Insights on Ind AS 118 Understanding the Presentation of Primary Financial Statements and Notes
CA Bhawna Grover
CA Prajwal Jha
Manager - Research and Advisory, Taxmann
Associate - Research and Advisory, Taxmann
Insights on Ind AS 118 Understanding the Presentation of Primary Financial Statements and Notes
CA Bhawna Grover
CA Prajwal Jha
Manager - Research and Advisory, Taxmann
Associate - Research and Advisory, Taxmann
Contents 1.
Introduction
5
2.
Understanding the architecture of financial statements
6
3.
Materiality – Not every prescribed item needs separate presentation
7
4.
What constitutes a useful structured summary?
7
5.
Presentation should not change without a reason
8
6.
Comparative information and changes in presentation
8
7.
Concept of Third Balance Sheet
8
8.
A framework that goes beyond presentation
10
9.
What does this mean for preparers and auditors?
10
10. Ind AS 1 vs Ind AS 118 — From General Presentation to Meaningful Financial Communication
11
11.
13
What to expect in this series?
12. Conclusion
13
Taxmann presents weekly series on Ind AS 118, exclusively for Accounts and Audit Module subscribers of Taxmann.com, focusing on the key principles and practical application of Ind AS 118 through structured, issue-based analysis. The series will cover the significant aspects of Ind AS 118 in a progressive manner, helping professionals understand the new presentation and disclosure requirements and their practical implications through relevant examples and illustrations.
1.
Introduction
Financial statements are often viewed primarily as a means of reporting an entity’s financial results. However, the usefulness of financial statements depends not only on the numbers reported but also on how those numbers are presented, classified and supplemented with relevant information. A financial statement that contains all the required numbers but fails to present them in a meaningful manner may not provide users with an effective basis for understanding the entity’s financial position and performance. Ind AS 118, Presentation and Disclosure in Financial Statements sets out requirements for the presentation and disclosure of information in general purpose financial statements with the objective of ensuring that such information is relevant and useful to users. Ind AS 118 is therefore focused on the communication of financial information. It establishes general and specific requirements for the presentation of information in the statement of profit and loss, balance sheet and statement of changes in equity, together with requirements relating to disclosures in the notes. The proposed framework also places greater emphasis on understanding the different roles played by the primary financial statements and the accompanying notes. This distinction is fundamental to appreciating how information should be presented and disclosed under the proposed Standard.
Insights on Ind AS 118 Understanding the Presentation of Primary Financial Statements and Notes
5
2.
Understanding the architecture of financial statements
Under Ind AS 118, a complete set of financial statements comprises the statement of profit and loss, balance sheet, statement of changes in equity, statement of cash flows, notes, comparative information for the preceding period and, where required, a balance sheet at the beginning of the preceding period. The statement of profit and loss, balance sheet, statement of changes in equity and statement of cash flows are collectively referred to as the primary financial statements. An entity is required to present the statement of profit and loss as a single statement, with profit or loss and other comprehensive income presented in two sections, with the profit or loss section appearing first. This framework is important because Ind AS 118 does not view the primary financial statements and notes as performing the same function.
2.1.
Primary financial statements
The primary financial statements are intended to provide structured summaries of an entity’s recognised assets, liabilities, equity, income, expenses and cash flows. They also assist users in comparing entities, comparing different reporting periods of the same entity and identifying areas where they may need additional information from the notes. Consequently, the information presented in the primary financial statements is generally more aggregated. The objective is not to reproduce every underlying transaction but to provide users with a useful and structured picture of the entity’s financial position, financial performance and cash flows.
2.2.
Notes to the financial statements
The notes have a complementary but different role. They provide material information necessary for users to understand the line items presented in the primary financial statements and supplement those statements with additional information required to achieve the objective of financial statements. This distinction results in an important principle under Ind AS 118: the primary financial statements provide the structured summary, while the notes provide greater detail and disaggregation. The information in the primary financial statements is therefore generally more aggregated, with more detailed information being provided in the notes. For preparers, this means that the question is not merely “Where is this disclosure required?” but also “What information belongs in the primary financial statements and what information should be provided in the notes?”
