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Making financial statements more relevant

Making financial statements more relevant

Seeing the bigger picture.


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Financial statement

For some time, preparers have been asking for ways to de-clutter financial
statement disclosures. Meanwhile, users want preparers to provide more
company-specific information, making the financial statements more relevant to their business and telling a coherent story.
The International Accounting Standards Board (IASB) has factored these
concerns into its ‘disclosure initiative’, which aims to improve presentation
and disclosures in financial reporting.
To address some of the perceived problems with current disclosure
requirements, on 18 December 2014 the IASB published clarifications to IAS 1 Presentation of Financial Statements.
These narrow-scope amendments are effective for periods beginning on or after 1 January 2016. However, early adoption is allowed. Тhe amendments have not yet been endorsed by the European Union.

But the amendments do not require any significant change to current practice. Only by keeping the bigger picture in mind, and avoiding a boilerplate, checklist approach to financial statement disclosures, can preparers achieve the improved reporting sought by these clarifications.

Key clarifications to IAS 1

  • There is an emphasis on materiality. Specific single disclosures that are not material do not have to be presented – even if they are a minimum requirement of a standard.
  • The order of notes to the financial statements is not prescribed. Instead, companies can choose their own order, and can also combine, for example, accounting policies with notes on related subjects.
  • It has been made explicit that companies:
  1. should disaggregate line items on the balance sheet and in the statement of profit or loss and other comprehensive income (OCI) if this provides helpful information to users; and
  2. can aggregate line items on the balance sheet if the line items specified by IAS 1 are immaterial.
  • Specific criteria are provided for presenting subtotals on the balance sheet and in the statement of profit or loss and OCI, with additional reconciliation requirements for the statement of profit or loss and OCI
  • The presentation in the statement of OCI of items of OCI arising from joint ventures and associates accounted for using the equity method follows IAS 1’s approach of splitting items that may, or that will never, be reclassified to profit or loss.

The road ahead

As part of the disclosure initiative’s short-term projects to improve disclosures, the final amendments to IAS 1 are joined by proposed amendments to IAS 7 Statement of Cash Flows, which propose:

  • a reconciliation of liabilities from financing activities; and
  • additional disclosures of information that may be relevant to the understanding of the liquidity of a company.

In addition, the IASB has planned medium-term research projects:

  • to explore the possibility of a single ‘disclosure framework’ for ‘presentation’ standards such as IAS 1, IAS 7 and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors;
  • to consider whether further guidance is needed on materiality; and
  • to examine disclosure requirements in IFRS to identify conflicts, duplication or overlaps.

More broadly, the IASB is considering presentation and disclosure as part of its revisions to its Conceptual Framework for Financial Reporting. The disclosure initiative complements the Board’s efforts in this respect.

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