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IAS 1 – Issues related to the application of IAS 1

Date recorded:

In January 2014 the Committee published a tentative agenda decision not to add to its agenda a request to clarify the application of some of the presentation requirements in IAS 1 Presentation of Financial Statements.

The purpose of the paper is to provide an analysis of the comments received on the tentative agenda decision, and set out the wording for the final agenda decision.

Discussion

A Committee member noted she had several concerns with the proposed wording for the agenda decision. She noted the reference to operating income that had been added to the agenda decision, and questioned what message would be conveyed by including this reference, and whether it would be suggesting that entities should be presenting operating income. She further noted that she disagreed with the statement that IAS 1 was clear that additional information could not be presented, and noted that the IASB had never clearly explained the extent to which additional information could be included in the financial statements. She added that she believed IAS 1 was more flexible than what the agenda decision conveyed, and noted that she believed that the IASB’s decision to undertake research on the presentation of other information and non-GAAP measures in financial statements was the right project to take on. She further added that in the meantime, the Committee could not go as far as it was intending to go in the agenda decision.

The Chairman noted that the Conceptual Framework for Financial Reporting defined assets, liabilities, revenue, and expenses, and that if an item was not one of those, it should not be included in a financial statement. He noted that IAS 1 carried forward that principle, and accordingly, if an entity wanted to present a column in the income statement showing net income without advertising, he did not believe that IAS 1 would allow this.

An IASB member present commented with respect to the term ‘hypothetical’. He observed that there were two different situations in which hypothetical information could arise. He firstly described the situation where a business combination had taken place during the year, and in which the entity wanted to report results as if the business combination had taken place on the first day of the preceding year in order to present the results of two years on a comparative basis. He noted that what was hypothetical in this situation was not the existence of the transaction but the period of the financial information. He noted that this situation differed from one where an entity wanted to provide information with respect to an event that did not happen, or might happen in the future, and noted that he saw this type of situation as being more problematic. With respect to pro forma information presented based on the first situation, he questioned whether the Committee would preclude or prohibit such information being presented, and noted that he would make this assessment based on the usefulness of the information to users of the financial statements. He added that based on the usefulness criteria, he was not sure that all situations of additional information could be precluded.

Another Committee member noted that he believed the Committee was on the right track with respect to the agenda decision, and noted that he did share a couple of the concerns already expressed. In relation to the reference to operating income in the agenda decision, he noted that there was some guidance around this in BC56 to IAS 1 and questioned whether the comments in the agenda decision somehow superseded that guidance, or if BC56 would still apply, and noted that a reference should be made to BC56.

Another Committee member also expressed concerns with respect to the reference to operating income in the agenda decision, and noted that regulators in North America were concerned with the inclusion of such a measure because there was no common definition as to what was and what was not included in such a measure. He noted that adding a comment in the agenda decision that this was a subtotal that was commonly used, without any guidance with respect to what was included in the amount concerned him. With respect to hypothetical information, he noted that he shared the views expressed by the IASB member. He noted that IFRS 3 clearly acknowledged that pro forma information presented as if a business combination had been effected at the beginning of the year was useful information, and that it could be argued that this was hypothetical information (because the business combination did not actually occur on that date). He questioned what precluded an entity from adding this information in a column in the financial statements (other than the ability for the information to be audited). With respect to presentation of additional statements, he questioned whether this would actually be precluded by IAS 1, and expressed concern that the agenda decision was going beyond stating the principles in the Standard.

Another Committee member noted that he thought the Committee was moving in the right direction with respect to emphasising principles in the agenda decision. However, he noted that he did not see the addition of the reference to operating income as helpful, and added that it may create further confusion, and would be better left out. He noted that he agreed with several other Committee members that there was nothing in IAS 1 that precluded an additional statement, and added that in certain jurisdictions (for example, Brazil), entities were actually required to include other statements in a set of IFRS compliant financial statements, and therefore, noted that he would be concerned with the Committee stating that entities could not have an additional statement included in the financial statements. He also expressed concerns with ‘what if’ accounting being included on the face of the statement of financial performance, and noted his preference for such information, if included, to be included in the notes.

Another Committee member noted that hypothetical information was not always irrelevant, noting that IAS 1 says that it is a judgement as to whether information would be considered relevant or not.

Another Committee member noted that he did not believe hypothetical information belonged on the face of the financial statements, or even in the notes unless required by an accounting standard to be disclosed. He noted his overall concern was that he was not sure that the agenda decision said anything that was not already included in IAS 1. He highlighted the fact that the Disclosure Initiative project was currently in progress, and questioned why the agenda decision did not just state that the reason for the Committee not taking this issue onto its agenda was because the IASB has a Disclosure Initiative project in progress that was dealing with the issues, further noting that the agenda decision was not saying anything particularly useful, or adding anything that could not be understood from a reading of IAS 1.

The Chairman questioned the Senior Director, Technical activities, as to whether the work being performed in the Disclosure Initiative extended to the face of the financial statements.

The Senior Director, Technical Activities responded, and confirmed that the Disclosure Initiative covered both the face of the financial statements and the notes. He added that an issue similar to this (with respect to additional subtotals etc.) was actually part of the Exposure Draft.

Another Committee member also commented with respect to the reference to operating income in the agenda decision. She noted that she was troubled by the fact that the agenda decision referred to operating income as there was no clear understanding as to what was actually meant by the term, and what should be included in operating income. She noted that she thought it was fine to reiterate the notion with respect to the usage of subtotals, but expressed concerns at including other information in the financial statements, noting that trained accountants might understand what the information meant, and the level of assurance over such information, but that other users may not. She further noted that she believed that the inclusion of other information in financial statements also diminished the credibility of IFRS and its usefulness, if the additional information was required in order to make financial statements ‘useful’.

