IAS 1 Part 2: OCI, Going Concern, Offsetting and Disclosure Requirements

IAS 1 Part 2: OCI, Going Concern, Offsetting and Disclosure Requirements

By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)

Lead Instructor, Global Fin X | www.globalfinx.in/manikanta

Part 1 of this series covered the structure of financial statements and how materiality works in practice. This post picks up where that left off: three areas of IAS 1 that I see misunderstood constantly, even by experienced accountants.

Other comprehensive income confuses people because the logic behind what goes there versus profit or loss is never explained clearly. Going concern gets treated as a checkbox until a company collapses and everyone asks why the auditor said nothing. Offsetting seems obvious until you realise how many preparers get it wrong in ways that distort the picture entirely.

I want to fix all three in this post.

Other Comprehensive Income: The Logic Behind It

Most students learn OCI as a list to memorise. Revaluation surplus goes here. Actuarial gains go here. FX translation goes here. That approach gets you through an exam. It will not get you through a conversation with a client who wants to know why their Rs. 300 crore gain on a bond portfolio is not sitting in their profit or loss.

Start with the underlying logic. Profit or loss is meant to reflect performance. The income statement tells shareholders what management did with their resources during the period. OCI exists for one reason: some gains and losses arise from changes in measurement, not from management's decisions, and including them in profit or loss would distort the performance picture.

Take a defined benefit pension plan. The actuarial gain or loss in any given year depends heavily on assumptions about discount rates, mortality rates, and salary growth. These are not things management controls or decides. Putting them in profit or loss would make the income statement swing wildly based on actuarial model inputs, not business performance. So they go to OCI. Shareholders see them. They flow into equity. But they do not distort the operating profit number.

That is the principle. Not all OCI items follow it perfectly, and the IASB has acknowledged as much. But it is the framework for understanding why the split exists.

What Goes to OCI Under Current IFRS

IAS 1 groups OCI items into two buckets based on one question: will this item ever be recycled to profit or loss?

Items that will be reclassified (recycled) to profit or loss:

• Foreign currency translation differences on foreign operations
• Gains and losses on cash flow hedging instruments (the effective portion)
• Gains and losses on FVOCI debt instruments under IFRS 9

Items that will never be reclassified:

• Revaluation surplus on PP&E and intangible assets (IAS 16, IAS 38)
• Remeasurements of defined benefit plan obligations (IAS 19)
• Gains and losses on equity instruments designated at FVOCI under IFRS 9

The distinction matters for how a reader interprets the OCI section. Recyclable items are temporary. They sit in OCI until a triggering event moves them to profit or loss. Non-recyclable items are permanent shifts in equity. They will never appear in profit or loss.

Recycling: Why It Exists and Why It Is Controversial

Consider Wipro, which has significant foreign operations. Currency translation differences accumulate in OCI each year as the functional currencies of those subsidiaries move against the Indian rupee. When Wipro disposes of one of those foreign operations, all the accumulated translation differences related to that subsidiary get recycled out of OCI into profit or loss in the period of disposal.

The logic: the gain or loss was always economically real. It was deferred in OCI because it was unrealised. Disposal is the realisation event. So the P&L in the disposal year captures the full economic result.

The FVOCI debt instrument works similarly. An NBFC holds a bond portfolio classified at FVOCI. As interest rates rise, bond prices fall. Those losses accumulate in OCI. When the bonds are sold, the cumulative OCI balance recycles into profit or loss. The P&L then shows the total gain or loss on the investment.

Equity instruments designated at FVOCI work differently. Under IFRS 9, an entity can irrevocably designate an equity investment as FVOCI. Fair value changes go to OCI. When that investment is sold, nothing recycles. The cumulative OCI balance stays in equity and can be transferred within equity (to retained earnings, for example), but it never touches profit or loss. The dividend income, if any, goes to profit or loss, but not the capital gain or loss.

That asymmetry is intentional. Equity investments are strategic holdings. The IASB decided that fair value volatility on strategic equity positions should not run through P&L. Indian insurers and banks that hold large cross-shareholding stakes use this designation frequently.

Tax on OCI Items

OCI items can be presented gross (before tax) with a single tax line showing the total tax effect, or each item can be shown net of its own tax effect. Either presentation is permitted. What is required is that the tax effect attributable to each OCI item is disclosed, whether on the face of the statement or in the notes.

