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IAS 1 — Disclosure initiative

Date recorded:

In the meeting, the IASB were requested to consider the proposed narrow focus amendments to IAS 1 Presentation of Financial Statements, discussing:

The IASB also discussed Agenda Paper 20 on the current/non-current classification of liabilities (separate notes on this topic are available here).

Disclosure of net debt

The Discussion Forum: Financial Reporting Disclosure Feedback Statement (the Feedback Statement) suggested the IASB should assess whether to add a requirement around the disclosure of “net debt” as part of a possible short term amendments to IAS 1. Net debt disclosure is not required in the standard. This topic has been discussed before by the IASB and the financial statement presentation (FSP) project explored the topic of net debt.

The FSP project described net debt as:

An entity shall provide an analysis of changes for the following line items in a single note and include a total of these items:

  • Cash;
  • Short-term investments;
  • Finance leases; and
  • Each line item in the debt category.

In addition, the FSP project encompassed “Liabilities that are borrowing arrangements entered into for the purpose of obtaining (or repaying) capital and related income effects shall be classified in the debt category.”

The IASB had initially suspended this project and did not take this matter further. However in practice, net debt and net debt reconciliations are reported by some companies and the nature of these disclosures vary as there is no common understanding of what information should be provided. Hence, the IASB are requested to reconsider this topic, specifically:

  1. Should net debt be defined in IFRS?
  2. Should net debt disclosures be specifically required in IFRS?
  3. What should be the nature and form of any disclosure of net debt? E.g. disaggregation and/or reconciliation.

Staff think any amendments made about net debt would require more extensive outreach to better understand the issues and provide a full analysis on the topic. In addition, defining net debt in IFRS would introduce a new requirement, therefore staff recommend to the IASB it should be outside the scope of the Amendments to IAS 1 project. 

In addition, Staff highlighted that the consideration of net debt would be better placed within the medium term project under the Disclosure Initiative for research into IAS 1, IAS 7 Statement of Cash Flows and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and the FSP project to create a “Disclosure Framework”.

A member expressed that in practice there is a general expectation about the issue being addressed in the short term rather than the medium term and was therefore disappointed to see it being deferred but agreed with staff’s proposal that it should not be addressed as part of this narrow focus amendment to IAS 1.

Another member also agreed with staff’s proposal and the importance of focus on net debt. The member was also against a “quick fix” approach to this matter.

One member asked staff to clarify where this issue would be addressed. In addition, in his view there are two aspects of net debt that need to be covered. The first being the definition of net debt and the presentation of it; which staff should address at a later date. The other being the issue of the roll forward of liabilities i.e. there is little understanding of what changes there are in net debt as it does not take into account events such as acquisition and disposals. This issue should be addressed now.

This member also requested the time line of the project.

Staff said the other project would be the Disclosure Framework project which looks at other similar topics such as materiality. The time frame is that staff would start work now and aim to prepare a proposal ED for 2014.

A member asked staff if they are going to look at this from a geographical perspective and staff said through outreach analysis they will be able to ascertain if the issue is widespread.

Staff reiterated the FSP have guidance on net debt reconciliation but only included certain categories. Staff wanted to use this but they may have difficulty in determining which categories to use or add in addition to those given by the FSP.

Another member was concerned about the net debt disclosure because there are other KPIs and she was not sure why the focus should be on net debt specifically. In the Communauté Economique et Monétaire d’Afrique Centrale (CEMAC) meeting the key point was the need for transparency about cash, any restrictions on cash and tax effects on cash. She would support a project around cash and liabilities but was not keen on the idea of focusing on purely net debt.

A member highlighted two issues in relation to net debt, with the first being on solvency and the second being the availability of cash. In practice, the use of net debt is often seen from a leverage perspective and this is what staff’s analysis should focus on i.e. cash to debt leverage and the availability of cash towards eliminating debt.

There was clear consensus amongst the Board that this issue should not be addressed in the short term and therefore they agreed with staff’s proposal to keep it outside the Amendments to IAS 1 project.

