Section overview
BAS 1 is concerned with the presentation of financial statements so that they are comparable across time and with other companies.
The objective of financial statements is to provide useful information to users making economic decisions. To achieve this information must be presented fairly or faithfully, which generally means it should be presented in accordance with BASs.
Each entity needs to select and apply accounting policies in order to present its financial
statements, and this should be done in accordance with BAS 8. The result will be information that is relevant, reliable, comparable and understandable.
In this chapter we look at the general requirements of BAS 1's assumptions. The rest of BAS 1, on the format and content of financial statements, will be covered in Chapter 12 when we look in detail at the preparation of company financial statements. We shall also look at certain concepts where BAS 1 overlaps with BAS Framework that we saw in Chapter 1.
2.1 Objectives and scope of BAS 1
The main objective of BAS 1 is:
'to prescribe the basis for presentation of general purpose financial statements, to ensure comparability both with the entity's financial statements of previous periods and with the financial statements of other entities.'
BAS 1 applies to all general purpose financial statements prepared and presented in accordance with Bangladesh Financial Reporting Standards (BFRSs – this refers to BASs as well, the collective term that we use in this study manual). 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 particular information needs.
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2.2 Purpose of financial statements
As we saw in Chapter 1 the objectives of financial statements are:
To provide information about the financial position, performance and cash flows of an entity that is useful to a wide range of users in making economic decisions
To show the result of management's stewardship of the resources entrusted to it
To assist users in predicting the entity's future cash flows and, in particular, their timing and certainty
To fulfil these objectives, financial statements must provide information about the entity's:
Assets
Liabilities
Equity
Income and expenses (including gains and losses)
Other changes in equity
Cash flows
A complete set of financial statements includes:
Balance sheet
Income statement
Accounting policies note
A statement showing changes in equity
Cash flow statement
Explanatory notes
Preparation of the financial statements is the responsibility of the board of directors. BAS 1 also recognises the value of a financial review by management and the production of any other reports and statements which may aid users, but these fall outside the Accounting syllabus scope.
2.3 Fair presentation and compliance with BASs
Most importantly, financial statements should present fairly the financial position, financial performance and cash flows of an entity. Applying BASs is presumed to result in fair presentation.
Definition
Fair presentation: The faithful representation of the effects of transactions, other events and conditions in accordance with BAS Framework so that the reliability of financial statements is maintained.
The following points made by BAS 1 expand on this principle.
Compliance with BASs should be explicitly stated in a note to the financial statements
All relevant BASs must be followed if compliance with BASs is disclosed
Use of an inappropriate accounting treatment cannot be rectified either by disclosure of accounting policies or notes/explanatory material
BAS 1 states what is required for a fair presentation.
Selection and application of accounting policies in accordance with BAS 8 (see section 2.4 below)
Presentation of information in a manner which provides relevant, reliable, comparable and As defined in Chapter 1
Covered in the Financial Accounting and Financial Reporting syllabuses Covered in the Accounting syllabus
As defined in Chapter 1, these are called the elements of financial statements
2.3.1 Departures from BASs
There may be (very rare) circumstances when management decides that compliance with a requirement of a BAS would be so misleading that financial statements would not meet their objectives. Departure from the BAS may therefore be required to achieve a fair presentation. The following should be disclosed in such an event.
Management confirmation that the financial statements fairly present the entity's financial position, performance and cash flows
Statement that all BASs have been complied with except in respect of departure from individual BASs, required to achieve a fair presentation
Details of the nature of the departure, why the BAS treatment would be misleading, and the treatment adopted
Financial impact of the departure
2.4 Selecting accounting policies: BAS 8
According to BAS 1, accounting policies should be selected and applied in accordance with BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors in order to comply with BASs.
2.4.1 What is an accounting policy?
Definition
Accounting policies: The specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.
2.4.2 Selecting and applying accounting policies
BAS 8 must be applied in selecting and applying accounting policies, and in accounting for changes in accounting policies selected. The intention of BAS 8 is explicitly stated as being the enhancement of the relevance and reliability of financial statements, and their comparability over time and with those of other entities.
Where a BAS specifically applies to a transaction or event, the accounting policy applied must be consistent with that BAS
Where there is no specific requirement in a BAS, management should use its judgement in developing policies so that information provided by the financial statements has two of the qualitative characteristics set out in BAS Framework, that is, it is:
Relevant to the decision-making needs of users.
Reliable in that they:
– Represent faithfully the results and financial position of the entity
– Reflect the economic substance of events and transactions and not merely the legal form – Are neutral, that is free from bias
– Are prudent
– Are complete in all material respects.
When applying this judgement, management should refer to and apply
First the requirements and guidance contained in BASs dealing with similar or related issues
Secondly the definitions etc in BAS Framework
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