One thing that surprises students: IAS 1 does not require disclosure of tax effects for individual items in the income statement itself. The requirement applies to OCI items only. The logic is that OCI items go directly to equity without passing through profit or loss, so users need to see the after-tax effect to understand the equity impact.

A Real Example: Indian IT and FX Translation

Infosys operates subsidiaries across the US, Europe, Australia, and several other geographies. Each subsidiary has its own functional currency. At each reporting date, the assets and liabilities of those subsidiaries are translated to Indian rupees at the closing rate. Income and expenses are translated at transaction date rates or averages. The difference lands in OCI as a foreign currency translation reserve.

In years when the rupee weakens significantly against the dollar, this translation reserve grows. Infosys's equity increases. But nothing goes to profit or loss. When you look at Infosys's annual report and see a large positive foreign currency translation reserve in equity, you are seeing accumulated OCI from years of rupee depreciation. If Infosys were to sell, say, its US subsidiary, all of that accumulated translation difference related to the US operations would recycle into profit or loss in that year.

This is why analysts looking only at profit or loss get an incomplete picture. Total comprehensive income, which is profit or loss plus OCI, is a better measure of economic performance for companies with significant foreign operations.

Going Concern: The Disclosure That Actually Matters

IAS 1 requires management to assess the entity's ability to continue as a going concern. If management has material uncertainty about this, it must be disclosed prominently. If the entity is not a going concern, the financial statements must be prepared on a different basis and that basis must be disclosed.

The assessment covers at least 12 months from the end of the reporting period. That is a minimum. If risks extend beyond 12 months and are known at the time of preparation, they cannot be ignored.

What Material Uncertainty Looks Like

Material uncertainty does not mean the company is about to collapse. It means there are conditions that cast significant doubt on the entity's ability to continue. Common triggers include:

• Net current liabilities or net liabilities overall
• Loan covenant breaches without confirmed waivers
• Significant operating losses with no clear path to recovery
• Dependence on a single customer, contract, or financing arrangement that is at risk
• Loss of a key licence or regulatory approval
• Cash flow forecasts showing insufficient liquidity within the 12-month assessment window

When any of these exist, management must disclose them. The disclosure must describe the nature of the uncertainty and the plans management has in place to address it. Vague statements like "management is confident of resolving the matter" without specifics do not satisfy IAS 1.

Jet Airways and IL&FS: What Happened and What the Standard Required

These two cases are worth examining because they show different failures of going concern disclosure.

Jet Airways is a cleaner case. In May 2018, Jet's auditors flagged material uncertainty about going concern in their review report, noting that the appropriateness of the going concern assumption was dependent on the airline's ability to raise finance and implement its cost reduction plans. The stock fell over 7% the next day. The auditors did their job: they identified the uncertainty and disclosed it. What followed over the next year, the collapse of the airline in April 2019, shows that even proper disclosure cannot fix an unviable business model. But the disclosure gave investors a clear warning signal.

IL&FS is a more troubling case. NFRA's inspection found that Deloitte Haskins & Sells, the statutory auditor for IL&FS Financial Services, did not adequately question the going concern assumption even as the company's debt was piling up and its ability to service obligations was deteriorating. The company continued to receive clean audits. When the group defaulted in September 2018 on short-term commercial paper, the scale of the problem shocked the market. NFRA found that the auditors did not display required professional scepticism and did not challenge the management on going concern.

The lesson from IL&FS is not just about auditor failure. It is about what going concern assessment requires of management in the first place. Management of IL&FS had access to cash flow projections, debt maturity schedules, and refinancing pipelines. A proper going concern assessment would have surfaced the liquidity problem much earlier. The fact that it did not, and that auditors accepted management's assessment without adequate challenge, is exactly the failure IAS 1's going concern requirement exists to prevent.

When the Entity Is Not a Going Concern

If management concludes the entity is not a going concern, the financial statements cannot be prepared on the standard accrual basis. The standard does not specify an alternative basis but requires that whatever basis is used, it must be disclosed.

In practice, liquidation basis accounting is typically applied. Assets are measured at net realisable value rather than carrying amount. Liabilities include costs of winding up that would not otherwise be recognised. The going concern period, which underlies the normal classification of assets and liabilities as current and non-current, no longer applies.

