As an academic, I have the unique opportunity to survey and interview expert practitioners from different roles, contexts, and levels of experience. Recently, I interviewed preparers and users of small and medium-sized JSE-listed entities.
There was an overwhelming feeling that IFRS financial statements were unnecessarily complex, overly lengthy and of limited use, with users placing more reliance on analyst reports generated using information not specifically disclosed in financial statements. This finding is not unique to the small and medium-sized listed space. Websites with insights on investing identify that important decision-useful information can be found on company websites, in broker reports, and in news articles. These websites emphasise the use of price-earnings ratios and analysis charts. Discussion related to the use of financial statements is limited. Bearing this in mind, users may be breathing a sigh of relief at the prospect of the release of the International Accounting Standards Board’s proposed General Presentations and Disclosures Standard.
The General Presentation and Disclosure Standard is set to be published in 2024 and forms part of the IASB’s larger project of improving the communication of information in financial statements. At its core, the new standard focuses on increased transparency and comparability in a bid to improve investors’ access to information in order to allow analysis to promote efficient investing decisions. With the focus on increased disclosure, we need to consider whether the inclusion of additional relevant information compensates for the loss of attention that may result from the inevitable increase in the length of financial statements.
CHANGES IN THE STANDARD
Several changes to IAS 1 are proposed in the new General Presentation and Disclosure Standard. This article highlights some notable changes.
The first change aims to increase the comparability of information included in the statement of profit or loss. To achieve this stated objective, the standard introduces three subtotals. These subtotals require the disclosure of operating profit or loss, operating profit or loss and income and expenses from integral associates and joint ventures, and profit or loss before financing and income tax. The disclosure of items related to other comprehensive income remains unchanged. The subtotals essentially divide the income statement into income and expenses from operating, investing, and financing activities respectively.
These income statement classifications now mirror the classifications of cashflows under IAS 7. In line with these amendments, it is proposed that the indirect method per IAS 7 now start with operating profit as opposed to profit before tax. The strive for increased comparability doesn’t stop there, with the IASB proposing that the choice of disclosure of interest and dividends as operating cashflows be removed. After all, choice is the enemy of comparability, is it not?
At this point, it is useful to discuss consistency and comparability, which are two terms that are often confused. Although they bear many similarities, it would be flippant to assume that consistency always results in increased comparability. Consider for example, if all property had to be measured on the cost model, regardless of how the property was used. Although consistent, this treatment would likely not improve comparability amongst entities that use property differently from one another. Users and preparers should be cognisant of this concept when interacting with financial statements.
Another key proposal relates, again, to the statement of profit and loss. Entities will be required to disclose a separate note detailing any unusual income and expenses. These are incomes and expenses with limited predictive value and are not expected to occur again in the next several years. The objective of the IASB is clear with this proposed amendment, aligning the information provided in the financial statements with the information required by analysts and valuers when performing valuations and other calculations. The inclusion of this note may result in investors finding financial statements more useful as a basis for decision-making, where once-off items are considered largely irrelevant in valuation models.
The last significant change discussed in this article is the introduction of management performance measures. The proposed standard requires that management performance measures be separately disclosed in the financial statements. So, what are management performance measures? Basically, any profit-related totals that are used to communicate management’s view of the entity’s performance − EBITDA springs to mind. The disclosure for these measures is substantial, with disclosures including the following:
- The fact that the measure shows management’s view of the performance of the entity
- Why the measure communicates management’s view of the performance of the entity
- The fact that the measure may not be comparable amongst entities
- A reconciliation of the measure to a subtotal required to be disclosed per IFRS, such as gross profit or operating profit
Although on the surface this disclosure may seem onerous, it is in pursuit of the IASB’s objective of increased transparency and comparability and if the user’s attention is retained up until this point in the financial statements, may influence the investing or financing decisions made.
By incorporating these amendments, the IASB may be aligning the financial statements to the often-used investor and analyst reports, potentially increasing the perceived usefulness of IFRS financial statements. Although more useful information may be provided, additional resources will need to be deployed to ensure that this information can be extracted from current accounting data and disclosed in a useful way, rather than applying a ’boilerplate’ and ‘tick-box’ approach.
CONCLUSION
The additional disclosures of management performance measures and unusual items will increase the length of financial statements, already overflowing with information, and may not have the desired effect of attracting users’ attention to these items. With the implementation of these proposed changes, entities and the IASB should consider what information is currently being included in the financial statements and what would be better left out. Consider, for example, a retail company where the only financial asset is trade receivables. Would it not be more useful to limit the disclosure required under IFRS 7 and focus more attention on the disclosure proposed under the General Presentation and Disclosure Standard? The result could be that users would have the ability to see the wood rather than being distracted by the trees.
Note
1 Additional information on financial reporting by small and medium-sized listed companies can be accessed in an article titled ‘IFRS financial statements in the small and medium-cap listed space’ available at https://www.accountancysa.org.za/recommend-ifrs-financial-statements-in-the-small-and-medium-cap-listed-space/.
Author
Kayleigh Greenslade CA(SA), Senior Lecturer at the University of the Witwatersrand