General presentation and disclosures – aggregate his, disaggregate hers

As we’ve discussed a few times previously, the IASB has issued for comment its long-awaited exposure draft General Presentation and Disclosures, with comments to be received by June 30, 2020.

Here’s one of the new sections:

  • An entity shall present in the primary financial statements or disclose in the notes the nature and amount of each material class of assets, liabilities, income or expense, equity or cash flow. To provide this information an entity shall aggregate transactions and other events into the information it discloses in the notes and the line items it presents in the primary financial statements. Unless doing so would override specific aggregation or disaggregation requirements in IFRS Standards, an entity shall apply the principles that:
  • (a) items shall be classified and aggregated on the basis of shared characteristics;
  • (b) items that do not share characteristics shall not be aggregated; and
  • (c) aggregation and disaggregation in the financial statements shall not obscure relevant information or reduce the understandability of the information presented or disclosed.
  • When presenting information in the primary financial statements or disclosing information in the notes, the description of the items shall faithfully represent the characteristics of those items.
  • An entity may aggregate immaterial items that do not share characteristics. However, using a non-descriptive label such as ‘other’ to describe a group of such items would not faithfully represent those items without additional information. Except as described (below), to faithfully represent aggregated items, an entity shall either:
  • (a) aggregate immaterial items with other items that share similar characteristics and can be described in a manner that faithfully represents the characteristics of the aggregated items; or
  • (b) aggregate immaterial items with other items that do not share similar characteristics but which may be described in a way that faithfully represents the dissimilar items.
  • If the steps set out (above) do not lead to descriptions that result in a faithful representation, an entity shall disclose in the notes information about the composition of the aggregated items, for example, by indicating that an aggregated item consists of several unrelated immaterial amounts and by indicating the nature and amount of the largest item in the aggregation.

This is more detailed than the current content of IAS 1, which says more broadly that “an entity shall decide, taking into consideration all relevant facts and circumstances, how it aggregates information in the financial statements, which include the notes,” and overall is driven more by concerns about disclosure overload and clutter – in particular by obscuring material information with immaterial information – than by establishing objective principles for aggregation. Of course, we’re all familiar with the general issue, as explained here:

  • The proposals respond to feedback from users of financial statements in the 2015 Agenda Consultation that financial statements do not always include information that is appropriately aggregated or disaggregated. For example, an entity might present in the statement of profit or loss all its operating expenses as a single line item, or an entity might disclose in the notes large ‘other’ expenses with no information provided to help users understand what these items comprise. In contrast, some users were concerned that some entities disclose too much detail, thereby obscuring material information. Providing the appropriate amount of detail will better enable users to compare information for the same entity between reporting periods and across different entities.

The IASB considered but rejected the idea of “providing quantitative thresholds for disaggregation, for example, requiring separate disclosure of any balances over 10% of an entity’s revenue or requiring entities to review whether balances exceeding such threshold should be disaggregated” and that of “introducing mandatory templates that would require specified line items,” noting in both cases that it would be impossible to develop templates or thresholds to apply in all cases. The illustrative examples accompanying the exposure draft aren’t primarily focused on this aspect of the proposals – for example, the illustrative statement of financial position includes a caption called “other current assets,” constituting some 6% of the total current assets, but doesn’t get into what the optimum level of accompanying note disclosure might be. So it wouldn’t be too surprising if the “appropriate amount of detail” sometimes remains elusive.

I’ll again refer us back, as I have several times before, to a one-time FASB and IASB “preliminary views” exposure draft on a joint financial statement presentation project they were conducting at the time, and in particular on the FASB staff’s ten-page tabular summary of their “tentative decisions” as of December 2009. This mused on requiring an analysis of the changes in balances of all significant asset and liability line items, with each line item analysis distinguishing between changes from cash inflows and outflows; from noncash transactions that are that are repetitive and routine in nature (for example, credit sales, wages, material purchases); from noncash transactions or events that are non-routine or non-repetitive in nature (for example, acquiring or disposing of a business); from accounting allocations (for example, depreciation); and so forth. That project died, and the current proposals don’t go in that direction. And yet, I would find it rather appealing if they’d moved at once on two fronts: polishing the quality and comparability of the summarized presentation provided by the primary financial statements, while also acknowledging that there’s increasingly less reason for anyone’s analysis to be constrained by the limits of such a summary…

Stay safe everyone…

The opinions expressed are solely those of the author

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