Keywords: Mazars, Thailand, IASB, IFRS, Financial Statements, Disclosures
20 February 2015
IASB stakeholders also expressed their concerns in their responses to the 2011 consultation on the IASB’s work plan, and during a public forum held in January 2013.
All the stakeholders agree to shoulder their share of the responsibility for the growing volume of notes.
The IASB therefore launched a vast project aimed at improving the relevance and quality of financial statements presented in IFRS, including the notes, in order to resolve those issues which lie within its remit.
The notes to the financial statements are considered as an integral part of the financial statements under IAS 1 (§10). This explains why, in this initiative, the IASB addresses aspects of disclosure both in the notes and in terms of presentation in the summary statements.
The initiative falls into two major phases:
- A first, short-term phase:
- Amendments to IAS 1 -Presentation of financial statements (see point 1);
- Proposed amendments to IAS 7 -Statement of cash flows (see point 2);
- Research project on materiality (see point 3).
- A second, medium-term phase:
- Principles of disclosure (see point 4);
- Standards-level review of disclosure (see point 5).
December 2014 thus saw the publication of amendments to IAS 1 (short-term), draft amendments to IAS 7 (short-term) and the launch of questionnaires on the principles of disclosure (medium-term).
1. Amendments to IAS 1: burying some misconceptions
To improve the relevance of financial statements, the amendments to IAS 1 published in December by the IASB are clarifications which aim to confirm the following aspects:
- Materiality applies to the financial statements as well as to the notes;
- It is not compulsory to present all the disclosures listed in different standards if they are not significant or relevant. However, it may be necessary to supply information that is not specifically listed in the IFRSs;
- Items on the statement of financial position and the statement of comprehensive income required by the standard can be disaggregated if this is relevant, subject to complying with certain principles;
- There is no required order for presentation in the notes, although preparers are advised to adopt a relevant, logical order that is comparable from one year to the next.
According to the Conceptual Framework adopted in 2010, the two “fundamental” characteristics of financial information are relevance and faithful representation. Materiality is an aspect of relevance while comparability and understandability are simply characteristics that enhance the financial information.
The IASB also clarifies that the breakdown of other comprehensive income into income which will be recycled in profit or loss and income which will not should also apply to the shares of other comprehensive income of entities accounted for on an equity basis.
The IASB regards these amendments as clarifications of existing texts. They may therefore be applied immediately, without waiting for the effective date which is set at 1 January 2016. Nor do entities need to mention that they are applying them.
In our view, this confirms that the texts could already have been interpreted in this way. Some French (Orange, Valeo) and foreign (Volvo) entities were doing so in 2014 or even 2013.
In the European context, since these amendments do not conflict with the existing texts, they can be applied even if they have not yet been endorsed in Europe.
Materiality and aggregation
In terms of materiality, the IASB clarified that:
- Information that is not material should not be included in the notes, even if it is specifically listed in the IFRSs. Such information can in effect obscure the disclosures which are actually relevant to readers of financial statements;
- On the other hand, if information is material to the understanding of financial statements but is not specifically listed in the IFRSs, it must be included. This last point is illustrated by the option to disaggregate specified items with sub-totals for presentation in the statement of financial position and the statement of comprehensive income, provided that the following principles are complied with:
- The sub-classifications of line items are items accounted for and measured in accordance with IFRSs;
- The disaggregated line items are presented and labelled in a way that makes the content of the sub-total clear and understandable;
- The sub-totals are presented in a manner which is consistent from one period to the next; and
- They are not presented with greater prominence than the sub-totals and totals required in the statement of financial position and statement of comprehensive income by IFRSs.
Order of presentation in the notes
The IASB has clarified that IAS 1 does not impose any particular order of presentation in the notes to the financial statements. Thus the most common order of presentation (statement of compliance with IFRS, accounting policies, supporting information for items presented in the statements, off-balance sheet and non-financial information), which was the only one suggested by IAS 1 and which the standard described as “normal”, becomes the third example of presentation behind the two examples below which:
- Give prominence to the activities of the group that the entity views as more relevant to an understanding of its financial position and financial performance, for example by grouping disclosures about certain operating activities;
- Group the information regarding items measured in a similar way, for example items measured at fair value.