This changes the financial statements significantly. A factory that has a carrying value of Rs. 200 crore under IAS 16 might be worth Rs. 80 crore in a forced sale. The difference matters to creditors and shareholders trying to assess recovery.

Offsetting: Simple Rule, Constant Violations

The rule under IAS 1 is clear. Assets and liabilities cannot be offset. Income and expenses cannot be offset. Unless another IFRS standard specifically requires or permits it.

That second sentence is important. Offsetting is not always wrong. It is wrong when done without a specific IFRS requirement permitting it.

What Is Not Offsetting

Three things look like offsetting but are not, and IAS 1 makes this explicit.

Presenting PP&E net of accumulated depreciation is not offsetting. The accumulated depreciation is a reduction in the carrying amount, not a separate liability being netted.

Presenting trade receivables net of an expected credit loss allowance is not offsetting. The ECL allowance reduces the gross receivable to its recoverable amount.

Presenting inventory net of a write-down to NRV is not offsetting. Same principle.

These are measurement adjustments, not netting of separate assets and liabilities.

Where Offsetting Is Permitted

IAS 32 permits offsetting of financial assets and financial liabilities when two conditions are both met: the entity has a legally enforceable right to set off the amounts, and the entity intends to settle on a net basis or to realise the asset and settle the liability simultaneously.

Both conditions must be met. A legally enforceable right alone is not enough. An intention to net settle alone is not enough.

This comes up in practice with derivative instruments and with cash pooling arrangements. An Indian company with a bilateral netting agreement with a bank across multiple derivative contracts might have the legal right to net. But if each contract settles individually, the intention criterion is not met, and the positions cannot be offset.

IAS 19 permits offsetting of defined benefit plan assets and liabilities across different plans only when the entity has a legally enforceable right to use a surplus in one plan to settle obligations under another, and intends to realise the surplus and settle the other simultaneously. In Indian context, where companies often have separate gratuity and leave encashment trusts, the question of whether these can be offset is frequently raised. They cannot, unless both conditions are met, which is rare.

Income and Expense Offsetting

IAS 1 permits income and expense netting in two specific situations: when gains and losses arising from similar transactions are not material individually and can be shown net, and when the gain or loss on an item is being reported alongside the related expense as a natural net presentation.

Foreign exchange gains and losses are the most common example. A company with high-volume FX transactions across the year does not need to present every gain and every loss separately. Showing a net FX gain or loss for the period is acceptable. But if the gross amounts are material to understanding performance, both must be shown.

Where I see violations most often: companies that net income against costs of generating that income. A consulting firm that shows fees earned net of directly attributable costs is not presenting income correctly. Revenue is gross. The costs are a separate expense. Netting them distorts both the revenue line and the expense line, which matters for margin analysis.

Disclosure Requirements: Structure and Substance

IAS 1 sets requirements for what the notes must contain beyond just the numbers. The structure I covered in Post 2. Here I want to focus on two specific areas: accounting policy disclosures and the capital disclosures requirement.

Accounting Policy Disclosures

Post 2 mentioned the 2021 amendment requiring disclosure of material accounting policies rather than significant ones. What does this look like in practice?

A material accounting policy is one that users need to understand the financial statements. The test is not whether the policy applies to a large part of the business. The test is whether, without knowing the policy, a user could not properly interpret the financial information.

For a pharmaceutical company like Sun Pharma, the revenue recognition policy for licensing arrangements and milestone payments is material. The policy for recognising employee benefits for office staff is not, because it is standard and its application does not affect the financial statements in a distinctive way.

For an infrastructure developer like Larsen & Toubro, the accounting policy for long-term construction contracts and how performance obligations are identified and satisfied is material. Without understanding that policy, a user cannot assess the revenue recognition pattern or the risk of revenue reversals.

The challenge in Indian practice is that Ind AS financial statements have historically carried extensive boilerplate accounting policy notes. Every policy the entity applies, regardless of materiality, appears in the notes. The effect is that the notes become harder to read, not easier. The material information is buried alongside 15 pages of generic policy descriptions.

This is changing. SEBI has signalled interest in improving disclosure quality. NFRA inspection reports have flagged insufficiently specific accounting policy disclosures. The direction is toward fewer, more entity-specific, more informative disclosures. That is what IAS 1 always intended.

Capital Disclosures

One IAS 1 requirement that often gets skipped: entities must disclose information that enables users to evaluate the entity's objectives, policies, and processes for managing capital.

