COMMISSION REGULATION (EC) No 1725/2003

of 29 September 2003

adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council

(Text with EEA relevance)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community.

Having regard to Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards (1), and in particular Article 3(3) thereof,

Whereas:

Regulation (EC) No 1606/2002 requires that for each financial year starting on or after 1 January 2005, publicly traded companies governed by the law of a Member State shall under certain conditions prepare their consolidated accounts in conformity with international accounting standards as defined in Article 2 of that Regulation.

The Commission, having considered the advice provided by the Accounting Technical Committee, has concluded that the international accounting standards in existence on 14 September 2002 meet the criteria for adoption set out in Article 3 of Regulation (EC) No 1606/2002.

The Commission has also considered the current improvements projects that propose to amend many existing standards. International accounting standards resulting from the finalisation of these proposals will be considered for adoption once those standards are final. The existence of these proposed amendments to existing standards does not impact upon the Commission's decision to endorse the existing standards, except in the cases of IAS 32 Financial instruments: disclosure and presentation, IAS 39 Financial instruments: recognition and measurement and a small number of interpretations related to these standards, SIC 5 Classification of financial instruments — Contingent settlement provisions, SIC 16 Share capital — reacquired own equity instruments (treasury shares) and SIC 17 Equity — Costs of an equity transaction.

The existence of high quality standards dealing with financial instruments, including derivatives, is important to the Community capital market. However, in the cases of IAS 32 and IAS 39, amendments currently being considered may be so considerable that it is appropriate not to adopt these standards at this time. As soon as the current improvement project is complete and revised standards issued, the Commission will consider, as a matter of priority, the adoption of the revised standards further to Regulation (EC) No 1606/2002.

Accordingly, all international accounting standards in existence on 14 September 2002 except IAS 32, IAS 39 and the related interpretations should be adopted.

The measures provided for in this Regulation are in accordance with the opinion of the Accounting Regulatory Committee.

HAS ADOPTED THIS REGULATION,

Article 1

The international accounting standards set out in the Annex are adopted.

Article 2

This Regulation shall enter into force on the third day following its publication in the Official Journal of the European Union.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

(1) OJ L 243, 11.9.2002, p. 1.

ANNEX

INTERNATIONAL ACCOUNTING STANDARDS

IAS 1: Presentation of financial statements (revised 1997)

IAS 2: Inventories (revised 1993)

IAS 7: Cash flow statements (revised 1992)

IAS 8: Profit or loss for the period, fundamental errors and changes in accounting policies (revised 1993)

IAS 10: Events after the balance sheet date (revised 1999)

IAS 11: Construction contracts (revised 1993)

IAS 12: Income taxes (revised 2000)

IAS 14: Segment reporting (revised 1997)

IAS 15: Information reflecting the effects of changing prices (reformatted 1994)

IAS 16: Property, plant and equipment (revised 1998)

IAS 17: Leases (revised 1997)

IAS 18: Revenue (revised 1993)

IAS 19: Employee benefits (revised 2002)

IAS 20: Accounting for government grants and disclosure of government assistance (reformatted 1 994)

IAS 21: The effects of changes in foreign exchange rates (revised 1993)

IAS 22: Business combinations (revised 1998)

IAS 23: Borrowing costs (revised 1993)

IAS 24: Related party disclosures (reformatted 1994)

IAS 26: Accounting and reporting by retirement benefit plans (reformatted 1994)

IAS 27: Consolidated financial statements and accounting for investments in subsidiaries (revised 2000)

IAS 28: Accounting for investments in associates (revised 2000)

IAS 29: Financial reporting in hyperinflationary economies (reformatted 1994)

IAS 30: Disclosures in the financial statements of banks and similar financial institutions (reformatted 1994)

IAS 31: Financial reporting of investments in joint ventures (revised 2000)

IAS 33: Earnings per share (1997)

IAS 34: Interim financial reporting (1998)

IAS 35: Discontinuing operations (1998)

IAS 36: Impairment of assets (1998)

IAS 37: Provisions, contingent liabilities and contingent assets (1998)

IAS 38: Intangible assets (1998)

IAS 40: Investment property (2000)

IAS 41: Agriculture (2001)

INTERPRETATIONS OF THE STANDING INTERPRETATIONS COMMITTEE

SIC-1: Consistency — Different cost formulas for inventories

SIC-2: Consistency — Capitalisation of borrowing costs

SIC-3: Elimination of unrealised profits and losses on transactions with associates

SIC-6: Costs of modifying existing software

SIC-7: Introduction of the euro

SIC-8: First-time application of IASs as the primary basis of accounting

SIC-9: Business combinations — Classification either as acquisitions or unitings of interests

SIC-10: Government assistance — No specific relation to operating activities

SIC-11: Foreign exchange — Capitalisation of losses resulting from severe currency devaluations

SIC-12: Consolidation — Special purpose entities

SIC-13: Jointly controlled entities — Non-monetary contributions by venturers

SIC-14: Property, plant and equipment — Compensation for the impairment or loss of items

SIC-15: Operating leases — Incentives

SIC-18: Consistency — Alternative methods

SIC-19: Reporting currency — Measurement and presentation of financial statements under IAS 21 and IAS 29

SIC-20: Equity accounting method — Recognition of losses

SIC-21: Income taxes — Recovery of revalued non-depreciable assets

SIC-22: Business combinations — Subsequent adjustment of fair values and goodwill initially reported

SIC-23: Property, plant and equipment — Major inspection or overhaul costs

SIC-24: Earnings per share — Financial instruments and other contracts that may be settled in shares

SIC-25: Income taxes — Changes in the tax status of an enterprise or its shareholders

SIC-27: Evaluating the substance of transactions involving the legal form of a lease

SIC-28: Business combinations — ‘Date of exchange’ and fair value of equity instruments

SIC-29: Disclosure — Service concession arrangements

SIC-30: Reporting currency — Translation from measurement currency to presentation currency

SIC-31: Revenue — Barter transactions involving advertising services

SIC-32: Intangible assets — Web site costs

SIC-33: Consolidation and equity method — Potential voting rights and allocation of ownership interests

Note:Any appendices to those standards and interpretations are not considered as part of those standards and interpretations and shall therefore not be reproduced.

Reproduction allowed within the European Economic Area. All existing rights reserved outside the EEE, with the exception of the right to reproduce for the purposes of personal use or other fair dealing. Further information can be obtained from the IASB at www.iasb.org.uk.