Totals and subtotals

The Feedback statement said the following on “totals and subtotals”:

Among the potential issues are whether subtotals of IFRS numbers such as EBIT (earnings before interest and tax) and EBITDA (earnings before interest, tax, depreciation and amortisation) should be acknowledged in IAS 1. Some preparers have told the IASB that they would like to be able to include these subtotals on the face of the income statement, but their auditors discourage them from doing so.

Staff explored in their paper whether amendments to IAS 1 should be made to clarify that additional subtotal/totals can be presented/disclosed in the financial statements. They assessed the reasons for no amendments, where the arguments was that the provisions of IAS 1 are currently sufficient to require an entity to disclose additional subtotal or totals in a way that the entity deems to be a fair presentation or disclosure.

Staff also noted that some auditors are discouraging from presentation of subtotals/totals such as EBIT and EBITDA on the face of the primary statements. Consequently, staff think that it would be helpful to add guidance to the Standard to clarify what factors should be considered to ensure a subtotal is fairly presented and that subtotals/totals of IFRS recognised amounts are eligible to be presented or disclosed in IFRS financial statements.

Staff asked the IASB the following questions:

  • Question 1 - Does the IASB agree that guidance should be added in IAS 1 to clarify what factors an entity should consider when aggregating IFRS recognised amounts into subtotals and totals?
  • Question 2 - Does the IASB agree that IAS 1 should not be amended to include specific examples of commonly reported totals or subtotals such as EBIT or EBITDA, for the reasons described in paragraphs 22-24 of the agenda paper?

The first member to speak had strong reservation in particular with regards to the wording in the staff’s proposal. In her view, fairly presented meant compliance with IFRS and did not understand the concept of “fairly presented” in staff’s paper.

Another member said the board should not encourage such kind of disclosures on the face of the primary statements; instead they should be dealt with in the notes to the financial statements or as supplementary schedules. He gave an example that the use of EBITDA as a proxy for cashflows was widespread in practice but EBITDA ignores the effects of for example working capital. He is not supportive of staff’s proposal to include such disclosures. In addition, by taking staff’s approach, it opens the potential for new types of disclosures. He agreed with other members this should be addressed as a medium term project rather than in the short term.

A member was supportive of staff’s proposal as there is problem already with for example operating profit not being defined but being used widely as a non GAAP disclosure, and therefore he supports the idea that companies should be able to use other non GAAP disclosures. He is also comfortable with the idea of subtotals being used to help users the understanding of the financial statements.

Another member pointed out that paragraphs 55 and 85 if IAS 1 allow the use of subtotals, if it enhances the fair presentation of a company’s financial statements. In agreement, another member suggested that it would be good to have some form of discipline around what should be disclosed. If this is not addressed, companies would continue as they are now and hence the issue will keep recurring. However, this member highlighted that the board should not encourage new subtotals.

Another member strongly agreed with staff’s proposal because auditors were discouraging the use of non GAAP measures even though the Standard permitted its use.

A member disagreed with staff for two reasons. The first reason was IAS 1 and IAS 7 are general standards and not industry specific and therefore disagreed with bringing in specific measures that may not be applicable to certain industries. The second reason was IAS 1 is a principles-based standard and including such measures may lead to conflict with the ideology of the standard. There was discussion on the interaction of Federal Communications Commission (FCC) listing rules and SEC registrants with such disclosures.

There was general agreement that this project should not be addressed in the short term, members also expressed that staff should address as part of their outreach/consultation if the use of subtotals should be in the primary statements or in the notes to the financial statements.

Regarding staff’s first question, the board had mixed views as there was concern about encouraging non GAAP measures. The general agreement was that staff should not encourage such disclosures but instead say that companies providing such disclosures should ensure it is relevant to their industry and disclose how. The board requested staff to amend the draft wording in paragraph 35 of the paper.

The Board agreed with staff on question two.

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