Financial Statement Presentation

Date recorded:

The Board discussed issues to be discussed in the forthcoming joint IASB/FASB Discussion Paper Preliminary Views on Financial Statement Presentation.


Presentation of liquidity information

Revisions to the Working Principle

At previous meetings, the Board agreed that:

  • entities that are not financial institutions should be required to classify the assets and liabilities in each of the categories on the statement of financial position into short- and long-term subcategories. An asset or liability would be classified as short-term if the shorter of (a) the contractual maturity or (b) the expected realisation or settlement of the asset or liability is within one year. Otherwise, the asset or liability would be classified as long-term; and
  • financial institutions should not be required to present short- and long-term subcategories for each category on the statement of financial position. The Board asked the staff to develop a principle for presenting liquidity information that would apply to all entities.

The Board first discussed a revision to the Liquidity Working Principle. Board members noted that solvency and liquidity are related but not the same. Solvency refers to an entity's ability to meet its financial commitments as they come due. Solvency is both long- and short-term. The short-term bit is a function of liquidity; the long-term is a function of the entity's ability to withstand financial shocks and surprises.

After a lengthy debate, the Board agreed to amend its Liquidity Working Principle along the lines of (staff and Board members agreed to discuss detailed drafting outside the meeting):

Financial statements should present information in a manner that helps a user assess an entity's ability to meet its financial commitments as they come due and to invest in business opportunities.

Application of the Working Principle

(a) Quantitative disclosures

The Board confirmed their view that the Preliminary Views would suggest that:

  • Entities that present a classified statement of financial position (balance sheet) would present short- and long-term subcategories for operating, investing, and financing activities. An asset or liability would be classified as short-term if the shorter of (a) the contractual maturity or (b) the expected realisation or settlement of the asset or liability is within one year.
  • Entities that present their statement of financial position based on liquidity because it provides information that is reliable and more relevant should present a detailed maturity schedule for short-term contractual assets and liabilities.
  • All entities should present a maturity schedule for long-term contractual assets and liabilities (much of this information is already disclosed, such as for leases, pensions, and long-term debt.)
  • The Board thought that using the approach to determining the classified/unclassified presentation that is in IAS 1.51 currently was better than trying to define a 'financial institution'. The staff will present this suggestion to the FASB at a later date.

(b) Qualitative disclosures

After a short and curtailed debate, the Board decided that it would not include a discussion or preliminary view on qualitative disclosures about capital adequacy and financial flexibility in the Discussion Paper. Rather, it would leave the existing disclosures required by IAS 1 paragraphs 124A-C and IFRS 7.33 alone for the time being.


Classification in consolidated financial statements by entities with significantly different businesses

The Boards' proposed working format for the primary financial statements disaggregates financial information between value creating ('business') activities, and the funding of that value creation ('financing activities' and 'equity'). The Boards' preliminary view is that an entity should classify its assets and liabilities as business or financing based on how it manages its activities or functions. In January 2007, the Boards decided to include their preliminary view on how a consolidated reporting entity consisting of significantly different businesses should apply the classification guidance. 'Entities consisting of significantly different businesses' are those entities that classify assets and liabilities of the same nature (for example, receivables) in different places (that is, in operating and financing).

In particular, the Board discussed how a consolidated reporting entity that is comprised of significantly different businesses should:

  • Apply the classification criteria to separate its value creating assets and liabilities from financing assets and liabilities.
  • Present the financial information for those different businesses in its consolidated financial statements.

The Board discussed three alternatives that would enable an entity presenting consolidated financial statements to report the activities of significantly different businesses (for instance, manufacturing activities for motor vehicles or airplanes and financing/leasing activities). There was clearly some degree of confusion about what the three alternatives would report and how they differ. Part of the confusion was because the Board was using terminology from IFRS 8 Operating Segments but not in the manner in which IFRS 8 uses it; part was a lack of clarity over the objective of the alternatives.

The Board asked the staff to do further work, but did suggest that:

  • The classification ('tagging' in XBRL) of assets and liabilities should be done at the segment level according to the nature (operating or financing) of those assets and liabilities in that segment. How the assets and liabilities are aggregated for consolidated financial statement purposes is a separate issue.
  • The Discussion Paper should propose that information about assets and liabilities in consolidated financial statements reporting the activities of significantly different businesses additional to that required by IFRS 8 be required; and that such information be required for operating and financing activities.
  • If different segments classify assets and liabilities in the same way, those segments could be aggregated in the balance sheet.
  • An illustration of the staff proposals compared with what is required now might help the Boards understand the effect of the staff proposals.

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