The Interpretations Committee received a request to clarify the application of some of the presentation requirements in IAS 1 Presentation of Financial Statements. The submitter expressed a concern that the absence of definitions in IAS 1 and the lack of implementation guidance give significant flexibility that may impair the comparability and understandability of financial statements. The submitter provided examples in the following areas:
- presentation of expenses by function;
- presentation of additional lines, headings and subtotals;
- presentation of additional statements or columns in the primary statements; and
- application of the materiality and aggregation requirements.
The Interpretations Committee noted that IAS 1 addresses the overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. The Interpretations Committee also noted that while IAS 1 does permit flexibility in presentation, it also includes various principles for the presentation and content of financial statements as well as more detailed requirements. These principles and more detailed requirements are intended to limit the flexibility such that these principles and requirements provide transparency in the financial statements. The Interpretations Committee identified some of the principles and guidance in IAS 1 that are relevant to the submitter's concerns. In particular paragraph 15 of IAS 1 sets out the overall requirement for a fair presentation. Among other things, this requires an entity to comply with applicable IFRSs and, in accordance with paragraph 17 of IAS 1:
- to select and apply accounting policies in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors;
- to present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and
- to provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.
Regarding the more specific issues raised:
- presentation of expenses by function: the Interpretations Committee noted that paragraph 99 of IAS 1 requires an entity to choose between presenting an analysis of expenses, by a classification based on either their nature or their function, on the basis of whichever provides information that is reliable and more relevant. The Interpretations Committee further noted the requirements of paragraph 104 of IAS 1 for entities classifying expenses by function to disclose additional information on the nature of the expense and observed that, when items of income and expense are material, an entity shall disclose their nature and amount separately in accordance with paragraph 97 of IAS 1.
- presentation of additional lines, headings and subtotals: the Interpretations Committee noted that paragraphs 85 and 86 of IAS 1 require an entity to present additional line items, headings and subtotals in the statement(s) presenting profit or loss and other comprehensive income when such presentation is relevant to an understanding of the entity’s financial performance and assists users in understanding the financial performance achieved and in making projections of future financial performance. An entity also considers factors including materiality and the nature and function of the items of income and expense.
- presentation of additional statements or columns in the primary statements: the Interpretations Committee noted that IAS 1 requires the presentation of additional information in the notes when this information is not presented elsewhere in the financial statements and it is relevant to an understanding of any of the financial statements (as set out in paragraph 112(c) of IAS 1). The Interpretations Committee noted that the addition of pro forma columns to the primary statements would be unlikely to meet this requirement.
- materiality and aggregation: the Interpretations Committee noted in accordance with paragraph 29 of IAS 1, “An entity shall present separately each material class of similar items. An entity shall present separately items of a dissimilar nature or function unless they are immaterial”. It also observed that in accordance with paragraph 31 of IAS 1, “an entity need not provide a specific disclosure required by an IFRS if the information is not material”.
The Interpretations Committee further noted that the IASB’s Disclosure Initiative project is currently discussing some proposed amendments to IAS 1 that would clarify the presentation of totals and subtotals and the concept of materiality in the context of specific disclosure requirements.
On the basis of the existing principles in IAS 1 and the fact that some of the issues raised have been brought to the attention of the IASB during the agenda consultation and have been discussed as part of the IASB’s Disclosure Initiative project, the Interpretations Committee determined that neither an Interpretation nor an amendment to a Standard should be made and consequently [decided] not to add this issue to its agenda.