Financial Statement Presentation

Date recorded:

Classification: Definitions and Management Approach

The Board began reconsideration of the classification of information within the financial statements as proposed in the 2008 Discussion Paper (DP) Preliminary Views on Financial Statement Presentation. In particular, this session focused on the management approach for classification of items in the financial statements as well as the section and category definitions proposed in the DP.

Generally, the discussion was difficult, with the Board divided about the level of specificity that any future IFRS should contain and the consequences of any decisions in this project (and even this topic) on other topics within the financial statement presentation project and other Board projects.


Management approach to classification of assets and liabilities

The Board agreed to continue to develop an approach to classification based on how a reporting entity organises its activities and uses its assets and liabilities on the basis that it would provide the most decision-useful presentation of financial information for users of the financial statements.


Separating business activities from financing activities

The Board reaffirmed its preliminary view expressed in the DP that, with respect to the statements of comprehensive income and cash flows, the financial statement should distinguish the business activities of an entity from activities that finance those activities. However, peeking ahead to a discussion to be held in November, they reserved the possibility that the statement of financial position might be presented on a basis similar to the current format, but with more disaggregation.


Defining the financing section

By a slim majority, the Board agreed that that the financing section should be defined narrowly as financial liabilities that have an agreed-upon schedule of repayment with an interest component (and that interest component is either explicit or implicit). Items directly related to those financial liabilities, such as fees would also be classified in that section. Derivatives held as part of an entity's non-equity sources of funding, regardless of whether it is an asset or a liability at the reporting date, would also be presented in that section.

There was a lengthy and somewhat confusing debate leading to this decision. Some Board members suggested that the financing section should also include financial assets if they are managed with related financial liabilities. Others were concerned about potential conflicts with the Board's decisions on the liabilities and equity project. Board members understood the frustration, but were not convinced that the liabilities and equity project should influence the categories presented on the balance sheet.

The staff will prepare a draft of the proposal and work with Board members off-line, returning to a public meeting if necessary.


Defining the business section

The Board was finely balanced between those who seemed to prefer being prescriptive about how activities were categorised and those who would not. There seemed to be consensus that the 'business' category should be the residual category, which placed strain on the financing category. The Board members with analyst backgrounds dominated the discussion, but did not agree. Some wanted structure without a great deal of prescription; others would err on the side of caution and would be more definitive about what should be categorised where.

A bare majority of the Board supported requiring no defined categories within the business section. Management would also have flexibility to devise groupings of information within the business section that assisted in communicating the relationships between groups of assets and liabilities.


Presentation of discontinued operations

The Board agreed that the forthcoming exposure draft should retain the DP proposal to present discontinued operations in a separate section in each financial statement. In addition, the exposure draft would not prescribe the level of detail that an entity should present about its discontinued operations or where that information should be presented.


Information about net debt

Whether to require information about net debt

The Board agreed that the forthcoming exposure draft should propose requiring information about net debt to be presented in the financial statements.

In the debate, it was apparent that how 'net debt' was defined would be critical. Several Board members were concerned that 'net debt' could be misleading if not presented and discussed carefully. For example, Board members were very concerned that inappropriate inferences about the ability to settle obligations with cash balances would be made. A common situation is that cash may reside in a favourable tax jurisdiction and could only be used to settle liabilities at the cost of a considerable tax penalty.

Defining 'net debt'

The Board discussed three alternative approaches to defining net debt. The concerns expressed in the previous discussion were again apparent as the Board sought to balance the need to develop a principles-based approach with the need to guarantee some degree of consistency among preparers. The Board concluded that 'net debt' should be defined to be the 'financing' category less the financial resources available to service those obligations.


How to present net debt information in the financial statements

The Board discussed several possible alternatives for presenting net debt. The Board indicated support for disclosure of net debt either on the face of the financial statement or in the footnotes, provided that it was not confused or mingled with the cash flow statement. In an indicative vote, the Board preferred a presentation that described net debt in a footnote, reconciling the movements in the components of net debt over the reporting period.

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