Under IFRS, IAS 1 Presentation of Financial Statements specifies required financial statements, their general features, structure and contents.
Required financial statements include:
- A statement of financial position (balance sheet),
- A statement of comprehensive income,
- A statement of changes in equity,
- A statement of cash flows, and
Claiming compliance with IFRS
Only a company that complies with all requirements of IFRS can claim compliance with the standards, except in rare cases in which management determines that complying with IFRS would be misleading, in which case it must disclose details of the departure from IFRS.
IAS 1 also specifies some general features which are carried forward from the Conceptual Framework such as fair presentation, going concern, accrual basis, materiality and aggregation, no offsetting, frequency of reporting (at least annual), comparative information (for all items), and consistency.
Structure and content requirements
Assets and liabilities on the balance sheet are required to be classified between current and non-current unless presentation based on liquidity makes more sense (for example in the case of a bank). Standards also specify certain minimum information that must be presented on the face of financial statements or in the notes.
Comparison of IFRS with other reporting frameworks
Even though there is a trend towards increased convergence, differences exist between IFRS and other accounting standards, such as US GAAP. US GAAP is mostly based on rules but IFRSs are based on principles.
Since the requirement to reconcile IFRS to US GAAP has been eliminated by the SEC, an analyst needs to be aware of any areas where accounting standards have not converged. Often there is not enough information in the financial statements for an analyst to attempt convergence himself, the best he can do is to maintain caution while using and interpreting such financial statements. In addition, he needs to monitor how new standards would impact companies and security valuation.
If an analyst encounters financial statements prepared under a financial reporting framework different than the prevailing framework in the country, he should:
- Convert the financial statements to the prevailing framework.
- Use the statement in the financial statement that would reconcile the financial statement to the prevailing financial reporting framework.
- Maintain caution in interpreting comparative information and monitor significant developments in financial reporting standards.
C is correct. Since the requirement to reconcile IFRS to US GAAP has been eliminated by the SEC, an analyst needs to be aware of any areas where accounting standards have not converged. Often there is not enough information in the financial statements for an analyst to attempt convergence himself, the best he can do is to maintain caution while using and interpreting such financial statements.