In December 2014, the International Accounting Standards Board (IASB) issued amendments to IAS 1, ‘Presentation of Financial Statements’. These amendments clarify guidance in IAS 1 on materiality and aggregation, the presentation of subtotals, the structure of financial statements and the disclosure of accounting policies. The amendments form a part of the IASB’s Disclosure Initiative, which explores how disclosures in International Financial Reporting Standards (IFRS) financial reporting can be improved.
Responding to the challenge of improving the effectiveness of disclosures in financial reports, the IASB completed the first step in its Disclosure Initiative with the publication of Disclosure Initiative (Amendments to IAS 1). The Disclosure Initiative, which started in 2013, is made up of a number of implementation and research projects that includes targeted actions as well as a broad and ambitious review of disclosure requirements.
The narrow-focus amendments to IAS 1 are designed to further encourage companies to apply professional judgement in determining what information to disclose in their financial statements. Moreover, these are intended to clarify, rather than significantly change, existing IAS 1 requirements. In most cases the amendments respond to excessively rigid interpretations of the wording in IAS 1.
The following is a summary of the key changes.
An entity should not aggregate or disaggregate information in a manner that obscures useful information, for example, by aggregating items that have different characteristics or disclosing a large amount of immaterial detail.
When management determines an item is material, the amendments require assessment of which specific disclosures set out in the relevant standard should be presented, and whether additional information is necessary to understand the impact on the financial position or performance.
2. Disaggregation and subtotals
The amendments clarify that it may be necessary to disaggregate some of the line items specified in IAS 1 paragraphs 54 (statement of financial position) and 82 (profit or loss). That disaggregation is required where it is relevant to an understanding of the entity’s financial position or performance.
The amendments address additional subtotals in the statement of financial position or the statement of profit or loss and other comprehensive income. The amendments give guidance on what additional subtotals are acceptable and how they are presented. The revised guidance captures common subtotals that are not specifically required by IFRS, such as operating profit or profit before interest and tax. Additional subtotals should:
The amendments require that additional subtotals in the statement of profit or loss and other comprehensive income should be reconciled to the subtotals and totals required by IAS 1.
Management should consider the understandability and comparability of the financial statements when it determines the order of the notes. An entity is not required to present the notes to the financial statements in a particular order. An entity might, for example, present more significant notes first, or present linked areas sequentially. Such flexibility, which is already permitted by IAS 1, allows management to tailor their presentation to their circumstances.
4. Disclosure of accounting policies
The amendments clarify how to identify a significant accounting policy by removing unhelpful examples from IAS 1.
5. OCI arising from investments accounted for under the equity method
The amendments require that the share of other comprehensive income arising from investments accounted for under the equity method is grouped based on whether the items will or will not subsequently be reclassified to profit or loss. Each group should then be presented as a single line item in the statement of other comprehensive income.
The amendments are effective for annual periods beginning on or after 1 January 2016. The transition provisions state that the disclosures in paragraphs 28-30 of IAS 8, that is, those regarding adoption of a new standard/policy are not required. Early application is permitted. The amendments have been adopted in the Philippines and shall also be effective for annual periods beginning on or after 1 January 2016.
The amendments will affect every entity preparing IFRS financial statements. The amendments do not require specific changes. However, they clarify a number of presentation issues and highlight that preparers are permitted to tailor the format and presentation of the financial statements to their circumstances and the needs of users.
The order of the notes needs to balance understandability and comparability and changes should generally result from a specific change in facts and circumstances.
Together with the amendments to IAS 1, preparers should also carefully consider recent Philippine Securities and Exchange Commission (SEC) guidelines on financial statement disclosures. These includes test of materiality (SEC Memorandum Circular No. 8 series of 2009), certain presentation format of related party disclosures (SEC Financial Reporting Bulletin No. 013), and recent compilation of material findings on audited financial statements as reviewed by the SEC (http://www.sec.gov.ph/accountants-information/findings-on-financial-statement).
In conclusion, preparers should review compliance of their financial statements in light of these amendments to and the SEC guidelines on financial statement disclosures.
Assurance Partner, Ethics and Business Conduct Leader, PwC Philippines
Tel: +63 (2) 8459 3063
Carlos Federico C. de Guzman
Assurance Partner, PwC Philippines
Tel: +63 (2) 8845 2728