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Insights on Ind AS 118 Understanding the Presentation of Primary Financial Statements and Notes
3.
Materiality – Not every prescribed item needs separate presentation
Another important aspect of the proposed framework is its emphasis on materiality. Where an Ind AS specifies information to be presented in the primary financial statements or disclosed in the notes, an entity need not provide that specific presentation or disclosure if the resulting information is not material. This remains the case even where the Standard describes the requirement as a minimum requirement or provides a list of specific items. At the same time, compliance with specific disclosure requirements may not always be sufficient. An entity is required to consider whether additional disclosures are necessary when the specified requirements do not provide sufficient information for users to understand the entity’s financial position and financial performance. Thus, materiality under Ind AS 118 operates in both directions, it can mean that a prescribed presentation or disclosure need not be separately provided when immaterial, while also requiring additional information where the existing disclosures are insufficient.
4. What constitutes a useful structured summary? The concept of a “useful structured summary” is central to determining what information should appear in the primary financial statements. Ind AS 118 requires an entity to use the role of the primary financial statements to determine which material information should be presented. Specific requirements establish the structure of the statement of profit and loss, balance sheet, statement of changes in equity and statement of cash flows. However, the existence of a specified line item does not automatically mean that it must always be presented separately. An entity need not separately present a line item if doing so is not necessary for the primary financial statement to provide a useful structured summary. Conversely, where the specified structure does not adequately provide a useful structured summary, an entity is required to present additional line items or subtotals. Such additional presentations must comprise amounts recognised and measured in accordance with Ind ASs, be compatible with the prescribed structure, be consistent from period to period and not be displayed more prominently than the required totals and subtotals. This approach indicates that Ind AS 118 is not intended to create a completely rigid format for financial statements. Instead, it combines prescribed requirements with principles designed to ensure that the resulting presentation remains useful to users.
Insights on Ind AS 118 Understanding the Presentation of Primary Financial Statements and Notes
7
5.
Presentation should not change without a reason
Consistency is another important element of the proposed framework. An entity is required to retain the presentation, disclosure and classification of items from one reporting period to another unless a different presentation, disclosure or classification would be more appropriate or an Ind AS requires a change. This requirement seeks to preserve comparability across reporting periods. A change in presentation should therefore not be made merely because management considers another format more convenient. There must be an appropriate basis for changing the presentation or classification. The importance of this principle becomes even more apparent when considering comparative information.
6. Comparative information and changes in presentation Ind AS 118 requires comparative information for the preceding reporting period for amounts reported in the financial statements, along with comparative narrative and descriptive information where necessary to understand the current period. Where an entity changes the presentation, disclosure or classification of items, it is generally required to reclassify comparative amounts unless doing so is impracticable. Where comparative information is reclassified, the entity must disclose the nature of the reclassification, the amount of each item or class of items reclassified and the reason for the reclassification. The emphasis on comparatives is important because users frequently analyse financial statements by looking at trends rather than considering individual reporting periods in isolation. Consistent presentation therefore contributes directly to the usefulness of financial information. In certain circumstances, where a retrospective change or reclassification has a material effect on the balance sheet at the beginning of the preceding period, a third balance sheet is required.
7.
Concept of Third Balance Sheet
An important consequence of retrospective changes is the requirement to present a third balance sheet in specified circumstances. Paragraph 37 of the Exposure Draft requires an entity to present a third balance sheet as at the beginning of the preceding period where: a)
8
it applies an accounting policy retrospectively, makes a retrospective restatement of items in its financial statements or reclassifies items in its financial statements; and
Insights on Ind AS 118 Understanding the Presentation of Primary Financial Statements and Notes
b)
such retrospective application, restatement or reclassification has a material effect on the information in the balance sheet at the beginning of the preceding period.
