance with the requirements of those Standards. Unless this or another Standard specifies to the contrary, such disclosures are made either on the face of the relevant financial statement or in the notes.

Identification of Financial Statements

44. Financial statements should be clearly identified and distinguished from other information in the same published document.

45. Statements of Standard Accounting Practice apply only to the financial statements, and not to other information presented in an annual report or other document. Therefore, it is important that users are able to distinguish information that is prepared using Statements of Standard Accounting Practice from other information which may be useful to users but is not the subject of Standards.

46. Each component of the financial statements should be clearly identified. In addition, the following information should be prominently displayed, and repeated when it Is necessary for a proper understanding of the information presented:

(a) the name of the reporting enterprise or other means of identification;

(b) whether the financial statements cover the individual enterprise or a group of enterprises;

(c) the balance sheet date or the period covered by the financial statements, whichever is appropriate to the related component of the financial statements;

(d) the reporting currency; and

(e) the level of precision used in the presentation of figures in the financial statements

48. Financial statements are often made more understandable by presenting information in thousands or millions of units of the reporting currency. This is acceptable as long as the level of precision in presentation is disclosed and relevant information is not lost.

50. In exceptional circumstances an enterprise may be required to, or decide to, change its balance sheet date, for example, following the acquisition of the enterprise by another enterprise with a different balance sheet date. When this is the case, it is important that users are aware that the amounts shown for the current period and comparative amounts are not comparable and that the reason for the change in balance sheet date is disclosed.

51. Normally, financial statements are consistently prepared covering a one year period. However, some enterprises prefer to report, for example, for a 52 week period for practical reasons. This Standard does not preclude this practice, as the resulting financial statements are unlikely to be materially different to those that would be presented for one year.

52. The usefulness of financial statements is impaired if they are not made available to users within a reasonable period after the balance sheet date. An enterprise should be in a position to issue its financial statements within six months of the balance sheet date. Ongoing factors such as the complexity of an enterprise’s operations are not sufficient reason for failing to report on a timely basis. More specific deadlines are dealt with by legislation and regulators.

55. When an enterprise supplies goods or services within a clearly identifiable operating cycle, separate classification of current and noncurrent assets and liabilities on the face of the balance sheet provides useful information by distinguishing the net assets that are continuously circulating as working capital from those used in the enterprise’s long-term operations. It also highlights assets that are expected to be realised within the current operating cycle, and liabilities that are due for settlement within the same period.

56. Information about the maturity dates of assets and liabilities is useful in assessing the liquidity and solvency of an enterprise. SSAP 3.29, Financial Instruments, Disclosure and Presentation, requires disclosure of the maturity dates of both financial assets and financial liabilities. Financial assets include trade and other receivables and financial liabilities include trade and other payables. Information on the expected date of recovery and settlement of non-monetary assets and liabilities such as inventories and provisions is also useful whether or not assets and liabilities are classified between current and non-current. For example, an enterprise discloses the amount of inventories which are expected to be realised after more than one year from the balance sheet date.

57. An asset should be classified as a current asset when it:

(a) is expected to be realised in, or is held for sale or consumptionin, the normal course of the enterprise’s operating cycle; or

(b) is held primarily for trading purposes or for the short-term and expected to be realised within twelve months of the balance sheet date; or

(c) is cash or a cash equivalent asset which is not restricted in its use.

All other assets should be class j/led as non-current assets.

58. This Standard uses the term ‘non-current’ to include tangible, intangible, operating and financial assets of a long-term nature. It does not prohibit the use of alternative descriptions as long as the meaning is clear.

59. The operating cycle of an enterprise is the time between the acquisition of materials entering into a process and its realisation in cash or an instrument that is readily convertible into cash. Current assets include inventories and trade receivables that are sold, consumed and realised as part of the normal operating cycle even when they are not expected to be realised within twelve months of the balance sheet date. Marketable securities are classified as current assets if they are expected to be realised within twelve months of the balance sheet date; otherwise they are classified as non-current assets.

(a) is expected to be settled in the normal course of the enterprise’s operating cycle; or

(b) is due to be settled within twelve months of the balance sheet date.

All other liabilities should be class fled as non-current liabilities.

