How to Audit the Presentation of Financial Statements Under IAS 1

What IAS 1 actually requires you to check

IAS 1 is 139 paragraphs long. On a typical non-Big 4 engagement, the paragraphs that generate findings cluster around four areas: classification on the face of the statements, disaggregation of material items, comparative information, and accounting policy disclosures. Everything else in the standard either applies to the preparer or gets handled by the disclosure checklist your firm already runs.

Classification and the current/non-current split

IAS 1.60 requires an entity to present current and non-current assets and liabilities as separate classifications on the face of the statement of financial position, unless a liquidity-based presentation provides more reliable and relevant information. In practice, almost every audit client you’ll encounter outside of banking and insurance uses the current/non-current split.

IAS 1.66 through IAS 1.76 contain the classification test. An asset is current if the entity expects to realise it, sell it, or consume it within its normal operating cycle, or within twelve months after the reporting period. A liability is current if the entity expects to settle it within its normal operating cycle, has no unconditional right to defer settlement for at least twelve months, or holds it primarily for trading.

Where this goes wrong on real files: the client classifies a term loan as non-current because the original maturity is five years, but a covenant breach at year-end gives the lender the right to demand immediate repayment. IAS 1.74 is explicit. If the entity does not have an unconditional right to defer settlement for at least twelve months after the reporting period, the liability is current. A covenant waiver received after the reporting date but before the date of authorisation for issue does not change the classification (IAS 1.75). The lender’s intention is irrelevant. What matters is the contractual right at the reporting date.

The December 2020 amendments to IAS 1.72A refined the conditions under which a right to defer must exist. A right to defer settlement must have substance and must exist at the reporting date. If the right is conditional on meeting covenants, the entity must comply with those conditions on or before the reporting date for the liability to be classified as non-current. This clarification closed a long-standing grey area where entities argued that a post-year-end waiver could cure a reporting-date breach.

This is one of the most frequent reclassification adjustments on mid-tier audit files. If your client has any borrowing with financial covenants, use the Financial Ratio Calculator to test the covenant compliance at the reporting date before accepting the classification.

The operating cycle dimension of the classification test is equally important but less often tested. IAS 1.68 assumes a twelve-month operating cycle when the cycle is not clearly identifiable. For most trading and service companies, twelve months is appropriate. But for entities with longer production or service cycles (construction companies working 18-month contracts, shipbuilders, agricultural businesses with multi-season crops), the operating cycle may be substantially longer. A receivable due in 14 months is current if the entity’s operating cycle is 18 months. An inventory item that takes two years to mature (wine, aged cheese, timber) is current if the maturation period represents the normal operating cycle.

Your working paper should document the operating cycle assumption and the basis for it. On first-year engagements, ask the client what their average time from purchase of raw material to collection of cash from sale is. That gives you the operating cycle. Then verify that the balance sheet classifications are consistent with that cycle. If the entity uses the twelve-month default without assessment, and the actual production or service cycle is longer, the classifications may be wrong.

Disaggregation of material items

IAS 1.29 requires that each material class of similar items be presented separately. IAS 1.30 extends this: items that are dissimilar in nature or function must be presented separately unless they are immaterial.

The disaggregation requirement means you can’t accept “sundry creditors” as a line item containing EUR 2.1M when EUR 1.8M of it is VAT payable and EUR 300K is accrued expenses. Those are dissimilar in nature. If they’re material (individually or in aggregate relative to your materiality threshold), they need separate presentation.

Your audit work here is straightforward but often skipped. Obtain the trial balance mapping to the face of the financial statements. For every line item on the balance sheet and income statement, verify that the components aggregated into that line are similar in nature and function. Flag any aggregation where a component exceeds your performance materiality. This mapping exercise takes 30 minutes on a mid-tier client and catches the majority of presentation errors.

One subtlety: IAS 1.30A permits an entity to disaggregate a line item in the notes rather than on the face of the statements. If the client prefers a cleaner balance sheet with fewer line items, the disaggregation can move to a note, but the note must be explicitly cross-referenced from the relevant line item. Check that both the disaggregation and the cross-reference exist.