INTERNATIONAL ACCOUNTING STANDARD IAS 1

(REVISED 1997)

Presentation of financial statements

This revised International Accounting Standard supersedes IAS 1, disclosure of accounting policies, IAS 5, information to be disclosed in financial statements, and IAS 13, presentation of current assets and current liabilities, which were approved by the Board in reformatted versions in 1994. IAS 1 (revised 1997) was approved by the IASC Board in July 1997 and became effective for financial statements covering periods beginning on or after 1 July 1998.

In May 1999, IAS 10 (revised 1999), events after the balance sheet date, amended paragraphs 63(c), 64, 65(a) and 74(c). The amended text becomes effective when IAS 10 (revised 1999) becomes effective, i.e. for annual financial statements covering periods beginning on or after 1 January 2000.

The following SIC interpretations relate to IAS 1:

— SIC-8: first-time application of IASs as the primary basis of accounting,

— SIC-18: consistency — alternative methods,

— SIC-27: evaluating the substance of transactions in the legal form of a lease,

— SIC-29: disclosure — Service concession arrangements.

Introduction

1. This Standard (‘IAS 1 (revised 1997)’) replaces International Accounting Standards IAS 1, disclosure of accounting policies, IAS 5, information to be disclosed in financial statements, and IAS 13, presentation of current assets and current liabilities. IAS 1 (revised) is effective for accounting periods beginning on or after 1 July 1998 although, because the requirements are consistent with those in existing Standards, earlier application is encouraged.

2. The Standard updates the requirements in the Standards it replaces, consistent with the IASC framework for the preparation and presentation of financial statements. In addition, it is designed to improve the quality of financial statements presented using International Accounting Standards by: (a) ensuring that financial statements that state compliance with IAS comply with each applicable Standard, including all disclosure requirements; (b) ensuring that departures from IAS requirements are restricted to extremely rare cases (instances of non-compliance will be monitored and further guidance issued when appropriate); (c) providing guidance on the structure of financial statements including minimum requirements for each primary statement, accounting policies and notes, and an illustrative appendix; and (d) establishing (based on the framework) practical requirements on issues such as materiality, going concern, the selection of accounting policies when no Standard exists, consistency and the presentation of comparative information.

3. To deal with users' demands for more comprehensive information on ‘performance’, measured more broadly than the ‘profit’ shown in the income statement, the Standard establishes a new requirement for a primary financial statement showing those gains and losses not currently presented in the income statement. The new statement may be presented either as a ‘traditional’ equity reconciliation in column form, or as a statement of performance in its own right. The IASC Board agreed in principle, in April 1997, to undertake a review of the way in which performance is measured and reported. The project is likely to consider, initially, the interaction between performance reporting and the objectives of reporting in the IASC framework. Therefore, IASC will develop proposals in this area.

4. The Standard applies to all enterprises reporting in accordance with IAS, including banks and insurance companies. The minimum structures are designed to be sufficiently flexible that they can be adapted for use by any enterprise. Banks, for example, should be able to develop a presentation which complies with this Standard and the more detailed requirements in IAS 30, disclosures in the financial statements of banks and similar financial institutions.

CONTENTS

Objective

Scope 1-4

Purpose of financial statements 5

Responsibility for financial statements 6

Components of financial statements 7-9

Overall considerations 10-41

Fair presentation and compliance with international accounting standards 10-19

Accounting policies 20-22

Going concern 23-24

Accrual basis of accounting 25-26

Consistency of presentation 27-28

Materiality and aggregation 29-32

Offsetting 33-37

Comparative information 38-41

Structure and content 42-102

Introduction 42-52

Identification of financial statements 44-48

Reporting period 49-51

Timeliness 52

Balance sheet 53-74

The current/non-current distinction 53-56

Current assets 57-59

Current liabilities 60-65

Information to be presented on the face of the balance sheet 66-71

Information to be presented either on the face of the balance sheet or in the notes 72-74

Income statement 75-85

Information to be presented on the face of the income statement 75-76

Information to be presented either on the face of the income statement or in the notes 77-85

Changes in equity 86-89

Cash flow statement 90

Notes to the financial statements 91-102

Structure 91-96

Presentation of accounting policies 97-101

Other disclosures 102

Effective date 103-104

The standards, which have been set in bold italic type, should be read in the context of the background material and implementation guidance in this Standard, and in the context of the Preface to International Accounting Standards. International Accounting Standards are not intended to apply to immaterial items (see paragraph 12 of the Preface).

OBJECTIVE

The objective of this Standard is to prescribe the basis for presentation of general purpose financial statements, in order to ensure comparability both with the enterprise's own financial statements of previous periods and with the financial statements of other enterprises. To achieve this objective, this Standard sets out overall considerations for the presentation of financial statements, guidelines for their structure and minimum requirements for the content of financial statements. The recognition, measurement and disclosure of specific transactions and events is dealt with in other International Accounting Standards.

SCOPE

1. This Standard should be applied in the presentation of all general purpose financial statements prepared and presented in accordance with International Accounting Standards.

2. General purpose financial statements are those intended to meet the needs of users who are not in a position to demand reports tailored to meet their specific information needs. General purpose financial statements include those that are presented separately or within another public document such as an annual report or a prospectus. This Standard does not apply to condensed interim financial information. This Standard applies equally to the financial statements of an individual enterprise and to consolidated financial statements for a group of enterprises. However, it does not preclude the presentation of consolidated financial statements complying with International Accounting Standards and financial statements of the parent company under national requirements within the same document, as long as the basis of preparation of each is clearly disclosed in the statement of accounting policies.

3. This Standard applies to all types of enterprises including banks and insurance enterprises. Additional requirements for banks and similar financial institutions, consistent with the requirements of this Standard, are set out in IAS 30, disclosures in the financial statements of banks and similar financial institutions.

4. This Standard uses terminology that is suitable for an enterprise with a profit objective. Public sector business enterprises may therefore apply the requirements of this Standard. Non-profit, government and other public sector enterprises seeking to apply this Standard may need to amend the descriptions used for certain line items in the financial statements and for the financial statements themselves. Such enterprises may also present additional components of the financial statements.