61. Current liabilities can be categorised in a similar way to current assets. Some current liabilities, such as trade payables and accruals for employee and other operating costs, form part of the working capital used in the normal operating cycle of the business. Such operating items are classified as current liabilities even if they are due to be settled after more than twelve months from the balance sheet date.

62. Other current liabilities are not settled as part of the current operating cycle, but are due for settlement within twelve months of the balance sheet date. Examples are the current portion of interest-bearing liabilities, bank overdrafts, dividends payable, income taxes and other non-trade payables. Interest-bearing liabilities that provide the financing for working capital on a long-term basis, and are not due for settlement within twelve months, are non-current liabilities.

64. Some obligations that are due to be repaid within the next operating cycle may be expected to be refinanced or ‘rolled over’ at the discretion of the enterprise and, therefore, are not expected to use current working capital of the enterprise. Such obligations are considered to form part of the enterprise’s long-term financing and should be classified as non-current. However, in situations in which refinancing is not at the discretion of the enterprise (as would be the case if there were no agreement to refinance), the refinancing cannot be considered automatic and the obligation is classified as current unless the completion of a refinancing agreement before approval of the financial statements provides evidence that the substance of the liability at the balance sheet date was long-term.

65. Some borrowing agreements incorporate undertakings by the borrower (covenants) which have the effect that the liability becomes payable on demand if certain conditions related to the borrower’s financial position are breached. In these circumstances, the liability is classified as non-current only when:

(a) the lender has agreed, prior to the approval of the financial statements, not to demand payment as a consequence of the breach; and

(b) it is not probable that further breaches will occur within twelve months of the balance sheet date.

68. This Standard does not prescribe the order or format in which items are to be presented. Paragraph 66 simply provides a list of items that are so different in nature or function that they deserve separate presentation on the face of the balance sheet. Illustrative formats are set out in the Appendix to this Standard. Adjustments to the line items above include the following:

(a) line items are added when another Statement of Standard Accounting Practice requires separate presentation on the face of the balance sheet, or when the size, nature or function of an item is such that separate presentation would assist in presenting fairly the enterprise’s financial position; and

(b) the descriptions used and the ordering of items may be amended according to the nature of the enterprise and its transactions, to provide information that is necessary for an overall understanding of the enterprise’s financial position. For example, a bank amends the above descriptions in order to apply the more specific requirements in paragraphs 15 to 19 of SSAP 3.28, Disclosures in the Financial Statements of Banks and Similar Financial Institutions.

69. The line items listed in paragraph 66 are broad in nature and need not be limited to items falling within the scope of other Standards. For example, the line item intangible assets includes goodwill and assets arising from development expenditure.

70. The judgement on whether additional items are separately presented is based on an assessment of:

(a) the nature and liqttidity of assets and their materiality, leading, in most cases, to the separate presentation of, goodwill and assets arising from development expenditure, monetary and non-monetary assets and current and non-current assets;

(b) their function within the enterprise, leading, for example, to the separate presentation of operating and financial assets, inventories, receivables and cash and cash equivalent assets; and

(c) the amounts, nature and timing of liabilities, leading, for example, to the separate presentation of interest-bearing and non-interest-bearing liabilities and provisions, classified as current or non-current if appropriate.

71. Assets and liabilities that differ in nature or function are sometimes subject to different measurement bases. For example certain classes of property, plant and equipment may be carried at cost, or at revalued amounts in accordance with SSAP 3.18. The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line items.

Information to be Presented Either on the Face of the Balance Sheet or in the Notes

73. The detail provided in sub-classifications, either on the face of the balance sheet or in the notes, depends on the requirements of Statements of Standard Accounting Practice and the size, nature and function of the amounts involved. The factors set out in paragraph 70 are also used to decide the basis of sub-classification. The disclosures will vary for each item, for example:

(a) tangible assets are classified by class as described in SSAP 3.18, Accounting for Fixed Assets, Investment Properties and Depreciation;

(b) receivables are analysed between amounts receivable from trade customers, other members of the group, receivables from related parties, prepayments and other amounts;

(c) inventories are sub-classified, in accordance with SSAP 3.8, Valuation and Presentation of Inventories, into classifications such as merchandise, production supplies, materials, work in progress and finished goods;

(d) provisions are analysed showing separately provisions for employee benefit costs and any other items classified in a manner appropriate to the enterprises operations; and

(e) equity capital and reserves are analysed showing separately the various classes of paid in capital, share premium and reserves.

