Disclosure initative

Date recorded:

The Technical Principal introduced the agenda papers on 'principles of disclosure' and informed the Board that the cover paper included a summary of the proposed topics in the Discussion Paper. One Board member asked why, for the financial statements as a whole, the Discussion Paper would include a discussion on materiality whilst for the notes it was stated in the summary that materiality would be covered by the materiality project. The Technical Principal replied that at that point there was no intention to address the notes separately. The overall guidance on financial statements also applied to the notes.


Principles of Disclosure: Cohesiveness in financial statements

The Technical Manager informed the Board that the agenda paper addressed the question of whether the Discussion Paper should include a discussion on cohesiveness in financial statements. The paper included views from constituents as to how cohesiveness could improve the usefulness of financial statements. Cohesiveness could be described as grouping, labelling and ordering of information in financial statements. The Technical Manager warned that too strict application of cohesiveness might lead to disclosure of less relevant information in financial statements. Cohesiveness could be introduced to IFRSs by introducing a principle in a disclosure standard that required an entity to structure and organise information in the financial statements in a cohesive manner or by ways of a communication principle in a disclosure standard that explains to preparers the advantage of cohesiveness. Staff recommended the latter option.

One Board member said that he had been one of opponents of the July 2010 Staff Draft of Exposure Draft to Financial Statements Presentation (the ‘FSP staff draft’). He therefore also disagreed with the staff recommendation. He said that the basic structure of the financial statements was functional as it was but agreed that minor improvements could be made.

A Board member struggled with the wording of the communication principle and said that the principle should also extend to the notes. The Technical Principal replied that the notes were included in the term 'financial statements' and that relationships between the primary financial statements and the notes should be highlighted through consistent use of terminology, grouping and ordering in different sections of the financial report.

Another Board member asked whether the 'principles of disclosure' project would also address the minimum line items issue. She agreed with the staff's view that it was difficult to distinguish between disclosure and presentation, i.e. the notes and the primary financial statements. She understood that the project would not go as far as the FSP staff draft but she said that users expressed strong demands for guidance on disclosure issues. She said that the statement of cash flows should be excluded from the cohesiveness principle. The Technical Principal replied that it was not the intention of staff to bring in cohesiveness as proposed in the FSP staff draft. The Board member said that it should be clarified in the Discussion Paper that the principle that was now proposed was different from the principle in the FSP staff draft.

A fellow Board member asked what the 'principles of disclosure' project wanted to achieve. He believed that the paper suggested that cohesiveness was a recommendation. He would therefore not see it as a principle of disclosure. The Technical Principal said that cohesiveness could also be listed as a characteristic, if the Board preferred this term.

One Board member believed that cohesiveness should rather be addressed in the performance reporting research project but agreed that results of that project would interact with the ‘principles of disclosure’ project. He said that to him, cohesiveness was a subset of the qualitative characteristics of financial reporting. In his view, cohesiveness might not work for all statements in a financial report but could work for the income and the cash flow statement. He therefore suggested excluding the balance sheet from the cohesiveness discussion.

Another Board member said that she agreed with reminding preparers to think about linkage and relationship in financial statements and by that increase their understandability. She suggested avoiding the term 'cohesiveness' as past discussions had already defined cohesiveness with different meanings. The Technical Principal agreed but said that staff had been unable to find a different term that described the same meaning.

One Board member commented on the concerns that were raised by constituents about cohesiveness in the FSP staff draft. One concern had been that the planned structuring of profit or loss was too prescriptive. The Board member said that, in his view, preparers still had enough discretion in this point. Another concern had been that cohesiveness would necessitate a direct cash flow statement. He disagreed with that understanding and said that cohesiveness could be achieved with both, direct and indirect cash flow statements. As long as the operating cash flow was consistent with operating profit, the operating cash flow could be derived by adjusting operating profit. The issue was that different numbers could be used as a starting point for operating cash flow. Also, he disagreed with the concern that cohesiveness could lead to a balance sheet that was counterintuitive. To him it improved the clarity of the statement of financial position. A fellow Board member replied that the issue was that the principles of cohesiveness and disaggregation had been combined in this discussion. The former Board member disagreed with that. The Technical Principal replied that most constituents felt that the balance sheet provided most relevant information when reported on a liquidity or current vs. non-current basis. The Research Director added that the proposal in the FSP staff draft suggested five sections in the balance sheet which looked very fragmented.

The Technical Principal said that staff was trying to point out that financial statements could be more understandable if an entity wanted to structure its notes according to the primary financial statements. One Board member asked whether this meant that cohesiveness would not be a requirement. The Technical Principal replied that staff wanted to ensure that the communication principle covered the idea of consistency across the financial statements. Another Board member asked whether this would mean that operating profit should not exclude tax and interest whilst operating cash flow should not include tax and interest? The Technical Principal replied that this decision would be in the entity's discretion but should be applied consistently throughout the entire set of financial statements.

One Board member asked how grouping and ordering would be different from aggregation and disaggregation. The Technical Principal replied that aggregation and disaggregation only related to recognised amounts.

The Chairman asked whether the Board supported the staff recommendation. Eleven Board members voted in favour.


Cash flow statements - 'cash and cash equivalents' and the management of liquid resources

The U.K. Financial Reporting Council’s Director of Research informed the Board that the agenda paper included three issues related to the cash flow statement, i.e. the definition of 'cash and cash equivalents', providing information on liquid resources, and net vs. gross presentation of cash flows. He conceded that the discussion in the agenda paper did not apply to cash flow statements of banks and other financial institutions.

The agenda paper suggested focusing on cash, rather than 'cash and cash equivalents', for the statement of cash flows. IAS 7 intended to reflect the entity's liquidity management but by doing this, the Standard made too many assumptions on the entity's behalf.

One Board member disagreed with changing guidance that worked in practice. He did not see a difference between cash demands with a bank or a money market fund that was managed by the same bank. He conceded that the threshold between cash equivalents and other financial assets was not a bright line. A fellow Board member agreed but favoured the approach in the agenda paper. He referred to the tentative staff view that allowed net presentation on cash flows only for those relating to financial instruments that were of the same class. He asked whether all assets in one class had the same credit risk. He said that money market instruments that had the same credit risk as cash could be presented as cash whilst instruments that had a different credit risk should not be classified as cash. The former Board member agreed with that and said that net presentation was needed for instruments that were used for liquidity management as otherwise vast amounts without relevance would be presented. One Board member asked whether it should be distinguished by liquidity risk rather than credit risk. The former Board member agreed.

One Board member asked whether the amendment of the definition would be required to proceed with the 'principles of disclosure' project. She said that the discussion reminded her of the 'classification of liabilities' project where there was a long discussion about whether or not a roll-over of debt was with the same lender. One Board member shared that concern.

Another Board member referred to the tentative staff view that the statement of cash flows should include a section that included cash flows relating to the management of liquid resources. He supported that view as consolidation in group financial statements eliminated information about liquidity. A fellow Board member agreed and said that in this light she would also support the tentative staff view that entities should be required to disclose their policy for the management of liquid resources.

No further comments were made.

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