PURPOSE OF FINANCIAL STATEMENTS

5. Financial statements are a structured financial representation of the financial position of and the transactions undertaken by an enterprise. The objective of general purpose financial statements is to provide information about the financial position, performance and cash flows of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements also show the results of management's stewardship of the resources entrusted to it. To meet this objective, financial statements provide information about an enterprise's: (a) assets; (b) liabilities; (c) equity; (d) income and expenses, including gains and losses; and (e) cash flows. This information, along with other information in the notes to financial statements, assists users in predicting the enterprise's future cash flows and in particular the timing and certainty of the generation of cash and cash equivalents.

RESPONSIBILITY FOR FINANCIAL STATEMENTS

6. The board of directors and/or other governing body of an enterprise is responsible for the preparation and presentation of its financial statements.

COMPONENTS OF FINANCIAL STATEMENTS

7. A complete set of financial statements includes the following components: (a) balance sheet; (b) income statement; (c) a statement showing either: (i) all changes in equity; or (ii) changes in equity other than those arising from capital transactions with owners and distributions to owners; (d) cash flow statement; and (e) accounting policies and explanatory notes.

8. Enterprises are encouraged to present, outside the financial statements, a financial review by management which describes and explains the main features of the enterprise's financial performance and financial position and the principal uncertainties it faces. Such a report may include a review of: (a) the main factors and influences determining performance, including changes in the environment in which the enterprise operates, the enterprise's response to those changes and their effect, and the enterprise's policy for investment to maintain and enhance performance, including its dividend policy; (b) the enterprise's sources of funding, the policy on gearing and its risk management policies; and (c) the strengths and resources of the enterprise whose value is not reflected in the balance sheet under International Accounting Standards.

9. Many enterprises present, outside the financial statements, additional statements such as environmental reports and value added statements, particularly in industries where environmental factors are significant and when employees are considered to be an important user group. Enterprises are encouraged to present such additional statements if management believes they will assist users in making economic decisions.

OVERALL CONSIDERATIONS

Fair presentation and compliance with international accounting standards

10. Financial statements should present fairly the financial position, financial performance and cash flows of an enterprise. The appropriate application of International Accounting Standards, with additional disclosure when necessary, results, in virtually all circumstances, in financial statements that achieve a fair presentation.

11. ( 1 ). An enterprise whose financial statements comply with International Accounting Standards should disclose that fact. Financial statements should not be described as complying with International Accounting Standards unless they comply with all the requirements of each applicable Standard and each applicable interpretation of the Standing Interpretations Committee

12. Inappropriate accounting treatments are not rectified either by disclosure of the accounting policies used or by notes or explanatory material.

13. In the extremely rare circumstances when management concludes that compliance with a requirement in a Standard would be misleading, and therefore that departure from a requirement is necessary to achieve a fair presentation, an enterprise should disclose: (a) that management has concluded that the financial statements fairly present the enterprise's financial position, financial performance and cash flows; (b) that it has complied in all material respects with applicable International Accounting Standards except that it has departed from a Standard in order to achieve a fair presentation; (c) the Standard from which the enterprise has departed, the nature of the departure, including the treatment that the Standard would require, the reason why that treatment would be misleading in the circumstances and the treatment adopted; and (d) the financial impact of the departure on the enterprise's net profit or loss, assets, liabilities, equity and cash flows for each period presented.

14. Financial statements have sometimes been described as being ‘based on’ or ‘complying with the significant requirements of’ or ‘in compliance with the accounting requirements of’ International Accounting Standards. Often there is no further information, although it is clear that significant disclosure requirements, if not accounting requirements, are not met. Such statements are misleading because they detract from the reliability and understandability of the financial statements. In order to ensure that financial statements that state compliance with International Accounting Standards will meet the standard required by users internationally, this Standard includes an overall requirement that financial statements should give a fair presentation, guidance on how the fair presentation requirement is met, and further guidance for determining the extremely rare circumstances when a departure is necessary. It also requires prominent disclosure of the circumstances surrounding a departure. The existence of conflicting national requirements is not, in itself, sufficient to justify a departure in financial statements prepared using International Accounting Standards.

15. In virtually all circumstances, a fair presentation is achieved by compliance in all material respects with applicable International Accounting Standards. 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 International Accounting Standards are insufficient to enable users to understand the impact of particular transactions or events on the enterprise's financial position and financial performance.

16. In extremely rare circumstances, application of a specific requirement in an International Accounting Standard might result in misleading financial statements. This will be the case only when the treatment required by the Standard is clearly inappropriate and thus a fair presentation cannot be achieved either by applying the Standard or through additional disclosure alone. Departure is not appropriate simply because another treatment would also give a fair presentation.

17. When assessing whether a departure from a specific requirement in International Accounting Standards is necessary, consideration is given to: (a) the objective of the requirement and why that objective is not achieved or is not relevant in the particular circumstances; and (b) the way in which the enterprise's circumstances differ from those of other enterprises which follow the requirement.

18. Because the circumstances requiring a departure are expected to be extremely rare and the need for a departure will be a matter for considerable debate and subjective judgement, it is important that users are aware that the enterprise has not complied in all material respects with International Accounting Standards. It is also important that they are given sufficient information to enable them to make an informed judgement on whether the departure is necessary and to calculate the adjustments that would be required to comply with the Standard. IASC will monitor instances of non-compliance that are brought to its attention (by enterprises, their auditors and regulators, for example) and will consider the need for clarification through interpretations or amendments to Standards, as appropriate, to ensure that departures remain necessary only in extremely rare circumstances.

19. When, in accordance with specific provisions in that Standard, an International Accounting Standard is applied before its effective date, that fact should be disclosed.

ACCOUNTING POLICIES

20. Management should select and apply an enterprise's accounting policies so that the financial statements comply with all the requirements of each applicable International Accounting Standard and interpretation of the Standing Interpretations Committee. Where there is no specific requirement, management should develop policies to ensure that the financial statements provide information that is: (a) relevant to the decision-making needs of users; and (b) reliable in that they: (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 (2) ; (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.

22. In the absence of a specific International Accounting Standard and an interpretation of the Standing Interpretations Committee, management uses its judgement in developing an accounting policy that provides the most useful information to users of the enterprise's financial statements. In making this judgement, management considers: (a) the requirements and guidance in International Accounting Standards dealing with similar and related issues; (b) the definitions, recognition and measurement criteria for assets, liabilities, income and expenses set out in the IASC framework; and (c) pronouncements of other standard setting bodies and accepted industry practices to the extent, but only to the extent, that these are consistent with (a) and (b) of this paragraph.

