The IASB’s joint work on financial statement presentation alongside its US counterpart the FASB, has largely been the stalking horse of the IASB’s efforts to revise IAS19. The FSP project has as its objective the development of an accounting standard that will mandate how entities organise the financial information in their financial statements.
As a first step towards that objective, the two boards in October issued a joint due process discussion paper setting out their preliminary views. Interested parties had until April 2009 to comment. The two boards are now working towards issuing an exposure draft of a proposed accounting standard later this year.
Critics of the current approach to financial statement presentation under both IFRS and US GAAP argue that:
It lacks a common approach; There is little linkage across the various financial statements; Dissimilar items are often aggregated together despite being subject to different economic mechanisms.
The boards have concluded that entities should classify information across a range of prescribed categories within each of a statement of financial position (balance sheet), a statement of comprehensive income (profit or loss account/SOCI), and a statement of cashflows.
Each financial statement would feature business, financing, income taxes, and discontinued operations categories. The statement of income would have a separate section devoted to other comprehensive income, while the others would have an equity section.
How an entity would classify items across each category is largely a matter of choice, albeit subject to the cohesiveness principle. Applying cohesiveness, a financing item on the balance sheet would appear in the financing category of the other statements. The new model also requires a greater degree of disaggregation.
How the IASB plans to achieve its single statement format for comprehensive income warrants further consideration. During the October 2009 board meeting, staff recommended that the IASB should eliminate the option currently set out in paragraph 81 of IAS1 that permits an entity to present all items of income and expense recognised in a period in two statements. The board agreed.
Of necessity, the recommendation had a convoluted logic, forcing staff to propose the removal of an option in IAS1 in order to mandate a particular outcome. This single-statement format is structured around two sections: profit or loss and other comprehensive income (OCI). Significantly, the decision does not affect which items can or cannot be presented as items of OCI, or whether an item must be reclassified on derecognition.
Pensions accounting has thus far run largely on a parallel track. The board has tentatively decided to recognise all pensions gains and losses immediately in profit or loss by eliminating the IAS19 corridor. The board has also tentatively decided to scrap the OCI or SORIE method of presentation.
Flowing from those decisions, the board has decided to disaggregate changes in the net pension asset or liability into an employment cost, a financing cost, and a financing component. All of these would be presented in the statement of comprehensive income. Further complicating matters is the treatment of remeasurements, which would be shown separately in the SOCI.
At this point it is worth looking ahead to what the board has referred to as “information about remeasurements”. It is an issue where both boards are currently divergent. At their joint October 2009 meeting, the FASB decided that entities must present information about remeasurements in a two-column format on the face of the financial statements. The IASB opted to put this information in the notes.
At the 2009 joint meeting, it was defined as: “An amount recognised in comprehensive income that reflects the effects of a change in the carrying amount of an asset or liability to a current price or value (or to an estimate of a current price or value).”
In their October 2008 due process discussion paper, the definition was amplified.
Since making this decision, the board has reached decisions about presentation in other projects. Of interest to pensions accountants is the IASB’s new financial instruments classification and measurement standard, IFRS9, Financial Instruments. After Japanese lobbying, the IASB agreed to permit entities to hold certain ‘strategic’ long-term equity investments at fair value through OCI with no recycling.