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IAS 1 — Issues related to the application of IAS 1

Date recorded:

In October 2013, the IFRS Interpretations Committee received a request from the European Securities and Markets Authority (ESMA) to clarify the application of some of the presentation requirements in IAS 1 Presentation of Financial Statements.

ESMA pointed out that IAS 1 gives a lot of flexibility to preparers when preparing their financial statements. In their opinion such flexibility may impair the comparability and understandability of the financial statements.  To illustrate this concern, ESMA identified a list of areas concerning the application of some of the presentation requirements in IAS 1 that it would like to bring to the attention of the Interpretations Committee, as follows:

  1. Issue A. Presentation of expenses by function.
  2. Issue B. Presentation of additional lines, headings and subtotals.
  3. Issue C. Presentation of additional statements or columns in the primary statements.
  4. Issue D. Application of the materiality and aggregation requirements.

Based on their analysis and assessment against the Interpretations Committee agenda criteria, the staff recommended that the Interpretations Committee should not add the issues raised by the submitter to its agenda.

Questions to the Interpretations Committee (Issue A)

  1. Does the Interpretations Committee agree that further work could be done as part of the Disclosure Initiative to clarify the disaggregation principle in paragraph 29 of IAS 1?
  2. Does the Interpretations Committee wish the staff to address the presentation of specific line items in the statement of profit or loss? If so, which?

Question to the Interpretations Committee (Issue B)

  1. Does the Interpretations Committee agree that further work could be done as part of the Disclosure Initiative to ensure that entities do not disclose ‘unusual’ or ‘exceptional’ items, because they are prohibited under IAS 1?

Questions to the Interpretations Committee (Issue C)

  1. Does the Interpretations Committee agree that IAS 1 prohibits the presentation of additional information that is not required in IFRS as part of a complete set of financial statements?
  2. Does the Interpretations Committee think that further work could be done as part of the Disclosure Initiative to provide additional guidance or principles in IAS 1 to prevent the presentation of additional statements or of additional information that is not required by IFRS?

Question to the Interpretations Committee (Issue D)

  1. Does the Interpretations Committee agree that no specific guidance should be added to paragraph 23(f) in IFRS 8 to address the submitter’s concern that this paragraph requires the disclosure of material items of income and expense for each reportable segment?

Final questions to the Interpretations Committee

  1. Does the Interpretations Committee agree with the staff’s recommendation that this issue should not be added to its agenda?
  2. If the Interpretations Committee agrees with the staff recommendation, does it agree with the proposed wording for the tentative agenda decision in Appendix B?

In opening the discussion, the Chairman noted that this was an issue raised by a regulator, and asked the regulator present to comment.

The regulator noted that this area is a major concern for ESMA and also IOSCO, and they often have discussions on IAS 1 regarding presentation.  The regulator noted that they agree with the staff position that most of the issues in the paper should be dealt with by the disclosure initiative; however, they expressed concern at the way the rejection is drafted, and would prefer something more factual.

The Chairman then turned discussion over to the members.

A member agreed that the Committee should not take the project on, but not for the reasons given in the paper.  The member expressed significant concerns regarding the words in the paper, noting that the fact that the issue would be too broad to be addressed by the Interpretations Committee was irrelevant.  The member noted that the Standard is clear on what is required, that flexibility and judgement is a good thing and that the project would be fundamentally changing what IAS 1 requires; and for these reasons it should not be added to the agenda.  The member also raised concern about Question 4 in the paper (regarding Issue C) – noting that they do not see anything anywhere in IFRS that precludes additional information being included in a set of financial statements (as long as the information is not misleading) and would be concerned if the Committee was effectively advocating that view to the world.

Another member commented that they agreed with the overall direction the staff was heading; noting that this is not the time to start changing the balance between prescription and flexibility in IAS 1.  However, the member expressed concerns regarding the wording of the agenda decision, stating that it gives the impression of a complete free for all, and that some additional language is needed.  The member referred to paragraph 17b of IAS 1, which talks about information that is relevant, reliable, comparable and understandable – the basis upon which judgements should be made, and noted that this notion should be brought out more fully than giving the impression that anything goes.

Another member agreed that this issue should not come onto the agenda.  The member noted that there is enough in IAS 1 that establishes the principles to decide what is acceptable in the context of additional information in the financial statements and notes, and enough in the Standard to determine what is misleading and what would not be allowed. The member further noted that they believe there is sufficient information in IAS 1 for management to make judgements and for regulators to take appropriate action if they feel the accounting is abusive.  The member also expressed concern about the wording of the agenda decision, as it does tend to suggest that there is flexibility in judgement without limit and noted the need for the wording to refer back to the need for balance and neutrality and the financial statements not being misleading.  The member noted that the issue is too broad for the Committee to take on, but reinforced that the Committee should not take this issue on because the principles are in IAS 1, and it is up to people to apply them appropriately.

A number of other members noted that they agreed with the conclusion in the paper, although shared the thoughts of the members who had already commented.

Other comments that arose in the course of discussion:

  • Reference was made to the work underway by the Disclosure Initiative
  • A couple of members made comments regarding the interpretation of ESMA’s letter and whether the paper actually described what ESMA’s real concerns were, and noted that the agenda decision as written is a bit too dismissive of their concerns.
  • There were comments regarding the fact that the rejection letter should be used to reinforce certain points, and that this would be useful to users and to the regulators
  • A member commented that there may be areas where more guidance (illustrative not prescriptive) could be useful – as the line between what is abusive vs. genuine flexibility is very blurry

The comment was made that ESMA staff was not surprised by the rejection notice, but were disappointed at the wording, and amendments (such as those discussed above) would be welcome. 

In summarising the discussion, the Chairman noted that there was broad agreement that this issue should not be added to the Committee’s agenda, broad recognition that the Board has projects underway that will deal with a lot of the issues, and broad agreement that there needed to be amendments to the wording in the agenda notice to make it clearer that IAS 1 is not a ‘free for all’.

The proposal was made to amend the wording in the agenda notice – adding language as articulated by one of the members (reproduced below), and for the staff to work with that member to finalise the wording.

All members of the Committee agreed with the proposal.

[The member referred to paragraph 17b of IAS 1, which talks about information that is relevant, reliable, comparable and understandable – the bases upon which judgements should be made, and noted that this notion should be brought out more fully than giving the impression that anything goes.]

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