GOING CONCERN

23. When preparing financial statements, management should make an assessment of an enterprise's ability to continue as a going concern. Financial statements should be prepared on a going concern basis unless management either intends to liquidate the enterprise or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions which may cast significant doubt upon the enterprise's ability to continue as a going concern, those uncertainties should be disclosed. When the financial statements are not prepared on a going concern basis, that fact should be disclosed, together with the basis on which the financial statements are prepared and the reason why the enterprise is not considered to be a going concern.

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, 12 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.

ACCRUAL BASIS OF ACCOUNTING

25. An enterprise should prepare its financial statements, except for cash flow information, under the accrual basis of accounting.

26. Under the accrual basis of accounting, transactions and events are recognised when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate. Expenses are recognised in the income statement on the basis of a direct association between the costs incurred and the earning of specific items of income (matching). However, the application of the matching concept does not allow the recognition of items in the balance sheet which do not meet the definition of assets or liabilities.

CONSISTENCY OF PRESENTATION

27. The presentation and classification of items in the financial statements should be retained from one period to the next unless: (a) a significant change in the nature of the operations of the enterprise or a review of its financial statement presentation demonstrates that the change will result in a more appropriate presentation of events or transactions; or (b) a change in presentation is required by an International Accounting Standard or an interpretation of the Standing Interpretations Committee (3).

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. A change in presentation to comply with national requirements is permitted as long as the revised presentation is consistent with the requirements of this Standard.

MATERIALITY AND AGGREGATION

29. Each material item should be presented separately in the financial statements. Immaterial amounts should be aggregated with amounts of a similar nature or function and need not be presented separately.

30. Financial statements result from processing large quantities of transactions which are structured by being aggregated into groups according to their nature or function. The final stage in the process of aggregation and classification is the presentation of condensed and classified data which form line items either on the face of the financial statements or in the notes. If a line item is not individually material, it is aggregated with other items either on the face of the financial statements or in the notes. An item that is not sufficiently material to warrant separate presentation on the face of the financial statements may nevertheless be sufficiently material that it should be presented separately in the notes.

31. In this context, information is material if its non-disclosure could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the item judged in the particular circumstances of its omission. In deciding whether an item or an aggregate of items is material, the nature and the size of the item are evaluated together. Depending on the circumstances, either the nature or the size of the item could be the determining factor. For example, individual assets with the same nature and function are aggregated even if the individual amounts are large. However, large items which differ in nature or function are presented separately.

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

OFFSETTING

33. Assets and liabilities should not be offset except when offsetting is required or permitted by another International Accounting Standard.

34. Items of income and expense should be offset when, and only when: (a) an International Accounting Standard requires or permits it; or (b) gains, losses and related expenses arising from the same or similar transactions and events are not material. Such amounts should be aggregated in accordance with paragraph 29.

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. IAS 18, revenue, 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 IAS 8, Net profit or loss for the period, fundamental errors and changes in accounting policies.

COMPARATIVE INFORMATION

38. Unless an International Accounting Standard permits or requires otherwise, comparative information should be disclosed in respect of the previous period for all numerical information in the financial statements. Comparative information should be included in narrative and descriptive information when it is relevant to an understanding of the current period's financial statements.

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.

40. When the presentation or classification of items in the financial statements is amended, comparative amounts should be reclassified, unless it is impracticable to do so, to ensure comparability with the current period, and the nature, amount of, and reason for, any reclassification should be disclosed. When it is impracticable to reclassify comparative amounts, an enterprise should disclose the reason for not reclassifying and the nature of the changes that would have been made if amounts were reclassified.

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. IAS 8 deals with the adjustments required to comparative information following a change in accounting policy that is applied retrospectively.

STRUCTURE AND CONTENT

Introduction

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. IAS 7 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 International Accounting Standards 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. International Accounting Standards 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 International Accounting Standards 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.

47. The requirements in paragraph 46 are normally met by presenting page headings and abbreviated column headings on each page of the financial statements. Judgement is required in determining the best way of presenting such information. For example, when the financial statements are read electronically, separate pages may not be used; the above items are then presented frequently enough to ensure a proper understanding of the information given.

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.

Reporting period

49. Financial statements should be presented at least annually. When, in exceptional circumstances, an enterprise's balance sheet date changes and annual financial statements are presented for a period longer or shorter than one year, an enterprise should disclose, in addition to the period covered by the financial statements: (a) the reason for a period other than one year being used; and (b) the fact that comparative amounts for the income statement, changes in equity, cash flows and related notes are not comparable.

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.

Timeliness

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 market regulation in many jurisdictions.

Balance sheet

The current/non-current distinction

53. Each enterprise should determine, based on the nature of its operations, whether or not to present current and non-current assets and current and non-current liabilities as separate classifications on the face of the balance sheet. Paragraphs 57 to 65 of this Standard apply when this distinction is made. When an enterprise chooses not to make this classification, assets and liabilities should be presented broadly in order of their liquidity.

54. Whichever method of presentation is adopted, an enterprise should disclose, for each asset and liability item that combines amounts expected to be recovered or settled both before and after 12 months from the balance sheet date, the amount expected to be recovered or settled after more than 12 months.

55. When an enterprise supplies goods or services within a clearly identifiable operating cycle, separate classification of current and non-current 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. IAS 32, 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 recovered after more than one year from the balance sheet date.

Current assets

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 consumption in, 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 12 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 classified 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 12 months of the balance sheet date. Marketable securities are classified as current assets if they are expected to be realised within 12 months of the balance sheet date; otherwise they are classified as non-current assets.

Current liabilities

60. A liability should be classified as a current liability when it: (a) is expected to be settled in the normal course of the enterprise's operating cycle; or (b) is due to be settled within 12 months of the balance sheet date. All other liabilities should be classified 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 12 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 12 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 12 months, are non-current liabilities.

63. An enterprise should continue to classify its long-term interest-bearing liabilities as non-current, even when they are due to be settled within 12 months of the balance sheet date if: (a) the original term was for a period of more than 12 months; (b) the enterprise intends to refinance the obligation on a long-term basis; and (c) that intention is supported by an agreement to refinance, or to reschedule payments, which is completed before the financial statements are authorised for issue. The amount of any liability that has been excluded from current liabilities in accordance with this paragraph, together with information in support of this presentation, should be disclosed in the notes to the balance sheet.

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 authorisation of the financial statements for issue 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 authorisation of the financial statements for issue, not to demand payment as a consequence of the breach; and (b) it is not probable that further breaches will occur within 12 months of the balance sheet date.