IAS 1.55 provides the positive counterpart to disaggregation. When a line item is not individually material but the entity decides to present it separately on the face of the statements, that additional line item is permitted if it aids user understanding. Some clients over-disaggregate, splitting the balance sheet into 40 line items with many below materiality. This is technically permitted but may obscure the significant items (IAS 1.30A addresses this directly). Your role is to verify that material items are presented separately. Whether immaterial items should be collapsed is a preparer judgment, not an audit adjustment.

Comparative information and reclassifications

IAS 1.38 requires comparative information for the preceding period for all amounts reported in the current period financial statements. IAS 1.38A goes further: comparative information must also be included for narrative and descriptive information when it’s relevant to understanding the current period.

The paragraph that catches most teams is IAS 1.41. When the entity reclassifies items in its financial statements, the comparatives must also be reclassified. IAS 1.41 requires disclosure of what was reclassified, the amount involved, the reason for the change, and the effect on each line item affected. A common file deficiency is accepting restated comparatives without verifying that all the required disclosures under IAS 1.41 are present.

Another area that generates findings: IAS 1.40A. If the entity presents a third statement of financial position (as required by IAS 8 when retrospective restatements occur), IAS 1.40A clarifies that the entity does not need to present the related notes to the third statement. But the third balance sheet itself must be presented, and teams sometimes miss this requirement when the client has changed an accounting policy retrospectively.

On a practical level, your comparative information work should include a mechanical tie-out (do prior year comparatives in the current year draft match the signed prior year accounts?) and a reclassification check (have any line items been moved, and if so, are the IAS 1.41 disclosures present?). The mechanical tie-out sounds basic, but it fails on roughly one in five first-year engagements where the client has switched accounting software.

Beyond the mechanical check, IAS 1.42 requires that when it is impracticable to reclassify comparative amounts, the entity must disclose the reason why reclassification was not possible and describe the nature of the adjustments that would have been made. “Impracticable” has a specific meaning under IFRS (IAS 8.5): it would require undue cost or effort. Simply stating that the prior year system did not capture the data in the required format does not meet this threshold without further support. If your client claims reclassification is impracticable, document the specific reason and assess whether IAS 8.5 is satisfied.

One further test that is often overlooked: IAS 1.38A requires comparative narrative information when it is relevant to understanding the current period. If the entity changed its revenue recognition approach in the current year, the prior year accounting policy note must be presented for comparison. If the entity disclosed a key judgment in the prior year that no longer applies, the prior year judgment disclosure should still appear as a comparative with a note explaining the change. This comparative narrative requirement goes beyond the numerical comparatives and is frequently absent from mid-tier files.

Required components of a complete set of financial statements

IAS 1.10 lists the required components: a statement of financial position, a statement of profit or loss and other comprehensive income (which can be presented as one statement or two separate statements), a statement of changes in equity, a statement of cash flows, and notes.

On established engagements this is rarely an issue. But on first-year audits or engagements transitioning from local GAAP to IFRS, missing components appear more often than you’d expect. The most frequently absent is a separate statement of other comprehensive income when the client has items that should be recognised outside profit or loss (revaluation gains, foreign currency translation adjustments, remeasurement of defined benefit plans). Verify that the client’s IFRS financial statements include all IAS 1.10 components and that each component carries a title meeting the requirements of IAS 1.49.

IAS 1.138 adds a disclosure requirement that sits at the boundary between presentation and events after the reporting period. The entity must disclose the date when the financial statements were authorised for issue and who gave that authorisation. This matters for audit because it determines the cut-off for adjusting events under IAS 10. If the date of authorisation for issue is not disclosed, the user cannot assess whether post-balance-sheet events have been appropriately considered. Check that this date appears in the notes, that it matches the date on the representation letter, and that your subsequent events review procedures ran at least up to this date.

A related point: IAS 1.137 requires the entity to disclose the amount of dividends proposed or declared before the financial statements were authorised for issue but not recognised as a distribution to equity holders during the period. If a dividend was proposed between year-end and the authorisation date, it is a non-adjusting event under IAS 10 but requires disclosure under IAS 1.137. This disclosure is missed on roughly one in four mid-tier files where a dividend is proposed in the period between year-end and sign-off.