Thus, the mere fact that an accounting policy is applied retrospectively or that a reclassification is made does not, by itself, trigger the requirement to present a third balance sheet. The additional condition of a material effect on the balance sheet at the beginning of the preceding period must also be satisfied. For example, Assume an entity has a reporting date of 31st March 2027 and presents comparative information for the year ended 31st March 2026. The beginning of the preceding period would be 1st April 2025. If a retrospective accounting policy change made by the entity has a material effect on the balance sheet as at 1st April 2025, the entity would be required to present: Balance sheet
Date
Current reporting period
31st March 2027
Preceding reporting period
31st March 2026
Beginning of preceding period
1st April 2025
Accordingly, what would ordinarily be a two-balance-sheet presentation becomes a threebalance-sheet presentation, with the third balance sheet providing users with information about the entity’s financial position at the beginning of the earliest comparative period presented. Paragraph 38 specifically requires the three balance sheets to be presented at the end of the current reporting period, the end of the preceding period and the beginning of the preceding period. It is important to note that the requirement to present a third balance sheet does not mean that an entity is required to provide a complete set of notes for that additional balance sheet. Where the third balance sheet is required, paragraph 39 requires the entity to provide the disclosures. However, the entity is not required to provide the related notes to the balance sheet as at the beginning of the preceding period. The underlying objective of this requirement is to enhance inter-period comparability. The Exposure Draft recognises that comparability enables users to assess trends in financial information and assists them in making economic decisions, particularly where such trends are relevant for predictive purposes. In essence, the third balance sheet requirement can be viewed as a safeguard for comparability: where a retrospective change materially affects the financial position at the beginning of the preceding period, users are provided with an additional balance sheet to enable them to understand the effect of that change at the earliest comparative date.
Insights on Ind AS 118 Understanding the Presentation of Primary Financial Statements and Notes
9
8. A framework that goes beyond presentation At first glance, Ind AS 118 may appear to be primarily concerned with the format of financial statements. However, the underlying framework is broader. The proposed Standard requires entities to think about: a)
what information should be presented in the primary financial statements;
b)
what information should be disclosed in the notes;
c)
how much aggregation is appropriate;
d)
when additional disaggregation is necessary;
e)
whether a line item provides a useful structured summary;
f)
whether presentation and classification remain consistent across periods; and
g)
whether the information provided is sufficient for users to understand the entity’s financial position and performance.
Therefore, the implementation of Ind AS 118 is likely to involve more than simply modifying the face of the financial statements. It requires entities to reconsider the architecture of financial information from the primary statements through to the underlying notes and disclosures.
9. What does this mean for preparers and auditors? For preparers, the proposed requirements could require a reassessment of existing financial statement formats, line-item classifications and note disclosures. Particular attention may be required where entities have historically relied on broad aggregation of information or where the existing presentation may not provide users with a sufficiently structured understanding of financial performance. For auditors, the proposed framework introduces an important layer of judgement around whether the financial statements provide a useful structured summary and whether material information has been appropriately presented or disclosed. Assessing consistency of presentation, appropriateness of classifications, adequacy of disaggregation and the materiality of individual items may therefore become important aspects of the financial statement audit. These considerations also provide the foundation for understanding some of the more prominent changes that Ind AS 118 proposes in relation to the statement of profit and loss.
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Insights on Ind AS 118 Understanding the Presentation of Primary Financial Statements and Notes
10. Ind AS 1 vs Ind AS 118 — From General Presentation to Meaningful Financial Communication Particulars
Ind AS 1
Ind AS 118
Overall focus
Lays down the general requirements for presentation of financial statements, including their structure and minimum content.
Moves the focus towards how financial information is communicated so that it is relevant and useful to users.
Overall architecture of financial statements
Prescribes the components of a complete set of financial statements and general presentation requirements.
Retains the overall architecture but provides a clearer distinction between primary financial statements and notes, with greater emphasis on their respective roles.
Primary financial statements
Identifies the balance sheet, statement of profit and loss/OCI, statement of changes in equity and cash flow statement as components of financial statements.
Views the primary financial statements as structured summaries of recognised assets, liabilities, equity, income, expenses and cash flows.
Role of primary financial statements
Primarily focuses on what should be presented and where it should be presented.
Focuses on whether the presentation provides a useful structured summary of the entity’s financial information.
Role of notes
Notes provide additional information and accounting policy information necessary to understand the financial statements.