Information to be presented on the face of the balance sheet

66. As a minimum, the face of the balance sheet should include line items which present the following amounts: (a) property, plant and equipment; (b) intangible assets; (c) financial assets (excluding amounts shown under (d), (f) and (g)); (d) investments accounted for using the equity method; (e) inventories; (f) trade and other receivables; (g) cash and cash equivalents; (h) trade and other payables; (i) tax liabilities and assets as required by IAS 12, income taxes; (j) provisions; (k) non-current interest-bearing liabilities; (l) minority interest; and (m) issued capital and reserves.

67. Additional line items, headings and sub-totals should be presented on the face of the balance sheet when an International Accounting Standard requires it, or when such presentation is necessary to present fairly the enterprise's financial position.

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 International Accounting Standard 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 18 to 25 of IAS 30, 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 liquidity 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 IAS 16. 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

72. An enterprise should disclose, either on the face of the balance sheet or in the notes to the balance sheet, further sub-classifications of the line items presented, classified in a manner appropriate to the enterprise's operations. Each item should be sub-classified, when appropriate, by its nature and, amounts payable to and receivable from the parent enterprise, fellow subsidiaries and associates and other related parties should be disclosed separately.

73. The detail provided in sub-classifications, either on the face of the balance sheet or in the notes, depends on the requirements of International Accounting Standards 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 IAS 16, property, plant and equipment; (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 IAS 2, 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 enterprise's 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: (a) for each class of share capital: (i) the number of shares authorised; (ii) the number of shares issued and fully paid, and issued but not fully paid; (iii) par value per share, or that the shares have no par value; (iv) a reconciliation of the number of shares outstanding at the beginning and at the end of the year; (v) the rights, preferences and restrictions attaching to that class including restrictions on the distribution of dividends and the repayment of capital; (vi) shares in the enterprise held by the enterprise itself or by subsidiaries or associates of the enterprise; and (vii) shares reserved for issuance under options and sales contracts, including the terms and amounts; (b) a description of the nature and purpose of each reserve within owners' equity; (c) the amount of dividends that were proposed or declared after the balance sheet date but before the financial statements were authorised for issue; and (d) the amount of any cumulative preference dividends not recognised. An enterprise without share capital, such as a partnership, should disclose information equivalent to that required above, showing movements during the period in each category of equity interest and the rights, preferences and restrictions attaching to each category of equity interest.

Income statement

Information to be presented on the face of the income statement

75. As a minimum, the face of the income statement should include line items which present the following amounts: (a) revenue; (b) the results of operating activities; (c) finance costs; (d) share of profits and losses of associates and joint ventures accounted for using the equity method; (e) tax expense; (f) profit or loss from ordinary activities; (g) extraordinary items; (h) minority interest; and (i) net profit or loss for the period. Additional line items, headings and sub-totals should be presented on the face of the income statement when required by an International Accounting Standard, or when such presentation is necessary to present fairly the enterprise's financial performance.

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 17 of IAS 30. Income and expense items are offset only when the criteria in paragraph 34 are met.

Information to be presented either on the face of the income statement or in the notes

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:

Revenue X Other operating income X Changes in inventories of finished goods and work in progress X Raw materials and consumables used X Staff costs X Depreciation and amortisation expense X Other operating expenses X Total operating expenses (X) Profit from operating activities X

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:

Revenue X Cost of sales (X) Gross profit X Other operating income X Distribution costs (X) Administrative expenses (X) Other operating expenses (X) Profit from operating activities X

83. Enterprises classifying expenses by function should disclose additional information on the nature of expenses, including depreciation and amortisation expense and staff costs.

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.

85. An enterprise should disclose, either on the face of the income statement or in the notes, the amount of dividends per share, declared or proposed, for the period covered by the financial statements.

CHANGES IN EQUITY

86. An enterprise should present, as a separate component of its financial statements, a statement showing: (a) the net profit or loss for the period; (b) each item of income and expense, gain or loss which, as required by other Standards, is recognised directly in equity, and the total of these items; and (c) the cumulative effect of changes in accounting policy and the correction of fundamental errors dealt with under the Benchmark treatments in IAS 8. In addition, an enterprise should present, either within this statement or in the notes: (d) capital transactions with owners and distributions to owners; (e) the balance of accumulated profit or loss at the beginning of the period and at the balance sheet date, and the movements for the period; and (f) a reconciliation between the carrying amount of each class of equity capital, share premium and each reserve at the beginning and the end of the period, separately disclosing each movement.

87. Changes in an enterprise's equity between two balance sheet dates reflect the increase or decrease 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. IAS 8, net profit or loss for the period, fundamental errors and changes in accounting policies, requires all items of income and expense recognised in a period to be included in the determination of net profit or loss for the period unless an International Accounting Standard requires or permits otherwise. Other Standards require gains and losses, such as revaluation surpluses and deficits and certain foreign exchange differences, to 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.

89. The requirements in paragraph 86 may be met in a number of ways. The approach adopted in many jurisdictions follows a columnar format which reconciles between the opening and closing balances of each element within shareholders' equity, including items (a) to (f). An alternative is to present a separate component of the financial statements which presents only items (a) to (c). Under this approach, the items described in (d) to (f) are shown in the notes to the financial statements. Both approaches are illustrated in the appendix to this Standard. Whichever approach is adopted, paragraph 86 requires a sub-total of the items in (b) to enable users to derive the total gains and losses arising from the enterprise's activities during the period.

Cash flow statement

90. IAS 7 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

91. The notes to the financial statements of an enterprise should: (a) present information about the basis of preparation of the financial statements and the specific accounting policies selected and applied for significant transactions and events; (b) disclose the information required by International Accounting Standards 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 (4).

92. Notes to the financial statements should be presented in a systematic manner. Each item on the face of the balance sheet, income statement and cash flow statement should be cross-referenced to any related information in the notes.

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 International Accounting Standards, 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 compliance with International Accounting Standards (see paragraph 11); (b) statement of the measurement basis (bases) and accounting policies applied; (c) 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 (d) 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.

Presentation of accounting policies

97. The accounting policies section of the notes to the financial statements should describe the following: (a) the measurement basis (or bases) used in preparing the financial statements; and (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 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; (f) capitalisation of borrowing costs and other expenditure; (g) construction contracts; (h) investment properties; (i) financial instruments and investments; (j) leases; (k) research and development costs; (l) inventories; (m) taxes, including deferred taxes; (n) provisions; (o) employee benefit costs; (p) foreign currency translation and hedging; (q) definition of business and geographical segments and the basis for allocation of costs between segments; (r) definition of cash and cash equivalents; (s) inflation accounting; and (t) government grants. Other International Accounting Standards specifically require disclosure of accounting policies in many of these areas.

