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IAS 1 replacement will hit P&L structure

Jamie Tomlin, chair of the LSCA’s technical committee, reviews the IASB’s draft proposals to replace IAS 1 Presentation of Financial Statement which is set to change how the financial cake is sliced.

"Jamie

March 2020

In December, the International Accounting Standards Board published its exposure draft, General Presentation and Disclosures. This is the eagerly anticipated replacement to IAS 1 Presentation of Financial Statements.

The proposals introduce new requirements on presentation and disclosures in the financial statements while carrying forward the other elements of IAS 1 without substantive change.

The biggest impact of the proposals is to the structure of the statement of profit or loss.

An entity’s performance will be separated into:

  • Operating activities
  • Integral associates and joint ventures
  • Investing, and
  • Financing

The concept of integral associates and joint ventures is discussed further below.

When preparing the primary statements an entity will need to aggregate (and disaggregate) transactions and balances. The basis on which aggregation is made is through shared characteristics.

This is a more defined approach than under the existing standard, although the only guidance on characteristics is contained in the application guidance which gives, as examples, nature, function, measurement basis, or another. Items with characteristics which could support being aggregated in more than one line item would need to be reported on a basis which ensured comparability.

Certain items are listed which are expected to be disaggregated, and these correspond to those items which the existing standard requires to be separately disclosed. Broadly these are write-downs of inventories and property, plant and equipment, restructuring costs, asset disposals, discontinued operation and litigation settlement.

The standard also means the end of exceptional items. Or maybe not. The description “Unusual income and expense” is used, and this will capture items which have “limited predictive value” and “it is not unreasonable to expect that… will not arise for several future… periods”.

Such items must be included in a single note, showing at least the amount, a narrative description and the line item included within. Where expenses are classified by function, disclosure is also required in a single note of the total operating expenses by nature. This is a stronger requirement than currently.

The notion of integral associates and joint ventures is completely new, and will require the investee to assess whether such entities are integral to the business and do not generate a return individually and largely independently of the entity.  Those associates and joint ventures which are integral would form part of the operating performance, while non-integral entities would be part of the investing performance.

The proposals also attempt to address the use of management performance measures. The definition for these is wide ranging and will have consequences for how an entity “publicises” its performance, as these include subtotals of income and expenditure which are used in public communications outside the financial statements, complement IFRS amounts and communicate to users managements view of aspects of the entity’s performance.

All information about management performance must be disclosed in a single note. The encapsulation of information used to communicate performance in public communications is going to require management to have a clear understanding of what they wish to say before the financial statements are approved, otherwise this is going to put an auditor in a difficult position!

The exposure draft is open for comment until 30 June 2020.

Jamie Tomlin is chair of the London Society of Chartered Accountants’ technical committee and director of auditing and accounting at Crowe.

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