Financial Statement Presentation

Date recorded:

The purpose of this session was to resolve the open issues identified by the staff when drafting the pre-ballot draft of the forthcoming discussion paper (DP).


Implication of scope change

The Board discussed the implications of the scope changes agreed at the April 2008 joint board meeting. At that meeting the Boards decided to retain the existing guidance on presentation of other comprehensive income (OCI) in the statement of comprehensive income, not change existing standards regarding items to be recognised outside profit or loss and not include additional segment and liquidity disclosures.

Several Board members expressed their disappointment about the reduction of scope and noted that the most advantageous parts of the project have been excluded. In particular, one Board member noted that the part on segment disclosures would have been a good opportunity to eliminate flaws in IFRS 8 Operating Segments.

However, there seemed to be a broad consensus that the Board has to stick with the decisions made in April 2008 and consequently the following decisions were made:

  • The project will not seek to change existing standards relating to which items are recognized outside of profit or loss, thereby retaining the current ad hoc approach to items reported outside of profit or loss and the recycling mechanism
  • The DP will present two options for OCI presentation:

a. Present OCI items in a separate section similar to how OCI is presented in a single statement of comprehensive income.

b. Classifying OCI items within the operating, investing and financing categories.

  • To include in the DP a paragraph explaining the Board's 'long term goal' of presenting all changes in assets and liabilities in one of the functional sections/categories in the statement of comprehensive income, that is, the goal to eliminate OCI items and the recycling mechanism. In addition, the DP will explicitly seek input from constituents on this long term goal.
  • When OCI is presented in a separate section an entity should indicate what category (operating, investing or financing) each OCI item relates to.
  • No further separation of OCI items should be required in the statement of financial position and the statement of cash flows.
  • Not to include as part of this project additional segment disclosures.
  • Not to include as part of this project liquidity disclosures. However, the previously agreed additional disclosures of contractual maturity information about short-term and long-term assets and liabilities should be retained in the project scope.

In addition the following decisions were made with regard to the scope of the project:

  • Not to extend intraperiod tax allocation; i.e. income taxes should continued to be allocated in the statement of comprehensive income in accordance with current guidance and income tax assets, liabilities and cash flows should be presented in a separate section in the statements of financial position and cash flows, respectively.
  • Not to change the requirements of earnings per share presentation; i.e. the current requirements of IAS 33 Earnings per Share will be not be changed.
  • Not to include additional capital management disclosures; i.e. the current requirements of IAS 1 Presentation of Financial Statements would not be changed.
  • Not to discuss offsetting of assets and liabilities as well as disclosures of information about measurement bases and measurement uncertainty; i.e. the current requirements of IAS 1 would not be changed.


Sweep Issues

Definition of operating and investing categories

The pre-ballot draft of the DP (some paragraphs were reproduced in the observer notes) stipulates that within the business section '(t)he operating category should include assets and liabilities that management views as related to the central purpose(s) for which the entity is in business (and changes in those assets and liabilities)' and that '(t)he investing category should include assets and liabilities that management views as unrelated to the central purpose for which the entity is in business (and any changes in those assets and liabilities)'.

Several Board members raised the concern that these definitions may lead to arbitrary classification and that the classification heavily depend on management's intentions (similar to the guidance in IFRS 8); e.g. management could try to move loss generating activities to the investing category. Other Board members responded that the risk of manipulation is relatively low since an entity needs to explain its classification at the beginning and has to stick with it. Finally the Board decided by majority vote to retain the definitions in the pre-ballot draft and to keep the labels operating category and investing category.

Labels for financing and equity sections

The Board was asked whether the labels of the 'equity' section and the 'financing' section should be kept or whether the labels should be changed to 'equity financing' and 'non-owner financing' in order to illustrate that both sections relate to financing. In addition, the FASB staff informed the Board that the FASB has tentatively decided to change the label of the 'equity' section to 'equity financing", thereby retaining the label 'finance' section.

The Board found it confusing to have a 'finance' section and an 'equity finance' section with the 'equity finance' section not being a sub-section of 'finance' and therefore disagreed with the FASB labelling.