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. For example, all private sector enterprises would be expected to disclose an accounting policy for income taxes, including deferred taxes and tax assets. 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 International Accounting Standards, but selected and applied in accordance with paragraph 20.

Other disclosures

102. An enterprise should disclose the following if not disclosed elsewhere in information published with the financial statements: (a) the domicile and legal form of the enterprise, its country of incorporation and the address of the registered office (or principal place of business, if different from the registered office); (b) a description of the nature of the enterprise's operations and its principal activities; (c) the name of the parent enterprise and the ultimate parent enterprise of the group; and (d) either the number of employees at the end of the period or the average for the period.

EFFECTIVE DATE

103. This International Accounting Standard becomes operative for financial statements covering periods beginning on or after 1 July 1998. Earlier application is encouraged.

104. This International Accounting Standard supersedes IAS 1, disclosure of accounting policies, IAS 5, information to be disclosed in financial statements, and IAS 13, presentation of current assets and current liabilities, approved by the Board in reformatted versions in 1994.

INTERNATIONAL ACCOUNTING STANDARD IAS 2

(REVISED 1993)

Inventories

This revised International Accounting Standard supersedes IAS 2, valuation and presentation of inventories in the context of the historical cost system, approved by the Board in October 1975. The revised Standard became effective for financial statements covering periods beginning on or after 1 January 1995.

In May 1999, IAS 10 (revised 1999), events after the balance sheet date, amended paragraph 28. The amended text is effective for annual financial statements covering periods beginning on or after 1 January 2000.

In December 2000, IAS 41, agriculture, amended paragraph 1 and inserted paragraph 16A. The amended text is effective for annual financial statements covering periods beginning on or after 1 January 2003.

One SIC interpretation relates to IAS 2:

— SIC-1: Consistency — different cost formulas for inventories.

CONTENTS

Objective

Scope 1-3

Definitions 4-5

Measurement of inventories 6

Cost of inventories 7-18

Costs of purchase 8-9

Costs of conversion 10-12

Other costs 13-15

Cost of inventories of a service provider 16

Cost of agricultural produce harvested from biological assets 16A

Techniques for the measurement of cost 17-18

Cost formulas 19-24

Benchmark treatment 21-22

Allowed alternative treatment 23-24

Net realisable value 25-30

Recognition as an expense 31-33

Disclosure 34-40

Effective date 41

The standards, which have been set in bold italic type, should be read in the context of the background material and implementation guidance in this Standard, and in the context of the ‘Preface to International Accounting Standards’. International Accounting Standards are not intended to apply to immaterial items (see paragraph 12 of the Preface).

OBJECTIVE

The objective of this Standard is to prescribe the accounting treatment for inventories under the historical cost system. A primary issue in accounting for inventories is the amount of cost to be recognised as an asset and carried forward until the related revenues are recognised. This Standard provides practical guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.

SCOPE

1. This Standard should be applied in financial statements prepared in the context of the historical cost system in accounting for inventories other than: (a) work in progress arising under construction contracts, including directly related service contracts (see IAS 11, construction contracts); (b) financial instruments; and (c) producers' inventories of livestock, agricultural and forest products, and mineral ores to the extent that they are measured at net realisable value in accordance with well established practices in certain industries; (d) biological assets related to agricultural activity (see IAS 41 Agriculture).

2. This Standard supersedes IAS 2, valuation and presentation of inventories in the context of the historical cost system, approved in 1975.

3. The inventories referred to in paragraph 1(c) are measured at net realisable value at certain stages of production. This occurs, for example, when agricultural crops have been harvested or mineral ores have been extracted and sale is assured under a forward contract or a government guarantee, or when a homogenous market exists and there is a negligible risk of failure to sell. These inventories are excluded from the scope of this Standard.

DEFINITIONS

4. The following terms are used in this Standard with the meanings specified: Inventories are assets: (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

5. Inventories encompass goods purchased and held for resale including, for example, merchandise purchased by a retailer and held for resale, or land and other property held for resale. Inventories also encompass finished goods produced, or work in progress being produced, by the enterprise and include materials and supplies awaiting use in the production process. In the case of a service provider, inventories include the costs of the service, as described in paragraph 16, for which the enterprise has not yet recognised the related revenue (see IAS 18, revenue).

MEASUREMENT OF INVENTORIES

6. Inventories should be measured at the lower of cost and net realisable value.

Cost of inventories

7. The cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Costs of purchase

8. The costs of purchase of inventories comprise the purchase price, import duties and other taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services. Trade discounts, rebates and other similar items are deducted in determining the costs of purchase.

9. The costs of purchase may include foreign exchange differences which arise directly on the recent acquisition of inventories invoiced in a foreign currency in the rare circumstances permitted in the allowed alternative treatment in IAS 21, The effects of changes in foreign exchange rates. These exchange differences are limited to those resulting from a severe devaluation or depreciation of a currency against which there is no practical means of hedging and that affects liabilities which cannot be settled and which arise on the recent acquisition of the inventories.

Costs of conversion

10. The costs of conversion of inventories include costs directly related to the units of production, such as direct labour. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings and equipment, and the cost of factory management and administration. Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labour.

11. The allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production facilities. Normal capacity is the production expected to be achieved on average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. The actual level of production may be used if it approximates normal capacity. The amount of fixed overhead allocated to each unit of production is not increased as a consequence of low production or idle plant. Unallocated overheads are recognised as an expense in the period in which they are incurred. In periods of abnormally high production, the amount of fixed overhead allocated to each unit of production is decreased so that inventories are not measured above cost. Variable production overheads are allocated to each unit of production on the basis of the actual use of the production facilities.

12. A production process may result in more than one product being produced simultaneously. This is the case, for example, when joint products are produced or when there is a main product and a by-product. When the costs of conversion of each product are not separately identifiable, they are allocated between the products on a rational and consistent basis. The allocation may be based, for example, on the relative sales value of each product either at the stage in the production process when the products become separately identifiable, or at the completion of production. Most by-products, by their nature, are immaterial. When this is the case, they are often measured at net realisable value and this value is deducted from the cost of the main product. As a result, the carrying amount of the main product is not materially different from its cost.

