Chapter 7: Presentation and disclosure
Financial statements are viewed in the Framework as a communication tool wherein an entity presents and discloses information about its assets, liabilities, equity, income and expenses. Recognised assets, liabilities and equity are depicted in an entity’s statement of financial position and income and expenses are depicted in an entity’s statement(s) of financial performance.
These are structured summaries that are designed to make financial information comparable and understandable. An important feature of the structures of those summaries is that the amounts recognised in a statement are included in the totals and, if applicable, subtotals that link the items recognised in the statement.
Typically, the statement of financial position and the statement(s) of financial performance provide summarised information and more detailed information is provided in the notes. Effective communication of information in financial statements makes that information more relevant and contributes to a faithful representation of an entity’s assets, liabilities, equity, income and expenses. It also enhances the understandability and comparability of information in financial statements. Effective communication of information in financial statements requires:
– focusing on presentation and disclosure objectives and principles rather than focusing on rules;
– classifying information in a manner that groups similar items and separates dissimilar items; and
– aggregating information in such a way that it is not obscured either by unnecessary detail or by excessive aggregation.
Just as cost constrains other financial reporting decisions, it also constrains decisions about presentation and disclosure. Hence, in making decisions about presentation and disclosure, it is important to consider whether the benefits provided to users of financial statements by presenting or disclosing particular information are likely to justify the costs of providing and using that information.
Presentation and disclosure objectives and principles
To facilitate effective communication of information in financial statements, when developing presentation and disclosure requirements in standards a balance is needed between:
– giving entities the flexibility to provide relevant information that faithfully represents the entity’s assets, liabilities, equity, income and expenses; and
– requiring information that is comparable, both from period to period for a reporting entity and in a single reporting period across entities.
Including presentation and disclosure objectives in standards supports effective communication in financial statements because such objectives help entities to identify useful information and to decide how to communicate that information in the most effective manner.
Effective communication in financial statements is also supported by considering the following principles:
– entity-specific information is more useful than standardised descriptions, sometimes referred to as ‘boilerplate’; and
– duplication of information in different parts of the financial statements is usually unnecessary and can make financial statements less understandable.
Classification is the sorting of assets, liabilities, equity, income or expenses on the basis of shared characteristics for presentation and disclosure purposes. Such characteristics include, but are not limited to, the nature of the item, its role (or function) within the business activities conducted by the entity, and how it is measured.
Classifying dissimilar assets, liabilities, equity, income or expenses together can obscure relevant information, reduce understandability and comparability and may not provide a faithful representation of what it purports to represent.
Classification of assets and liabilities
Classification is applied to the unit of account selected for an asset or liability. However, it may sometimes be appropriate to separate an asset or liability into components that have different characteristics and to classify those components separately. That would be appropriate when classifying those components separately would enhance the usefulness of the resulting financial information. For example, it could be appropriate to separate an asset or liability into current and non-current components and to classify those components separately.
Offsetting occurs when an entity recognises and measures both an asset and liability as separate units of account, but groups them into a single net amount in the statement of financial position. Offsetting classifies dissimilar items together and therefore is generally not appropriate.
Offsetting assets and liabilities differs from treating a set of rights and obligations as a single unit of account.
Classification of equity
To provide useful information, it may be necessary to classify equity claims separately if those equity claims have different characteristics.
Similarly, to provide useful information, it may be necessary to classify components of equity separately if some of those components are subject to particular legal, regulatory or other requirements. For example, in some jurisdictions, an entity is permitted to make distributions to holders of equity claims only if the entity has sufficient reserves specified as distributable. Separate presentation or disclosure of those reserves may provide useful information.
Classification of income and expenses
Classification is applied to:
– income and expenses resulting from the unit of account selected for an asset or liability; or
– components of such income and expenses if those components have different characteristics and are identified separately. For example, a change in the current value of an asset can include the effects of value changes and the accrual of interest. It would be appropriate to classify those components separately if doing so would enhance the usefulness of the resulting financial information.
Recognised changes in equity during the reporting period comprise:
– income minus expenses recognised in the statement(s) of financial performance; and
– contributions from, minus distributions to, holders of equity claims.
A particularly important facet of classification is determining whether items of financial performance should be considered part of profit and loss or as other comprehensive income.
Profit or loss and other comprehensive income
Income and expenses are classified and included either:
– in the statement of profit or loss; or
– outside the statement of profit or loss, in other comprehensive income.
The statement of profit or loss is the primary source of information about an entity’s financial performance for the reporting period. That statement contains a total for profit or loss that provides a highly summarised depiction of the entity’s financial performance for the period. Many users of financial statements incorporate that total in their analysis either as a starting point for that analysis or as the main indicator of the entity’s financial performance for the period. Nevertheless, understanding an entity’s financial performance for the period requires an analysis of all recognised income and expenses, including income and expenses included in other comprehensive income, as well as an analysis of other information included in the financial statements.
Because the statement of profit or loss is the primary source of information about an entity’s financial performance for the period, all income and expenses are, in principle, included in that statement. Indeed, the Board observes that its intention in establishing this principle was to emphasise that the statement of profit or loss is the default location for income and expenses.
However, in developing standards, the Board may decide in exceptional circumstances that income or expenses arising from a change in the current value of an asset or liability are to be included in other comprehensive income when doing so would result in the statement of profit or loss providing more relevant information, or providing a more faithful representation of the entity’s financial performance for that period.
Income and expenses that arise on a historical cost measurement basis are included in the statement of profit or loss. That is also the case when income and expenses of that type are separately identified as a component of a change in the current value of an asset or liability. For example, if a financial asset is measured at current value and if interest income is identified separately from other changes in value, that interest income is included in the statement of profit or loss.
In the view of the Board, if the statement of profit or loss is the primary source of information about financial performance for a period, the cumulative amounts included in that statement over time need to be as complete as possible. As a consequence, income and expenses can only be excluded permanently from the statement of profit or loss if there is a compelling reason in to do so in any particular case. In principle, therefore, income and expenses included in other comprehensive income in one period are reclassified from other comprehensive income into the statement of profit or loss in a future period when doing so results in the statement of profit or loss providing more relevant information, or providing a more faithful representation of the entity’s financial performance for that future period.
However, if, for example, there is no clear basis for identifying the period in which reclassification would have that result, or the amount that should be reclassified, the Board may, in developing standards, decide that income and expenses included in other comprehensive income are not to be subsequently reclassified.
Aggregation is the adding together of assets, liabilities, equity, income or expenses that have shared characteristics and are included in the same classification. Aggregation makes information more useful by summarising a large volume of detail. However, aggregation conceals some of that detail. Hence, a balance needs to be found so that relevant information is not obscured either by a large amount of insignificant detail or by excessive aggregation.
Different levels of aggregation may be needed in different parts of the financial statements. For example, typically, the statement of financial position and the statement(s) of financial performance provide summarised information and more detailed information is provided in the notes.