 

74. An enterprise should disclose the following, either on the face of the balance sheet or in the notes:

76. The effects of an enterprise’s various activities, transactions and events differ in stability, risk and predictability, and the disclosure of the elements of performance assists in an understanding of the performance achieved and in assessing future results. Additional line items are included on the face of the income statement and the descriptions used and the ordering of items are amended when this is necessary to explain the elements of performance. Factors to be taken into consideration include materiality and the nature and function of the various components of income and expenses. For example, a bank amends the descriptions in order to apply the more specific requirements in paragraphs 9 to 14 of SSAP 3.28. Income and expense items are offset only when the criteria in paragraph 34 are met.

77. An enterprise should present, either on the face of the income statement or in the notes to the income statement, an analysis of expenses using a classification based on either the nature of expenses or their function within the enterprise.

78. Enterprises are encouraged to present the analysis in paragraph 77 on the face of the income statement.

79. Expense items are further sub-classified in order to highlight a range of components of financial performance which may differ in terms of stability, potential for gain or loss and predictability. This information is provided in one of two ways.

80. The first analysis is referred to as the nature of expense method. Expenses are aggregated in the income statement according to their nature, (for example depreciation, purchases of materials, transport costs, wages and salaries, advertising costs), and are not reallocated amongst various functions within the enterprise. This method is simple to apply in many smaller enterprises because no allocations of operating expenses between functional classifications is necessary.

An example of a classification using the nature of expense method is as follows:   

81. The change in finished goods and work in progress during the period represents an adjustment to production expenses to reflect the fact that either production has increased inventory levels or that sales in excess of production have reduced inventory levels. In some jurisdictions, an increase in finished goods and work in progress during the period is presented immediately following revenue in the above analysis. However, the presentation used should not imply that such amounts represent income.

82. The second analysis is referred to as the function of expense or ‘cost of sales’ method and classifies expenses according to their function as part of cost of sales, distribution or administrative activities. This presentation often provides more relevant information to users than the classification of expenses by nature, but the allocation of costs to functions can be arbitrary and involves considerable judgement. An example of a classification using the function of expense method is as follows:

84. The choice of analysis between the cost of sales method and the nature of expenditure method depends on both historical and industry factors and the nature of the organisation. Both methods provide an indication of those costs which might be expected to vary, directly or indirectly, with the level of sales or production of the enterprise. Because each method of presentation has merit for different types of enterprise, this Standard requires a choice between classifications based on that which most fairly presents the elements of the enterprise’s performance. However, because information on the nature of expenses is useful in predicting future cash flows, additional disclosure is required when the cost of sales classification is used.

Changes in Equity

87. Changes in an enterprise’s equity between two balance sheet dates reflect the increase or decease in its net assets or wealth during the period, under the particular measurement principles adopted and disclosed in the financial statements. Except for changes resulting from transactions with shareholders, such as capital contributions and dividends, the overall change in equity represents the total gains and losses generated by the enterprises activities during the period.

88. All items of income and expense recognised in a period should be included in the determination of net profit or loss for the period unless a Statement of Standard Accounting Practice requires or permits otherwise. Other gains and losses, such as revaluation surpluses and deficits and certain foreign exchange differences, should be recognised directly as changes in equity along with capital transactions with and distributions to the enterprise’s owners. Since it is important to take into consideration all gains and losses in assessing the changes in an enterprise’s financial position between two balance sheet dates, this Standard requires a separate component of the financial statements which highlights an enterprise’s total gains and losses, including those that are recognised directly in equity.

Cash Flow Statement

90. SSAP 3.22 sets out requirements for the presentation of the cash flow statement and related disclosures. It states that cash flow information is useful in providing users of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilise those cash flows.