Other costs

13. Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. For example, it may be appropriate to include non-production overheads or the costs of designing products for specific customers in the cost of inventories.

14. Examples of costs excluded from the cost of inventories and recognised as expenses in the period in which they are incurred are: (a) abnormal amounts of wasted materials, labour, or other production costs; (b) storage costs, unless those costs are necessary in the production process prior to a further production stage; (c) administrative overheads that do not contribute to bringing inventories to their present location and condition; and (d) selling costs.

15. In limited circumstances, borrowing costs are included in the cost of inventories. These circumstances are identified in the allowed alternative treatment in IAS 23, borrowing costs.

Cost of inventories of a service provider

16. The cost of inventories of a service provider consists primarily of the labour and other costs of personnel directly engaged in providing the service, including supervisory personnel, and attributable overheads. Labour and other costs relating to sales and general administrative personnel are not included but are recognised as expenses in the period in which they are incurred.

Cost of agricultural produce harvested from biological assets

16A. Under IAS 41, agriculture, inventories comprising agricultural produce that an enterprise has harvested from its biological assets are measured on initial recognition at their fair value less estimated point-of-sale costs at the point of harvest. This is the cost of the inventories at that date for application of this Standard.

Techniques for the measurement of cost

17. Techniques for the measurement of the cost of inventories, such as the standard cost method or the retail method, may be used for convenience if the results approximate cost. Standard costs take into account normal levels of materials and supplies, labour, efficiency and capacity utilisation. They are regularly reviewed and, if necessary, revised in the light of current conditions.

18. The retail method is often used in the retail industry for measuring inventories of large numbers of rapidly changing items, that have similar margins and for which it is impracticable to use other costing methods. The cost of the inventory is determined by reducing the sales value of the inventory by the appropriate percentage gross margin. The percentage used takes into consideration inventory which has been marked down to below its original selling price. An average percentage for each retail department is often used.

Cost formulas

19. The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by using specific identification of their individual costs.

20. Specific identification of cost means that specific costs are attributed to identified items of inventory. This is an appropriate treatment for items that are segregated for a specific project, regardless of whether they have been bought or produced. However, specific identification of costs is inappropriate when there are large numbers of items of inventory which are ordinarily interchangeable. In such circumstances, the method of selecting those items that remain in inventories could be used to obtain predetermined effects on the net profit or loss for the period.

Benchmark treatment

21. ( 5 ) The cost of inventories, other than those dealt with in paragraph 19, should be assigned by using the first-in, first-out (FIFO) or weighted average cost formulas

22. The FIFO formula assumes that the items of inventory which were purchased first are sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced. Under the weighted average cost formula, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. The average may be calculated on a periodic basis, or as each additional shipment is received, depending upon the circumstances of the enterprise.

Allowed alternative treatment

23. ( 5 ) The cost of inventories, other than those dealt with in paragraph 19, should be assigned by using the last-in, first-out (LIFO) formula

24. The LIFO formula assumes that the items of inventory which were purchased or produced last are sold first, and consequently the items remaining in inventory at the end of the period are those first purchased or produced.

Net realisable value

25. The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined. The cost of inventories may also not be recoverable if the estimated costs of completion or the estimated costs to be incurred to make the sale have increased. The practice of writing inventories down below cost to net realisable value is consistent with the view that assets should not be carried in excess of amounts expected to be realised from their sale or use.

26. Inventories are usually written down to net realisable value on an item by item basis. In some circumstances, however, it may be appropriate to group similar or related items. This may be the case with items of inventory relating to the same product line that have similar purposes or end uses, are produced and marketed in the same geographical area, and cannot be practicably evaluated separately from other items in that product line. It is not appropriate to write inventories down based on a classification of inventory, for example, finished goods, or all the inventories in a particular industry or geographical segment. Service providers generally accumulate costs in respect of each service for which a separate selling price will be charged. Therefore, each such service is treated as a separate item.

27. Estimates of net realisable value are based on the most reliable evidence available at the time the estimates are made as to the amount the inventories are expected to realise. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the end of the period to the extent that such events confirm conditions existing at the end of the period.

28. Estimates of net realisable value also take into consideration the purpose for which the inventory is held. For example, the net realisable value of the quantity of inventory held to satisfy firm sales or service contracts is based on the contract price. If the sales contracts are for less than the inventory quantities held, the net realisable value of the excess is based on general selling prices. Provisions or contingent liabilities may arise from firm sales contracts in excess of inventory quantities held or from firm purchase contracts. Such provisions or contingent liabilities are dealt with under IAS 37, provisions, contingent liabilities and contingent assets.

29. Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. However, when a decline in the price of materials indicates that the cost of the finished products will exceed net realisable value, the materials are written down to net realisable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realisable value.

30. A new assessment is made of net realisable value in each subsequent period. When the circumstances which previously caused inventories to be written down below cost no longer exist, the amount of the write-down is reversed so that the new carrying amount is the lower of the cost and the revised net realisable value. This occurs, for example, when an item of inventory, which is carried at net realisable value because its selling price has declined, is still on hand in a subsequent period and its selling price has increased.

RECOGNITION AS AN EXPENSE

31. When inventories are sold, the carrying amount of those inventories should be recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories should be recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, should be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.

32. The process of recognising as an expense the carrying amount of inventories sold results in the matching of costs and revenues.

33. Some inventories may be allocated to other asset accounts, for example, inventory used as a component of self-constructed property, plant or equipment. Inventories allocated to another asset in this way are recognised as an expense during the useful life of that asset.

DISCLOSURE

34. The financial statements should disclose: (a) the accounting policies adopted in measuring inventories, including the cost formula used; (b) the total carrying amount of inventories and the carrying amount in classifications appropriate to the enterprise; (c) the carrying amount of inventories carried at net realisable value; (d) the amount of any reversal of any write-down that is recognised as income in the period in accordance with paragraph 31; (e) the circumstances or events that led to the reversal of a write-down of inventories in accordance with paragraph 31; and (f) the carrying amount of inventories pledged as security for liabilities.

35. Information about the carrying amounts held in different classifications of inventories and the extent of the changes in these assets is useful to financial statement users. Common classifications of inventories are merchandise, production supplies, materials, work in progress and finished goods. The inventories of a service provider may simply be described as work in progress.

