Presentation of financial statements – a new IFRS on the horizon
19 February 2020: in December 2019, the IASB issued extensive proposals which aim to improve how information is communicated in the financial statements, with a particular focus on the statement of profit or loss, writes Sarah Dunn, Technical Manager in ICAEW's Financial Reporting Faculty.
Central to the proposals is the suggestion that IAS 1 Presentation of Financial Statements be replaced with a new standard that would comprise:
- new requirements on presentation and disclosure in the financial statements; and
- requirements brought forward from IAS 1 (with only limited changes to the wording).
This is a significant project which will affect all companies reporting under IFRS. It is unsurprising then that the IASB’s exposure draft is also significant in size, reaching over 100 pages. It is also accompanied by two similar sized documents, one outlining the basis for conclusions and another providing illustrative examples. Thankfully the IASB has also issued a shorter overview document which is well worth a read.
Summary of key proposals
Structure of statement of profit or loss
It is proposed that an entity would classify income and expenses within the following categories:
- integral associates and joint ventures;
- income tax; and
- discontinued operations.
In addition, an entity would present the following new subtotals in the statement of profit or loss:
- operating profit or loss;
- operating profit or loss and income and expenses from integral associates and joint ventures; and
- profit or loss before financing and income tax.
Integral and non-integral associates and joint ventures
An entity would be required to classify its equity-accounted associates and joint ventures as either "integral" or "non-integral" (as defined in the new standard). Whether an associate or joint venture is "integral" or "non-integral" will then have implications for where information is presented in the statement of profit or loss, statement of financial position, cash flow statement, and in the notes. For example, as noted above, income and expenses from integral associates and joint ventures would be presented within a separate category on the face of the statement of profit or loss together with a sub-total.
Management performance measures
The new standard would define "management performance measures" as subtotals of income and expenses that: (a) are used in public communications outside financial statements; (b) complement totals or subtotals specified in IFRS Standards; and (c) communicate to users of financial statements management’s view of an aspect of an entity’s financial performance.
An entity would be required to disclose certain information about management performance measures in a single note in the financial statements including, for example, a reconciliation to the most directly comparable total or subtotal specified by IFRS.
Unusual income and expenses
A definition for "unusual income and expenses" would be introduced and a requirement for entities to disclose unusual income and expenses in a single note. Application guidance would be available to help an entity identify its unusual income and expenses.
Aggregation and disaggregation
The new standard would outline principles and general requirements on the aggregation and disaggregation of information applicable both to presentation in the primary financial statements and disclosure in the notes.
Nature of expense method
Entities would continue to be required to present in the statement of profit or loss an analysis of operating expenses using either the nature of expense method or the function of expense method. The new standard would describe the factors to consider when deciding which method of operating expense analysis should be used.
An entity that presents an analysis of operating expenses using the function of expense method in the statement of profit or loss would be required to disclose in a single note an analysis of its total operating expenses using the nature of expense method.
The Financial Reporting Faculty will be assessing these proposals closely in the coming months and will monitor this important project over time, with a view to providing guidance to members as required. Further resources on IFRS can also be found here.
Comments to the IASB are due by 30 June 2020. We are also interested to get your views. If you have any comments on the IASB proposals then please contact us at firstname.lastname@example.org.