This includes the qualitative description of what the entity manages as capital, whether this is the same as equity or includes other components like debt. It includes quantitative data about what the entity manages as capital. It includes whether the entity has complied with any externally imposed capital requirements, such as regulatory capital ratios for banks, and the consequences of non-compliance if any.

For Indian banks, this disclosure connects directly to RBI's capital adequacy requirements. For listed Indian companies with debt covenants that include leverage ratios, the capital disclosures section should address those requirements and whether they are being met.

I rarely see this done with the specificity it deserves. Most entities include a generic paragraph about managing capital to ensure the business continues as a going concern and maximises shareholder returns. That satisfies the letter of IAS 1. It provides no useful information to a reader trying to understand how close the entity is to breaching a covenant or what the consequence of a breach would be.

Ind AS vs IAS 1: Differences in This Section

The Ind AS 1 treatment of OCI, going concern, and offsetting is substantially the same as IAS 1. The differences worth noting are narrow.

That last row matters. Indian companies under Ind AS are still technically required to disclose significant accounting policies, not just material ones, because the ICAI has not yet formally adopted the 2021 amendment to IAS 1 into Ind AS 1. Companies that voluntarily apply the spirit of the amendment and focus their notes on material policies are ahead of the curve and produce better financial statements. But they are not yet required to.

What Big 4 Auditors Focus On in This Section

Three areas dominate.

OCI completeness and classification. Auditors check that all items required to go through OCI are not instead flowing through profit or loss. The reverse error also occurs: items that belong in profit or loss being routed through OCI to manage the income statement. Neither is acceptable. Classification errors between profit or loss and OCI affect how performance is reported and how earnings per share is calculated.

Going concern assessment quality. The quality of management's going concern assessment is an audit focus area in every engagement, not just distressed situations. Auditors look at the assumptions underlying cash flow forecasts, the headroom above covenant thresholds, the availability of undrawn facilities, and the track record of the entity in meeting its forecasts. In post-COVID India, going concern disclosures became far more prominent across sectors. NFRA has since included going concern assessment quality in its inspection focus areas.

Offsetting compliance. As the PwC thematic review published in September 2024 noted, offsetting violations are common. Auditors look for instances where gross positions are being netted without a specific IFRS permission. Cash pooling arrangements, intercompany balances, and derivative portfolios are the highest-risk areas. In Indian conglomerates with complex treasury functions spanning multiple entities and currencies, offsetting errors appear more frequently than in simpler corporate structures.

FAQ

Can an entity choose not to present OCI at all?

No. If an entity has items that IFRS requires to be recognised in OCI, those items must be presented. OCI cannot be omitted from the statement of comprehensive income.

Is total comprehensive income the same as profit or loss?

Only if there are no OCI items. Total comprehensive income equals profit or loss plus all OCI items for the period.

What is the difference between reclassification and recycling?

They mean the same thing. When an OCI item is moved to profit or loss upon a triggering event, that transfer is called reclassification in the standard and recycling in common usage. Both terms refer to the same accounting event.

How long must going concern disclosures remain in the financial statements?

Until the material uncertainty no longer exists. If the conditions that created going concern doubt are resolved before the next reporting date, the disclosure may not be necessary in the following year's statements. But the resolution must be genuine and evidenced.

Is showing trade receivables net of ECL allowance allowed?

Yes. This is specifically not considered offsetting under IAS 1. The ECL allowance is a measurement adjustment, not a liability being netted against an asset.

Can a company offset a tax asset against a tax liability?

Only if it has a legally enforceable right to offset, and intends to settle on a net basis. IAS 12 sets out the conditions. Current tax assets and current tax liabilities can be offset if the entity has the right and intention. Deferred tax assets and deferred tax liabilities can be offset only if they relate to the same taxable entity and the same tax authority.

What happens if a company discovers mid-year that its going concern assumption is no longer valid?

The financial statements being prepared must reflect the situation at the reporting date. If the going concern assumption is no longer appropriate, management discloses this and prepares the statements on an alternative basis. Interim reporting under IAS 34 also requires going concern disclosures if material uncertainty exists at the interim date.

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This is Post 3 of the Global Fin X IFRS Series. Previous: IAS 1 Part 1: Presentation of Financial Statements. Next: IFRS 18: What Changes When IAS 1 Is Replaced in 2027.