Presentation in the statement of comprehensive income of the group’s share in the other comprehensive income of associates and joint ventures
The IASB has also clarified that, like other comprehensive income items, these shares must be broken down into those which will be subsequently reclassified to profit or loss and those which will not.
The Basis for Conclusions clarifies that these shares are net of tax by nature, and that if the group were liable for taxes on these shares, these amounts should be presented in accordance with the general provisions for presentation in other comprehensive income (presentation of amounts net of taxes or of gross amounts, accompanied by disclosures on the tax amounts relative to each item, thus distinguishing between those which are recycled in profit or loss and those which are not).
2. Draft amendments to IAS 7: improving disclosures on the cash flow statement
In December 2014 the IASB published an exposure draft with a view to requiring the following disclosures:
- A reconciliation of the amounts in the opening and closing statements of financial position for each item for which cash flows have been, or would be, classified as financing activities in the statement of cash flows, excluding equity items. The reconciliation would include changes from financing cash flows, changes arising from obtaining or losing control of subsidiaries and other businesses, and other non-cash changes (for example, the effect of changes in foreign exchange rates, and changes in fair values).
- Disclosures regarding restrictions that affect cash and cash equivalent balances, when this information is relevant to understanding the entity’s liquidity. These restrictions include the tax liabilities that would arise on the repatriation of foreign cash and cash equivalent balances.
The IASB believes that these amendments should meet the needs of investors for information without going so far as to require a reconciliation of the net debt, feeling that the concept of net debt would take too long to define.
Comments on this exposure draft may be submitted no later than 17 April 2015. The document can be consulted at the IFRS website.
3. Materiality research project: defining the principles for applying the materiality concept
In the course of its work on the Conceptual Framework, the IASB came to the conclusion that the way it addresses materiality is appropriate. However, given the implementation difficulties, work has been undertaken with the stakeholders to identify the problems and to determine to what extent more guidance could be provided.
The questions around materiality include:
- How does the concept of materiality apply to the notes to the financial statements, when assessing the level of significance of qualitative or quantitative disclosures?
- How does the application of materiality differ in making the decision to correct an error or to omit a disclosure, to make a new disclosure or presentation as compared with the presentation in the summary statements, or to remove a disclosure or presentation that was present in the summary statements?
- How does the concept of materiality apply to comparative information?
- Should the concept of materiality incorporate the notion of a collective assessment that is to say across the notes as a whole or even in the context of the financial statements as a whole?
The IASB expects to publish a draft Practice Statement on materiality during the second quarter of 2015.
4. Defining the principles of disclosure
The objective of this research project is to identify and develop a set of principles for disclosure in IFRS that could form the basis of a Standards-level project.
The IASB proposes to review the general requirements in IAS 1 -Presentation of Financial Statements, IAS 7 - Statement of Cash Flows and IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors.
This review should lead to the publication of a Discussion Paper in the second quarter of 2015.
The research will focus on the following aspects:
- The principles of disclosure for the notes including the objectives and boundaries with other documents (for example, the management commentary), and principles regarding the organisation, placement (within or out of the financial statements), format and linkage of information;
- The information in a complete set of IFRS financial statements, including the presentation and disclosure of non-IFRS financial information (for example, non-IFRS performance measures) and comparative information;
- Differential disclosures and proportionality, for example reflecting the type of entity or the size of the group;
- Cash flow reporting; and
- The disclosure of interim financial information.
The IASB is relying on a number of accounting standard setters to undertake this work. In particular, the Italian standard setter OIC (OrganismoItaliano di Contabilità) has launched two questionnaires on IAS 8, one for investors and one for entities preparing financial statements under IFRS. These questionnaires are to be completed by mid- February 2015 and are available a the IFRS website.
Meanwhile the English FRC (Financial Reporting Council) is at work on the review of cash flow reporting.
5. Standards-level review of disclosure: rationalising scattered provisions
This project will be informed by the principles being developed in the Principles of Disclosure project and will review disclosures in all IFRSs to identify and assess conflicts, duplication and overlaps.
Apart from a discussion to launch the project, no calendar for publication of IASB due process documents has yet been established.
The IASB has launched a vast project. Breaking this down into short and medium-term phases should make it possible to achieve tangible results relatively quickly, provided that all the stakeholders play along.
We will no doubt have occasion to return to this project in order to report both the practical impact of the short-term work and developments in the medium-term phases.