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General presentation and disclosures: ICAEW's point of view

22 December 2020: ICAEW has responded to the IASB’s Exposure Draft on General Presentation and Disclosures (Primary Financial Statements). What is our point of view?

The International Accounting Standards Board (IASB) has proposed improvements to the way information is communicated in the financial statements, with a focus on financial performance. 

The proposals are a response to investor demand and, if adopted, would require more comparable information and more transparency. Michael Stewart, Senior Expert of Financial Reporting at Huawei, chaired ICAEW’s Financial Reporting Faculty Committee’s working party on this area and contributed to the resultant response.

“The IASB confirmed that the primary audience for financial statements are current and potential investors, lenders and other creditors,” says Stewart. “This project does not attempt to change that. What the General Presentation and Disclosures Project aims to do is to make sure that the information presented is clearer, more structured, and more comparable so that when those same users make decisions around investment or lending, they receive that information more clearly.”

It is all about making it easier for those parties to access that information, and that information has more order and more structure to it, he points out. 

“The project is also intended to provide more standardisation in terms of making sure every company provides information to a similar level of detail, subject to materiality,” he adds. “The idea is that those users are then able to receive and use a much clearer message about that company’s performance.”

So, what has prompted this initiative? “There was feedback from users of financial statements – such as investors and analysts – about some of the challenges they face in reading financial statements, and about finding the information that’s important and relevant to them,” says Stewart. “That is the driving force behind this.”

Speaking as part of ICAEW’s working group on this initiative, Stewart says ICAEW’s response to the Exposure Draft makes it clear that what matters is how users actually use the information in front of them. “How do they consume it?” he says. “It should be about improving the communication of that information to assist with the way in which users are actually using that information.”

In essence, the Exposure Draft focuses on three key areas of reporting. The first is the structure of the income statement. “The IASB is proposing more structure than is currently required in the existing standard. It identifies an operating section of the income statement, an investing section and a financing section. It specifies some definitions for the financing and investing section and then suggests the operating section effectively becomes the default category and comprises anything that does not fit in the other two categories. Through doing that, the IASB has identified an operating profit subtotal and that is very welcome. I think the IASB has been quite clever here by defining operating profit in this way.”

The second area of focus in the Exposure Draft relates to identifying unusual income and expense. “Users say that identifying unusual income and expense is particularly helpful. If companies need to highlight income and expense which is not expected to reoccur in the future, then it would help users and analysts strip out that non-reoccurring income or expense so that they can predict more easily how the company is going to perform in the future.” 

Until now, highlighting unusual income and expense has not been a requirement. This proposal would make it mandatory. It relates to income and expense that is not expected to reoccur within the next several annual accounting periods. 

“We can see why and how this helps users of financial statements, but we question whether the way in which the IASB has defined unusual income and expense is the best way to do so, although we don’t disagree with the definition itself. Perhaps it would be better if it were wrapped up with its guidance on disaggregation and aggregation – which is also part of this package,” says Stewart. “This will help companies determine to what extent they should disaggregate information in the financial statements.”

He continues: “We support this approach, and we think the unusual income and expense issue should be part of this disaggregation to give the appropriate level of granular information. Where ICAEW has disagreed with the IASB is around grouping all that information into one note to the financial statements. We prefer a more natural disaggregated format.”

The third area relates to the disclosure of management performance measures – subtotals of income and expenses that are not specified in IFRS Standards – in a single note to the financial statements. “We are largely supportive of the definition itself and we support that the IASB has not tried to restrain what a company defines as a management performance measure. Companies are, thereby, allowed to tell their own story, using the metrics they think best communicate the company’s performance,” says Stewart.

In this note to the financial statements, companies would be required to explain why the measures provide useful information, how they are calculated and to provide a reconciliation to the most comparable profit subtotal specified by IFRS Standards. These requirements would, says the IASB, add transparency and discipline to the use of non-GAAP measures and make it easier for investors to find the information they need. “While the IASB’s ideas on this point are sound, the way in which it proposes to execute it we think needs to be more practical,” he warns

The proposals in the Exposure Draft, if adopted, would result in a new IFRS Standard that sets out general presentation and disclosure requirements relevant for all companies, replacing IAS 1 Presentation of Financial Statements. Some other IFRS Standards may also be amended.