Notes to the Financial Statements

Structure

(a) present information about the basis of preparation of the financial statements and the spec j/ic accounting policies selected and applied for significant transactions and events;

(b) disclose the information required by Statements of Standard Accounting Practice that is not presented elsewhere in the financial statements; and

(c) provide additional information which is not presented on the face of the financial statements but that is necessary for a fair presentation.

93. Notes to the financial statements include narrative descriptions or more detailed analyses of amounts shown on the face of the balance sheet, income statement, cash flow statement and statement of changes in equity, as well as additional information such as contingent liabilities and commitments. They include information required and encouraged to be disclosed by Statements of Standard Accounting Practice, and other disclosures necessary to achieve a fair presentation.

94. Notes are normally presented in the following order which assists users in understanding the financial statements and comparing them with those of other enterprises:

(a) statement of the measurement basis (bases) and accounting policies applied;

(b) supporting information for items presented on the face of each financial statement in the order in which each line item and each financial statement is presented; and

(c) other disclosures, including:

(i) contingencies, commitments and other financial disclosures; and

(ii) non-financial disclosures.

95. In some circumstances, it may be necessary or desirable to vary the ordering of specific items within the notes. For example, information on interest rates and fair value adjustments may be combined with information on maturities of financial instruments although the former are income statement disclosures and the latter relate to the balance sheet. Nevertheless, a systematic structure for the notes is retained as far as practicable.

96. Information about the basis of preparation of the financial statements and specific accounting policies may be presented as a separate component of the financial statements.

(b) each specific accounting policy that is necessary for a proper understanding of the financial statements.

98. In addition to the specific accounting policies used in the financial statements, it is important for users to be aware of the measurement basis (bases) used (historical cost, current cost, realisable value, fair value or present value) because they form the basis on which the whole of the financial statements are prepared. When more than one measurement basis/(bases) is used in the financial statements, for example when certain non-current assets are revalued, it is sufficient to provide an indication of the categories of assets and liabilities to which each measurement basis is applied.

99. In deciding whether a specific accounting policy should be disclosed, management considers whether disclosure would assist users in understanding the way in which transactions and events are reflected in the reported performance and financial position. The accounting policies that an enterprise might consider presenting include, but are not restricted to, the following:

(a) revenue recognition;

(b) consolidation principles, including subsidiaries and associates;

(c) business combinations;

(d) joint ventures;

(e) recognition and depreciation amortisation of tangible and intangible assets;

100. Each enterprise considers the nature of its operations and the policies which the user would expect to be disclosed for that type of enterprise. When an enterprise has significant foreign operations or transactions in foreign currencies, disclosure of accounting policies for the recognition of foreign exchange gains and losses and the hedging of such gains and losses would be expected. In consolidated financial statements, the policy used for determining goodwill and minority interest is disclosed.

101. An accounting policy may be significant even if amounts shown for current and prior periods are not material. It is also appropriate to disclose an accounting policy for each policy not covered by existing Statements of Standard Accounting Practice but selected and applied in accordance with paragraph 20.

Other Disclosures

104. This Statement of Standard Accounting Practice supersedes SSAP 3.2, Disclosure of Accounting Policies, SSAP 3.10, Information to be Disclosed in financial Statements, and SAP 3.14, Presentation of Current Assets and Current Liabilities.

Appendix - Illustrative Financial Statement Structure

The Standard sets out the components of financial statements and minimum requirements for disclosure on the face of the balance sheet and the income statement as well as for the presentation of changes in equity. It also establishes further items that may be presented either on the face of the relevant financial statement or in the notes. The purpose of the Appendix is to provide examples of the ways in which the requirements ‘for the presentation of the income statement, balance sheet and changes in equity might be presented in the primary financial statements. The order of presentation and the descriptions used for line items should be changed where necessary in order to achieve a fair presentation in each enterprise’s particular circumstances.

Two income statements are provided for illustrative purposes, illustrating the two alternative classifications of income and expenses, by nature and by function. The two alternative approaches to presenting changes in equity are also illustrated.

XYZ GROUP - BALANCE SHEET AS AT 31 DECEMBER 20-2

(in thousands of currency units)

XYZ GROUP - INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20-2

(illustrating the classification of expenses by function)

(in thousands of currency units)

(illustrating the classification of expenses by nature)

(in thousands of currency units)