An IASB member present noted that he understood the concerns that had been expressed by Committee members with respect to pro forma columns, and the potential for confusion, but noted that if such columns were properly labelled (actual and pro forma) with a footnote that explained the basis upon which the pro forma column had been prepared, this should eliminate such confusion. He further noted that if certain other information was accepted to be a form of GAAP and included within financial statements, it would improve the quality of the information as at least this would result in the information having been audited, noting that this was one reason why putting such information outside the financial statement was of concern to him.

Another IASB member present commented that in the prior month, when the insurance project was being discussed, the IASB felt it necessary to prohibit the display of premium information on the face of the statement of financial performance as it was concerned the information could be confused with revenue. She noted that this suggested that the fact that the IASB felt the need to prohibit this information was because IAS 1 would have permitted it had the IASB not prohibited it.

The IOSCO representative present at the meeting added several comments to the discussion. She noted that IAS 1 permits flexibility in presentation; however, noted that this flexibility related to presentation of amounts that had been determined by applying IFRS recognition, measurement, and classification criteria. She noted that IAS 1 provided some latitude in how such amounts were presented, but added that the standard did not go so far as to allow presentation to trump recognition, measurement and classification. With respect to additional information, she noted that this was something the IASB would need to consider, and acknowledged that there was not enough of a basis in IAS 1 for the Committee to conclude on this aspect now. Further, with respect to compliance, she noted that the fundamental issue in any regulatory jurisdiction was the notion that misleading investors was not acceptable and noted that when looking at sample filings around the world from a compliance perspective, it could sometimes appear that presentations were misleading, for example, in situations where there were numbers with no explanation as to what the numbers were, or income statements that did not foot from top to bottom, and were merely a series of numbers with double underscores. She noted that there was an overall message that you cannot go to the point either within IAS 1s provisions and potentially jump off the cliff to misleading and somehow use the standards as your defence.

The ESMA representative present at the meeting also added several comments to the discussion. He noted that with respect to columns, it was ESMA’s understanding that a lot of people believed it was possible to include additional columns because subtotals could be included. He noted that columns provided much more flexibility and the ability to omit certain information, and therefore, there was more danger of misleading users of financial statements. He asked that if the IASB and Committee believed that additional columns could be included, that this fact was clarified through the Disclosure Initiative and the amendments to IAS 1. He noted that ESMA preferred that the sentence that made reference to operating income was included in the agenda decision, because a lot of issuers presented operating income. He supported a reference to BC56 of IAS 1 being included, as noted by a Committee member earlier in the discussion as this paragraph provides some guidance as to what should be taken into account when presenting operating income. He further noted that the purpose of financial statements was to present fairly the financial position, performance and cash flows of an entity, and that this was done through faithful representation of the transactions, which seemed to lead to only the inclusion of non-hypothetical information in financial statements. He noted that he believed it will be important that a clear distinction is made between historical and hypothetical information, and also that a clear distinction is made between what can be included on the face of the financial statements versus in the notes.

Another Committee member noted that she believed something should be done quite urgently by the IASB in relation to what was appropriate to present on the face of the statements and in the notes with respect to additional information that is not currently required by IFRSs. She noted that she believed this issue was beyond the limits of what could be done with IAS 1 by the Committee, and stressed the importance of the IASB doing something to address the issue in the near future. She noted that she had spent considerable time reviewing ESMA’s proposals with respect to non-GAAP measures, and believed that one of the key problems that arose when non-GAAP measures were discussed, was the fact that there was no clear definition as to what a GAAP measure actually was, and added that the IASB would be better placed to clarify what a GAAP measure was, and thereafter, to explain what was acceptable and not acceptable within financial statements.

Another Committee member noted that he was surprised by the discussion that the inclusion of hypothetical information in the primary financial statements could be considered acceptable. He noted that he thought the language in IAS 1 was clear that where information was presented beyond the minimum requirements, it was to provide more clarity on amounts that were already part of that statement. He noted that he did not believe that, for example, pre-tax income without advertising expense was an amount already included in the statement, and that by including such a measure, one would be providing more clarity. He added that in such a case, one would be providing a measure that was not an IFRS measure, and could not even be described as being reasonably helpful because operating income less advertising would provide a measure that would never have happened (if an entity did not advertise, it would not have had as much revenue) so noted that he did not see how such a measure could be considered to provide more information about financial performance. He further added it might be reasonable to include such information in a footnote if there was sufficient description as to what it was, and added that he strongly supported the view that hypothetical information did not belong on the face of the financial statements.

The Senior Director, Technical Activities acknowledged the concern raised by a Committee member with respect to non-GAAP measures. He noted that the staff was scheduled to have a first small group meeting on June 18 to educate IASB members on non-GAAP measures and other issues. He noted that the Disclosure Initiative project was designed to enable items to be fed into the project without having to wait for a discussion paper to be produced, and noted that this was one issue that the staff were conscious of.

In bringing the discussion to a conclusion, the Chairman noted that basic financial statements are comprised of assets, liabilities, revenue, and expenses, as determined in accordance with IFRS. He noted that IAS 1 provides some flexibility on the presentation of those amounts, and that the presentation of amounts beyond the amounts that were required (not hypothetical or pro forma amounts), was a subject for urgent consideration by the Disclosure Initiative. He proposed asking the staff to rewrite an agenda decision that reflected the summary, and asked the Committee members whether they supported such a proposal. Nine Committee members supported the proposal.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.