IFRS Financial Reporting: Concepts and Statements

Posted on Jan 6, 2026 in Financial and Accounting Management

What is Financial Reporting?

Financial Accounting (narrow): bookkeeping: records transactions.

Financial Reporting (wide): a rules-based system designed to communicate a company’s financial position and performance to users.

Core Steps of Financial Reporting

  1. Identification – determining what happened.
  2. Measurement – quantifying the financial impact.
  3. Communication – reporting results to users.

Objective of Financial Reporting

Provide useful financial information to primary users:

  • Existing and potential investors
  • Lenders
  • Other creditors

This information is used for decisions regarding:

  • Buying, selling, or holding equity or debt.
  • Granting or settling loans.
  • Voting or influencing management.

General Purpose Reporting

General purpose reporting features:

  • One report for all users.
  • Efficient and fair communication.
  • Focus on capital providers (primary users).

Financial Reporting Institutions

  • IASB: Issues International Financial Reporting Standards (IFRS).
  • EFRAG / EU Commission: Endorse IFRS for use in the EU.
  • Auditors: Ensure reliability of financial statements.

IAS Regulation in the EU

Mandatory Use: EU listed companies must use IFRS for consolidated financial statements (FS).

Optional Use: Member states decide IFRS use for:

  • Annual accounts.
  • Non-listed companies.

Effects of IFRS Adoption

IFRS adoption leads to:

  • Harmonisation
  • Comparability
  • Transparency
  • Easier access to international capital

Role of the Conceptual Framework

The Conceptual Framework serves as the rulebook of principles behind IFRS. It is needed because accounting uses judgment, and it ensures standards are consistent and logical.

Qualitative Characteristics of Financial Information

Fundamental Characteristics

  • Relevance: Information has predictive and confirmatory value (subject to materiality).
  • Faithful Representation: Information must be complete, neutral, and free from error.

Enhancing Characteristics

  • Comparability
  • Verifiability
  • Timeliness
  • Understandability

Cost Constraint

Report information only if the benefits outweigh the costs.

Underlying Assumptions

  • Going concern
  • Reporting entity
  • Monetary unit
  • Periodicity
  • Accrual basis (recognizing economic events regardless of cash flow timing)

Elements of Financial Statements

Financial Position Elements

  • Assets: Controlled resources expected to yield future economic benefits.
  • Liabilities: Present obligations requiring an outflow of resources.
  • Equity: The residual interest in the assets after deducting liabilities.

Financial Performance Elements

  • Income: Increases in equity (other than contributions from owners).
  • Expenses: Decreases in equity (other than distributions to owners).

Recognition and Measurement

  • Revenue Recognition: Recognized when the performance obligation is satisfied.
  • Expense Recognition:
    • Product costs are matched with related revenue.
    • Period costs are expensed immediately.

Measurement Bases

The primary measurement bases used are Historical Cost and Fair Value.

The Five Financial Statements (IAS 1.10)

A complete set of financial statements includes:

  1. Statement of Financial Position (Balance Sheet)
  2. Statement of Comprehensive Income
  3. Statement of Changes in Equity
  4. Statement of Cash Flows
  5. Notes to the Financial Statements

Note: All statements must be analyzed together.

Statement of Financial Position (Balance Sheet)

This statement shows the financial position at a specific date, detailing Assets, Liabilities, and Equity.

Accounting Equation: Assets = Liabilities + Equity

Usefulness of the Balance Sheet

The balance sheet helps users to:

  • Assess liquidity (short-term ability to meet obligations).
  • Assess solvency (long-term ability to meet obligations).
  • Analyze capital structure.
  • Evaluate risk and financial flexibility.
  • Predict future cash flows.

Classification of Elements

Assets

Resources controlled from past events with expected future benefits.

  • Current Assets: Expected to be realized within one year or the operating cycle (e.g., cash, inventories, receivables).
  • Non-current Assets: Held for long-term use (e.g., Property, Plant, and Equipment (PPE), intangibles, long-term investments).

Liabilities

Present obligations causing an expected outflow of resources.

  • Current Liabilities: Settled within one year (e.g., payables, short-term debt).
  • Non-current Liabilities: Long-term obligations (e.g., loans, bonds, provisions, deferred tax).

Equity

The residual interest after deducting liabilities. Includes: Share capital, Share premium, Retained earnings, Treasury shares, and Non-controlling interests.

Limitations of the Balance Sheet

  • Reliance on historical cost.
  • Inclusion of estimates and judgment.
  • Key intangibles may not be recognized.

Statement of Comprehensive Income

This statement shows financial performance over a period and explains changes in equity resulting from operations.

Statement of Profit or Loss (P&L)

Measures: Income – Expenses = Net Profit/Loss.

Usefulness of the P&L

  • Evaluate past performance.
  • Predict future earnings.
  • Identify recurring performance.

Other Comprehensive Income (OCI)

OCI includes items excluded from the P&L to reduce volatility and improve faithful representation:

  • Revaluation surplus.
  • Actuarial gains/losses.
  • Foreign exchange (FX) translation differences.
  • Certain fair value changes.

Statement of Changes in Equity

Explains why equity changed during the reporting period. Includes:

  • Profit or loss and OCI.
  • Dividends paid.
  • Share issues or buybacks.
  • Changes in Non-Controlling Interests (NCI).

Usefulness

  • Links the income statement and the balance sheet.
  • Shows transactions with owners.

Statement of Cash Flows

Details cash inflows and outflows, classified into three activities:

  1. Operating activities
  2. Investing activities
  3. Financing activities

Importance of Cash Flows

  • Highlights that profit does not equal cash flow.
  • Measures liquidity and survival capacity.
  • Assesses dividend and financing capacity.

Notes to Financial Statements

The notes are essential because, without them, the financial statements are incomplete. They:

  • Explain accounting policies used.
  • Provide detail and breakdowns of line items.
  • Disclose estimates, judgments, and risks.

Segment Reporting (IFRS 8)

Segment reporting provides information about different business segments. A segment is reportable if it meets three criteria:

  1. Engages in business activities from which it earns revenues and incurs expenses.
  2. Its operating results are reviewed regularly by the Chief Operating Decision Maker (CODM).
  3. Separate financial information is available.

Reportable Segment Thresholds

A segment is reportable if it meets any of the following 10% thresholds:

  • Revenue
  • Profit or loss
  • Assets

The 75% Rule

Reported segments must cover at least 75% of the entity’s total external revenue.

Small segments that do not meet the thresholds can be combined, grouped into an “All other segments” category, or reported separately if deemed useful.