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IAS 34 – Condensed statement of cash flows

Date recorded:

Agenda Paper 4 provides the Committee with a draft of a tentative agenda decision that reflects the conclusions reached at the January 2014 meeting.

The Chairman pointed out that the issue at hand was about how far one can condense information.

A Committee member pointed out that IAS 1 Presentation of Financial Statements made reference to headings, line items and sub totals, whereas IAS 34 Interim Financial Reporting only mentioned headings and subtotals. He noted that there were two views on IAS 34, with some people reading paragraph 10 of IAS 34 to say that it deliberately excluded line items, and making similar conclusions with respect to the balance sheet and income statement, and condensing on the face as well as in the notes; with others taking the view that it was implicit that the interim financial statements should include the same line items as annual financial statements, and the only condensing should be in the notes. He pointed out that the agenda decision did not say which view was better, and whether the conclusions one reached for the condensed statement of cash flows should be consistently applied to the other primary financial statements. He further noted that this issue highlighted the disconnect between IAS 1 and IAS 34.

Another Committee member noted that the agenda decision should refer to what IAS 34 stated about minimum content before going on to remind people that the minimum content was likely not to be enough in most situations, and it should also remind them of the principles in the standard to include more detail. But he cautioned that the Committee should not blindly ignore what the standard said about minimum content because there would be situations where that minimum content would be enough. He noted that outreach indicated that there was not a lot of diversity in practice and that most entities were including additional line items, and he suggested adding this point to the agenda decision.

Another Committee member noted that she did not believe the proposed agenda decision to be useful as it was not responding to the question asked, which was ‘how far can one condense’. She cautioned that the agenda decision could not say ‘do not only present three line items’ because that was not in line with the standard. She referred to the comment made by the previous Committee member, noting that the agenda decision could refer to the fact that outreach performed found that there was no lack of diversity in practice, and that generally, companies presented more than three line items.

Another Committee member noted that he shared the concerns expressed by the first Committee member that the wording in the standard said what it said and that it was beyond the scope of the Committee’s activities to address the fact that the standard appeared to permit three line items. He suggested that, in the agenda decision, instead of basing the decision on the financial statements not being misleading, the decision should state that the principle of IAS 34 was to provide an update from the previous year end (reference to paragraph 15) and use that to say that an entity needed to provide all the information necessary to enable people to understand the changes in financial position and performance of the entity since the end of the last annual reporting period, and that maybe it was unlikely that this objective could be achieved by only presenting three line items. He noted that this way the Committee would address what was asked, but without the extra step of fixing the tension between IAS 1 and IAS 34.

The Senior Director, Technical Activities commented that interim financial statements would be addressed as part of the Disclosure Initiative. He noted that the staff had a scope paper that would be going to the Board next month regarding presentation and disclosure generally, and that they were going to ask the question regarding interim financial statements. He noted that there was tension between the IASB and the FASB because the FASB tended to put everything that was in the annual financial statements into interim financial statements and that had not been the IASB approach because of the general concept in IAS 34 that interim financial statements provided an update. He noted that it was a fundamental issue whether the interim financial statements should be providing more information or just serving as an update, and further cautioned that not all issues would necessarily be solved in the Disclosure Initiative.

The representative from ESMA (the organisation that had originally brought this issue to the Committee) noted that it would be appreciated if there was something added to the agenda decision that it was unlikely that three line items would result in sufficient information. He noted that there was a disconnect between IAS 1 and IAS 34 in relation to cash flows, noting that cash flows are not mentioned in paragraph 15 of IAS 34 (which only referred to changes in financial position and performance), whereas cash flows were mentioned in IAS 1.

A Committee member noted that she was concerned with the proposal to include wording in the agenda decision that it would be ‘highly unlikely’ one could meet the principle in the standard without adding more line items as this would risk creating a presumption, and presumptions should not be created for the cash flow statement when they did not exist for the other primary statements.

Another Committee member noted that the proposed agenda decision did not add much, but it served as a reminder to look at the entire standard and not just the sentence in paragraph 10 and of the broader principles in IAS 34. He added that he was not in favour of including the presumption that including only three lines would not be adequate.

Another Committee member commented that she did not believe it would be a stretch to say that, if one made the assumption that additional line items were required in the income statement and balance sheet to meet the requirements of paragraph 25 of IAS 34, this assumption should also be extended to the cash flow statement.

Another Committee member noted that interim financial reporting has become more and more important to the financial markets, and that IAS 34 was flawed in this area and needed fixing. Referring to the comment made by the previous Committee member, he noted that he did not think anyone would conclude that three or four line items on a balance sheet would be sufficient for the reader of interim financial statements, and questioned why one would think this would suffice for the cash flow statement.

The Chairman summarised the discussion, and proposed a plan for moving forward. He noted that:

  • This was a live issue that was brought to the Committee from ESMA; and therefore, it was not uncommon in practice
  • The statement of cash flows was a primary financial statement that was not less important than the balance sheet and income statement
  • Therefore, it would seem that in preparing interim financial statements, one should think about all of the statements in the same way
  • Accordingly, unless one believed that presenting a condensed balance sheet that only included assets, liabilities and equity would be sufficient, it would be inappropriate to include a cash flow statement with three lines only
  • The Committee should incorporate into the agenda decision the idea that one needed to think consistently across the entire interim financial statements, and across the entirety of the standard, because the only way to get to the three line item idea is through a very selective reading of the standard.
  • The agenda decision should be redrafted to take the above comments into account

In response to the comment made by the ESMA representative that paragraph 15 of IAS 34 does not apply to the statement of cash flows, a Committee member made the comment that the paragraph talked about changes in financial position and performance and that performance and position were assessed not just through the balance sheet and income statement, but through all primary financial statements including the statement of cash flows.

The Chairman noted that this issue did not need to come back to a further meeting and that the revised tentative agenda decision will be circulated for fatal flaw review.

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