A European example of issues arising in disaggregating revenue for disclosure purposes
Here’s another of the issues arising from extracts of enforcement decisions issued in the past by the European Securities and Markets Authority (ESMA); this is from their 24th edition:
- The issuer is a producer of primary minerals and secondary mineral sand products (‘secondary mineral products’). The issuer completed two major projects over the last few years in an effort to enhance its revenue. These projects led to recovery of secondary mineral products from waste streams and from mineral sands concentrate products. The issuer disclosed in the segment reporting note in its financial statements that it disaggregated revenue by its three major product lines (Product line A, Product line B and Product line C). Product lines A and C relate to primary mineral products.
- In a presentation on its website coinciding with the publication of its 2018 earnings announcement, the revenue of one of its three product lines (Product line B) was disaggregated into a primary mineral line (product line B1) and a secondary mineral products line (product line B2) , resulting in the presentation of four product lines.
- In determining the disaggregation of revenue, the issuer determined that the split into the three major product categories was appropriate, despite differences in the underlying economic characteristics. Consequently, the revenue for both the primary and secondary products of one major product line was aggregated for disclosure purposes in the segment reporting note.
The enforcer (as ESMA likes to term it) disagreed with this, taking the view that the issuer should have provided more disaggregation of revenue in accordance with IFRS 15.114. Here’s what it had to say on that:
- The enforcer noted that although revenue information for one product line (Product line B) disclosed in the notes to the financial statements was aggregated for primary and secondary minerals, disaggregated information was provided in the issuer’s earnings presentation and in narrative disclosures within the other sections of the annual report. Furthermore, the issuer had disclosed that it had a defined strategy to increase recoveries of minerals with the aim to increase the ratio of the higher-grade primary minerals to the lower grade secondary mineral products. The enforcer noted that primary and secondary mineral products are subject to different price volatility.
- The enforcer recalled that paragraph 114 of IFRS 15 requires issuers to disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
- The enforcer considered that external economic factors have a different impact on the price per tonne for both primary and secondary mineral products, as primary minerals are of a higher quality grade compared to the secondary mineral products. Moreover, the enforcer established that the issuer used other information (beyond the segment disclosures in the financial statements) to evaluate its financial performance. Given that the secondary mineral products have a different customer base and that their price is more volatile compared to that of primary minerals, further disaggregation of revenue for Product line B should have been provided in accordance with IFRS 15.
The broad point is clear: if an entity has shown by its own internal and external reporting decisions and practices elsewhere that it considers a certain level of disaggregation of revenue to be useful and meaningful for users, it’s not likely to fly if it then asserts that something less than that is sufficient for the financial statements. It would certainly be interesting to know more about the basis on which “the issuer determined that the split into the three major product categories was appropriate, despite differences in the underlying economic characteristics,” and more about the issuer’s underlying motive. After all, the application guidance to IFRS 15 goes out of its way to emphasize that this should be a wide-angle assessment, with the determination of categories to be disclosed going beyond major distinctions by market and product line to potentially include, among other things, the market or type of customer (for example, government and non-government customers), contract duration (for example, short-term and long-term contracts) and sales channels (for example, goods sold directly to consumers and goods sold through intermediaries): further, it’s emphasized that an entity may need to disaggregate by more than one category to meet the objective.
It’s a bit disheartening, after all this time, that there are still issuers who apparently view their “real” financial communications as being their investor presentations and other less formalized materials, while regarding the financial statements as a compliance exercise – presumably of interest only to regulators and enforcers (who in turn are assumed not to look at those other materials) – in which the goal is to give away as little as possible. Disheartening, but not of course surprising…
The opinions expressed are solely those of the author