36. When the cost of inventories is determined using the LIFO formula in accordance with the allowed alternative treatment in paragraph 23, the financial statements should disclose the difference between the amount of inventories as shown in the balance sheet and either: (a) the lower of the amount arrived at in accordance with paragraph 21 and net realisable value; or (b) the lower of current cost at the balance sheet date and net realisable value.

37. The financial statements should disclose either: (a) the cost of inventories recognised as an expense during the period; or (b) the operating costs, applicable to revenues, recognised as an expense during the period, classified by their nature.

38. The cost of inventories recognised as an expense during the period consists of those costs previously included in the measurement of the items of inventory sold and unallocated production overheads and abnormal amounts of production costs of inventories. The circumstances of the enterprise may also warrant the inclusion of other costs, such as distribution costs.

39. Some enterprises adopt a different format for the income statement which results in different amounts being disclosed instead of the cost of inventories recognised as an expense during the period. Under this different format, an enterprise discloses the amounts of operating costs, applicable to revenues for the period, classified by their nature. In this case, the enterprise discloses the costs recognised as an expense for raw materials and consumables, labour costs and other operating costs together with the amount of the net change in inventories for the period.

40. A write-down to net realisable value may be of such size, incidence or nature to require disclosure under IAS 8, net profit or loss for the period, fundamental errors and changes in accounting policies.

EFFECTIVE DATE

41. This International Accounting Standard becomes operative for financial statements covering periods beginning on or after 1 January 1995.

INTERNATIONAL ACCOUNTING STANDARD IAS 7

(REVISED 1992)

Cash flow statements

This revised International Accounting Standard supersedes ias 7, statement of changes in financial position, approved by the board in october 1977. the revisecame effective for financial statements covering periods beginning on or after 1 January 1994.

CONTENTS

Objective

Scope 1-3

Benefits of cash flow information 4-5

Definitions 6-9

Cash and cash equivalents 7-9

Presentation of a cash flow statement 10-17

Operating activities 13-15

Investing activities 16

Financing activities 17

Reporting cash flows from operating activities 18-20

Reporting cash flows from investing and financing activities 21

Reporting cash flows on a net basis 22-24

Foreign currency cash flows 25-28

Extraordinary items 29-30

Interest and dividends 31-34

Taxes on income 35-36

Investments in subsidiaries, associates and joint ventures 37-38

Acquisitions and disposals of subsidiaries and other business units 39-42

Non-cash transactions 43-44

Components of cash and cash equivalents 45-47

Other disclosures 48-52

Effective date 53

The standards, which have been set in bold italic type should be read in the context of the background material and implementation guidance in this Standard, and in the context of the ‘Preface to International Accounting Standards’. International Accounting Standards are not intended to apply to immaterial items (see paragraph 12 of the Preface).

OBJECTIVE

Information about the cash flows of an enterprise 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. The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation.

The objective of this Standard is to require the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities.

SCOPE

1. An enterprise should prepare a cash flow statement in accordance with the requirements of this Standard and should present it as an integral part of its financial statements for each period for which financial statements are presented.

2. This Standard supersedes IAS 7, statement of changes in financial position, approved in July 1977.

3. Users of an enterprise's financial statements are interested in how the enterprise generates and uses cash and cash equivalents. This is the case regardless of the nature of the enterprise's activities and irrespective of whether cash can be viewed as the product of the enterprise, as may be the case with a financial institution. Enterprises need cash for essentially the same reasons however different their principal revenue-producing activities might be. They need cash to conduct their operations, to pay their obligations, and to provide returns to their investors. Accordingly, this Standard requires all enterprises to present a cash flow statement.

BENEFITS OF CASH FLOW INFORMATION

4. A cash flow statement, when used in conjunction with the rest of the financial statements, provides information that enables users to evaluate the changes in net assets of an enterprise, its financial structure (including its liquidity and solvency) and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. Cash flow information is useful in assessing the ability of the enterprise to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different enterprises. It also enhances the comparability of the reporting of operating performance by different enterprises because it eliminates the effects of using different accounting treatments for the same transactions and events.

5. Historical cash flow information is often used as an indicator of the amount, timing and certainty of future cash flows. It is also useful in checking the accuracy of past assessments of future cash flows and in examining the relationship between profitability and net cash flow and the impact of changing prices.

DEFINITIONS

6. The following terms are used in this Standard with the meanings specified: Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cash flows are inflows and outflows of cash and cash equivalents. Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Financing activities are activities that result in changes in the size and composition of the equity capital and borrowings of the enterprise.

Cash and cash equivalents

7. Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. For an investment to qualify as a cash equivalent it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition. Equity investments are excluded from cash equivalents unless they are, in substance, cash equivalents, for example in the case of preferred shares acquired within a short period of their maturity and with a specified redemption date.

8. Bank borrowings are generally considered to be financing activities. However, in some countries, bank overdrafts which are repayable on demand form an integral part of an enterprise's cash management. In these circumstances, bank overdrafts are included as a component of cash and cash equivalents. A characteristic of such banking arrangements is that the bank balance often fluctuates from being positive to overdrawn.

9. Cash flows exclude movements between items that constitute cash or cash equivalents because these components are part of the cash management of an enterprise rather than part of its operating, investing and financing activities. Cash management includes the investment of excess cash in cash equivalents.

PRESENTATION OF A CASH FLOW STATEMENT

10. The cash flow statement should report cash flows during the period classified by operating, investing and financing activities.

11. An enterprise presents its cash flows from operating, investing and financing activities in a manner which is most appropriate to its business. Classification by activity provides information that allows users to assess the impact of those activities on the financial position of the enterprise and the amount of its cash and cash equivalents. This information may also be used to evaluate the relationships among those activities.

12. A single transaction may include cash flows that are classified differently. For example, when the cash repayment of a loan includes both interest and capital, the interest element may be classified as an operating activity and the capital element is classified as a financing activity.

Operating activities

13. The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to repay loans, maintain the operating capability of the enterprise, pay dividends and make new investments without recourse to external sources of financing. Information about the specific components of historical operating cash flows is useful, in conjunction with other information, in forecasting future operating cash flows.

14. Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the enterprise. Therefore, they generally result from the transactions and other events that enter into the determination of net profit or loss. Examples of cash flows from operating activities are: (a) cash receipts from the sale of goods and the rendering of services; (b) cash receipts from royalties, fees, commissions and other revenue; (c) cash payments to suppliers for goods and services; (d) cash payments to and on behalf of employees; (e) cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits; (f) cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activitie