Gives a more explicit complementary role to notes — primary statements provide the structured summary, while notes provide the material detail and disaggregation needed to understand the line items.
Materiality
Contains general materiality requirements for presentation and disclosure.
Gives materiality a more prominent role in deciding whether specified information needs to be separately presented or disclosed.
Specified line items
Provides requirements for separately presenting specified line items, subject to the applicable requirements.
A specified line item need not necessarily be separately presented where doing so is not necessary to provide a useful structured summary, subject to the requirements of the Standard.
Additional line items / subtotals
Permits additional line items, headings and subtotals where relevant to understanding the entity’s financial position/performance.
Makes this concept more closely linked to the useful structured summary. Additional line items or subtotals may be needed where the prescribed structure does not provide sufficient useful information.
Insights on Ind AS 118 Understanding the Presentation of Primary Financial Statements and Notes
11
Particulars
Ind AS 1
Ind AS 118
Consistency of presentation
Requires consistency in presentation and classification from one period to another unless a change is justified.
Retains consistency but links it more directly with usefulness and comparability of information. A change is appropriate where another presentation or classification provides more useful information or is required by an Ind AS.
Comparative information
Requires comparative information for the preceding period, with requirements for reclassification where necessary.
Retains comparative information requirements while placing greater emphasis on consistency, comparability and reclassification when presentation or classification changes.
Third balance sheet
Requires a third balance sheet in specified circumstances involving retrospective changes/restatements or reclassifications having a material effect.
Retains the concept and clarifies its application where the change has a material effect on the balance sheet at the beginning of the preceding period. It also specifically addresses the related disclosure requirements.
Aggregation and disaggregation
Contains general principles concerning aggregation and separate presentation of material items.
Gives greater prominence to the relationship between aggregation in primary financial statements and disaggregation in the notes.
Primary statements vs notes — overall approach
More focused on prescribed presentation and disclosure requirements.
Establishes a clearer communication architecture: primary statements → structured summary; notes → material detail and explanation.
Statement of Profit and Loss
Provides the general presentation requirements for income and expenses and certain subtotals.
Introduces a more structured approach to the P&L, including categories of income and expenses, defined subtotals and requirements concerning operating profit and other presentation aspects.
Management-defined Performance Measures (MPMs)
Does not contain the comprehensive MPM framework contemplated by Ind AS 118.
Introduces specific requirements relating to management-defined performance measures, including their disclosure and reconciliation.
Overall philosophy
Primarily a general presentation standard setting out requirements for the form and content of financial statements.
A more developed financial communication framework, combining prescribed requirements with concepts such as useful structured summary, materiality, aggregation and disaggregation.
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Insights on Ind AS 118 Understanding the Presentation of Primary Financial Statements and Notes
11. What to expect in this series? The principles discussed above form the foundation on which the remaining requirements of Ind AS 118 are built. In the coming articles of “Practical Insights on Ind AS 118”, these principles will be examined through specific requirements and practical situations. The series will progressively explore the proposed changes relating to the statement of profit and loss, including the classification of income and expenses, defined subtotals and the operating category. It will subsequently delve into areas such as presentation of expenses, management-defined performance measures, aggregation and disaggregation of information, and other significant aspects of the proposed framework. Rather than considering these requirements in isolation, each article will seek to examine how the requirement operates, the judgement involved in applying it and the practical issues that may arise for preparers and auditors.
12. Conclusion Ind AS 118 seeks to strengthen financial reporting by focusing on one of the fundamental questions in financial statements, how financial information should be communicated so that it is useful to users. Its proposed framework places the primary financial statements in the role of providing structured summaries, while the notes provide the material detail and additional information necessary to understand those summaries. At the same time, principles relating to materiality, useful structured summaries, consistency, comparative information and reclassification provide the foundation for determining how information should be presented. For professionals, understanding these foundational principles is essential before moving to the more specific presentation and disclosure requirements of Ind AS 118. The subsequent articles in this series will build upon this foundation and examine each significant aspect of the proposed Standard from a practical perspective.
Insights on Ind AS 118 Understanding the Presentation of Primary Financial Statements and Notes
13
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