The 2021 amendments changed what counts as a required disclosure

The IASB issued amendments to IAS 1 in February 2021 (effective for annual periods beginning on or after 1 January 2023) that replaced the requirement to disclose “significant accounting policies” with a requirement to disclose “material accounting policy information” (IAS 1.117). This is not a relabelling.

Under the old requirement, firms routinely accepted boilerplate accounting policy notes copied from the standard text or from a template set. Clients disclosed a revenue recognition policy referencing IFRS 15’s five-step model even when all revenue came from straightforward product sales with no variable consideration and no contract modifications. Technically compliant under the old wording. Practically useless to the reader.

IAS 1.117A through IAS 1.117E now provide guidance on what constitutes material accounting policy information. The IASB’s accompanying guidance defines material accounting policy information as information that, when considered together with other information in the financial statements, can reasonably be expected to influence the decisions of primary users. Generic IFRS 15 boilerplate is no longer sufficient if it doesn’t describe the entity’s actual transactions and the judgments applied.

For your audit file, the practical consequence is that you need to evaluate each accounting policy note against IAS 1.117B: does the policy relate to material transactions, does it involve significant judgment or estimation, and is the information entity-specific rather than generic? If the answer to all of those is no, the policy note may actually need to be removed. The standard now explicitly discourages immaterial boilerplate (IAS 1.117C).

IAS 1.117D provides specific examples of when accounting policy information is likely to be material. These include situations where the entity has changed its accounting policy during the period and where the entity has chosen from alternatives permitted by IFRS (such as the cost model versus revaluation model for property under IAS 16). A third example is where the entity has developed an accounting policy in accordance with IAS 8 because no IFRS specifically applies. Each of these situations triggers a materiality assessment that should appear in your working paper.

The practical effect on audit files is significant. Before the 2021 amendments, most firms had template accounting policy note packs with 20 or more standard notes. After the amendments, a typical mid-tier entity might legitimately need only eight to twelve. Every remaining policy note should describe what the entity actually does (how it recognises revenue, what estimates it makes for provisions, which depreciation method it applies) rather than restating the standard’s requirements in abstract terms.

How to build a policy materiality assessment table

Your working paper should document, for each material accounting policy, why the information disclosed is material and entity-specific. A simple cross-reference table linking each policy note to the relevant balance or transaction class, with a brief rationale for inclusion, satisfies both IAS 1.117 and reviewer expectations.

The table structure that works on real files has four columns: the policy note reference number from the financial statements, the related line item or transaction class, whether the policy involves material transactions, significant judgment, or entity-specific information (the IAS 1.117B criteria), and the conclusion (retain, condense, or remove).

This table turns what used to be a rubber-stamp exercise into a documented assessment. When a reviewer asks why a particular policy note was included or excluded, the table provides the answer without further explanation. It also forces the preparer to remove boilerplate, because any policy note that scores “no” on all IAS 1.117B criteria has no basis for inclusion.

One point teams miss: when you recommend removing a boilerplate policy note, the client may resist. They’re used to disclosing it. Point them to IAS 1.117C and the IASB’s Basis for Conclusions paragraph BC72G, which explicitly states that including immaterial accounting policy information can obscure material information and reduce the overall quality of the financial statements. The standard isn’t just permitting removal. It’s encouraging it.

Worked example: Bakker Industrial B.V.

Client: Bakker Industrial B.V., a Dutch manufacturer of industrial valves. Revenue: EUR 38M | Total assets: EUR 27M | Reporting framework: IFRS as adopted by the EU. Overall materiality: EUR 540K (1.4% of revenue) | Performance materiality: EUR 405K.

1. Classification test on borrowings

Bakker has a EUR 4.2M term loan with ABN AMRO, classified as non-current. The loan agreement contains a debt service coverage ratio covenant tested quarterly. At 31 December, the DSCR was 1.08 against a covenant minimum of 1.10.