The Board decided not to change the labels.

The reconciliation schedule and the indirect schedule

Regarding the reconciliation schedule (reconciliation of cash flows to net income) the staff suggested the following changes:

  • The 'cash flows not affecting income' column should be eliminated from the schedule and be combined with the 'accruals and systematic allocations' column. The combined column should then be labelled 'accruals and systematic allocations that are not remeasurements'.
  • The equity section should be omitted from the cash flow information that is used as the starting point for the reconciliation schedule.

One Board member noted that as a result of the first proposed change the reconciling item relating to cash inflows from issuing a bond would be shown in the 'accruals and systematic allocations that are not remeasurements' column even though such an item has nothing to do with accrual accounting. This Board member also pointed that the contents of this column would be heterogeneous and that some entities may even end up with only one reconciliation column. The staff responded that they are fully aware of these disadvantages but that the change was proposed because of difficulties in determining cash flows that never affect income. The staff noted that e.g. for zero coupon bonds the classification would be difficult and that there are many other items that do not affect income incidentally but may affect income later.

Eventually, the Board agreed to the staff recommendations.

Regarding the indirect schedule (reconciliation of net income to cash flows) currently required by US GAAP the Board decided that such a schedule should not be required under IFRSs and that the DP should not address the indirect schedule at all.

Disaggregation by function and nature

Subject to editorial changes the Board agreed to the preliminary views on disaggregation by function and nature in the statement of comprehensive income. According to the paragraphs reproduced in the observer notes an entity should disaggregate income and expense items first by function and should provide further disaggregation by nature with both disaggregation steps being required only when they enhance the usefulness of information.

The Board was concerned with the illustrative example provided by staff showing 27 line items in total continuing operating income alone. Several Board members noted that such a statement of comprehensive income would be much too detailed and that presenting cash flows in accordance with the cohesiveness principle would be burdensome. The Board asked the staff to emphasise in the DP that only the main items should be shown on the face of statement of comprehensive income and that further disaggregation should be presented in the notes.


The statement of changes in equity

The Board decided not to consider any further changes to the statement of changes in equity, i.e. to limit the preliminary views to the decisions already reached in phase A of the project.


Disaggregation in the discontinued operations section

The Board agreed not to include in the DP any specific disaggregation requirements for discontinued operations.


Disclosure of total assets and total liabilities

The Board decided that an entity should disclose total assets and liabilities either on the statement of financial position or in the notes. In addition, an entity that presents its assets and liabilities in short-term and long-term subcategories should also disclose totals for short-term assets, short-term liabilities, long-term assets and long-term liabilities.


Issues not yet fully deliberated

Foreign currency gains and losses

The staff noted that according to the decision not to address OCI issues the pre-ballot draft of the DP no longer contains the preliminary view that foreign currency translation adjustments (FCTAs) should be presented in a separate section. For the DP to be complete on foreign currency gains and losses the staff presented guidance on the classification of foreign currency gains and losses other than FCTAs.

The Board agreed to the staff recommendation to include the following preliminary view:

An entity should display transaction gains and losses, including the components of the net gain or loss on remeasuring the financial statements of an entity into its functional currency, in the same section and category as the assets or liabilities that gave rise to the gains or losses.

Basket transactions

This issue relates to the presentation of gains/losses and cash flows that result from single transactions that involve the purchase or disposal of multiple assets, or a combination of assets and liabilities, that are classified in more than one category under the working format (basket transactions).

The Board decided to present in the DP an allocation approach and alternatives for presenting basket transactions without allocating the effects to the multiple categories.

Regarding the allocation approach the Board decided that:

  • Amounts allocated to determine gain or loss should be based on the relative fair value of non-cash assets, that is, no relative fair value allocations should be made to liabilities and cash.
  • No hypothetical cash flows should be allocated to liabilities in a basket transaction, that is, no cash flows would be allocated to liabilities.

Way forward

The staff intends to circulate to the Board a second pre-ballot draft in early July 2008 and a ballot-draft in August 2008. The DP will have a comment period of six months and is expected to be published in early September 2008.

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.