We’ve already considered the IASB’s amendments to IAS 1 resulting from its Disclosure Initiative, effective for annual periods beginning on or after January 1, 2016, with earlier application permitted….
In recent weeks, the IFRS Foundation has issued its own audited financial statements for the year ended December 31, 2014, and although (and in part because) they’re not the most complex statements you’ll ever come across, they provide a nicely accessible example of putting some of these ideas into practice.
This wording comes near the very start of the notes to the statements:
- “The Foundation’s most important intangible asset is the intellectual property embodied in IFRS. The Foundation does not recognize this asset because the value and future economic benefits cannot be reliably measured. Accordingly, costs related to the development of IFRS are recognized as an expense when they are incurred. All other accounting policies that are relevant to an understanding of the financial statements are provided throughout the notes to the financial statements.”
This reflects how, following the amendments, IAS 1 no longer refers to “the summary of significant accounting policies,” opening the door to presenting each significant accounting policy in conjunction with other disclosures about that item, or in some other way, rather than as a single list. The Foundation takes the view that a user’s first question might be about the accumulated value of its investment in IFRS, and addresses that issue head-on. Since no other policies are of equal significance, or in any way out of the ordinary, they’re placed in the statements in proximity with the items they relate to, eliminating one reason to jump back and forth between different pages. Also, the Foundation expresses these other policies extremely concisely, seldom taking more than a sentence or two (e.g. “Inventories comprise IFRS publications, which are carried at the lower of the cost of printing, on a first-in-first-out basis, or their net realizable value.”)
As part of the amendments, the IASB deleted the IAS 1 statement that “users would expect an entity subject to income taxes to disclose its accounting policies for income taxes, including those applicable to deferred tax liabilities and assets,” potentially allowing preparers not to disclose an accounting policy for (among other things) income taxes if the amounts are currently immaterial or, perhaps if the policy would merely repeat the same standard wording that’s available in a thousand places. Accordingly, the Foundation’s statements are refreshingly short of technical padding. Tax isn’t significant in this instance because it’s a tax-exempt organization, but to take a different example, here’s the wording on investments:
- “Bonds are recognized at fair value and subsequently measured at fair value through profit or loss. The values of these Bonds are quoted on active markets, described as Level 1 in IFRS 13. The Foundation measures all other financial instruments at amortized cost. The carrying amount of these instruments is a reasonable approximation of their fair value. These financial instruments include cash and cash equivalents, contributions receivable, publication related receivables, and trade and other payables.”
And that’s it! This eliminates pointless descriptions of categories that don’t apply, as well as cumbersome wording about recognition, derecognition, impairment, the other levels in the fair value hierarchy, and the other eye-glazing material that typically causes an entity’s financial instruments accounting policy to extend well over a page.
Indeed, the entire notes to the IFRS Foundation’s statements fill just eight pages, albeit in fairly small type – an implicit rebuke to the many even smaller and simpler entities that seem to require at least twice as much (unfortunately, the 2013 statements don’t appear to be accessible on the website anymore, so I’m not sure how much progress that represents). Throughout, they seem to demonstrate a rigorous approach to materiality, reflecting the new wording in the standard that “an entity need not provide a specific disclosure required by an IFRS if the information resulting from that disclosure is not material. This is the case even if the IFRS contains a list of specific requirements or describes them as minimum requirements.” So, for example, the statements don’t provide a full reconciliation for leasehold improvements, furniture and equipment, simply stating: “There have been no significant movements in 2014 other than depreciation.”
They also take on one of my personal irritants: pointless descriptions of future amendments to standards that can’t possibly be material to the reporting entity. The IFRS Foundation confines itself to highlighting (again, extremely concisely) the big two pending changes, IFRS 9 and IFRS 15, stating in each case that it’s “not likely to have a material effect on the financial statements of the Foundation.” Who would ever need more than that?
The statements also help illustrate how the amendments counter any notion that the notes have to be presented in a certain order, introducing the layout as follows: “The explanatory notes have been organized into sections that provide a more cohesive story of the financial reporting implications of the Foundation’s core activity—the development of International Financial Reporting Standards—how it funds that activity and how it manages the contributions from the several currencies of its funding providers.” This reflects the new language in IAS 1 that the notes might be ordered to (give) prominence to the areas of its activities that the entity considers to be most relevant to an understanding of its financial performance and financial position, such as grouping together information about particular operating activities. Other possible approaches in the standard include grouping together information about items measured similarly such as assets measured at fair value; or following the order of the line items in the statements of profit or loss and other comprehensive income and the statement of financial position.
All in all, it’s about the last thing one might have expected from the IFRS Foundation’s financial statements – they’re actually a useful reference point for preparers and auditors, not just for IFRS oversight junkies. Readership should sky-rocket!
The opinions expressed are solely those of the author