A covenant breach existed at the reporting date. ABN AMRO issued a waiver on 18 January (before the date of authorisation for issue on 15 March). Under IAS 1.74 and IAS 1.75, the waiver received after the reporting date does not change the classification. Reclassification of the EUR 4.2M loan from non-current to current liabilities is required.

2. Disaggregation test on trade payables

Bakker’s “trade and other payables” line on the balance sheet shows EUR 3.8M. The breakdown: trade payables EUR 2.1M, VAT payable EUR 890K, social security contributions EUR 410K, accrued holiday pay EUR 400K.

VAT payable (EUR 890K) exceeds performance materiality (EUR 405K) and is dissimilar in nature to trade payables. IAS 1.29 requires separate presentation. Accrued holiday pay (EUR 400K) is borderline but relates to employee obligations, not supplier obligations. Social security contributions (EUR 410K) are also employee-related, not trade-related.

3. Accounting policy evaluation under the 2021 amendments

Bakker’s draft notes include eight accounting policy disclosures. The auditor prepares the policy materiality assessment table:

Three policy notes (2.4 Leases, 2.5 Foreign currency, 2.7 Employee benefits) are removed. Policy note 2.1 is condensed to describe Bakker’s actual product sales and pricing terms rather than generic IFRS 15 language.

The file shows a reclassification entry on the borrowing (supported by the covenant breach analysis), a disaggregation adjustment on trade payables with IAS 1.29 cited, and a policy note rationalisation table documenting which notes were removed and why. Each adjustment traces to a specific IAS 1 paragraph. The worked example demonstrates what a presentation testing working paper should contain: not a ticked checklist, but a set of tests with documented findings.

Practical checklist for your current engagement

1. Obtain the trial balance-to-financial-statements mapping and verify that every line item aggregates only items similar in nature and function (IAS 1.29, IAS 1.30). Flag any component exceeding performance materiality that sits with dissimilar items.
2. For every borrowing classified as non-current, confirm the entity has an unconditional right to defer settlement for at least twelve months after the reporting date (IAS 1.74). Test covenant compliance at the reporting date. Do not rely on post-year-end waivers to support non-current classification.
3. Perform a mechanical tie-out of prior year comparatives to the signed prior year financial statements. Verify that any reclassifications include the IAS 1.41 disclosures (the nature and amount of each reclassification, plus the reason it was made).
4. Prepare a policy materiality assessment table: list each accounting policy note, link it to the relevant balance or transaction, assess whether it involves material transactions or significant judgment (IAS 1.117B), and document your conclusion. Remove or condense boilerplate policies that fail the IAS 1.117B test.
5. Confirm all components required by IAS 1.10 are present. On first-year IFRS engagements, verify that a separate statement of other comprehensive income exists if the entity has OCI items.
6. Verify the date of authorisation for issue is disclosed (IAS 1.138) and that no adjusting events between that date and board approval have been missed.

Common mistakes regulators flag

• Generic boilerplate accounting policies: The FRC’s 2022–23 inspection cycle found that accounting policy disclosures frequently consisted of generic boilerplate rather than entity-specific information, particularly for IFRS 15 and IFRS 16 policies. The 2021 amendments to IAS 1.117 took effect from 1 January 2023, and early inspection results suggest many firms have not yet updated their disclosure checklists to reflect the shift from “significant” to “material” accounting policy information.
• Failure to reclassify borrowings on covenant breach: The AFM has repeatedly flagged failures to reclassify borrowings from non-current to current when covenant breaches exist at the reporting date. Classification under IAS 1.74 and IAS 1.75 is binary. A post-year-end waiver does not change the reporting date classification.

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Further reading and source references

• IAS 1, Presentation of Financial Statements: the source standard governing all presentation requirements, classification rules, and disclosure obligations covered in this guide.
• IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors: relevant to the definition of “impracticable” and the conditions under which a third statement of financial position is required.
• IAS 10, Events After the Reporting Period: connects to IAS 1.138 (date of authorisation for issue) and IAS 1.137 (dividends declared after the reporting period).
• ISA 720, The Auditor’s Responsibilities Relating to Other Information: relevant to the auditor’s consideration of consistency between the financial statements and other information in the annual report.