Commentary on the application
of certain aspects of IAS 1
Presentation of Financial Statements
by selected Irish equity issuers
October 2013
OUR MISSION
To support and enhance public confidence in the
accountancy profession and in financial reporting
through the exercise of effective, independent oversight
and the promotion of adherence to high standards
Contents
Section
Title
1
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2
Purpose of this Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3
Previous IAASA activity relating to IAS 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 – 8
4
Key messages and summary of findings
5
Page
4.1
Key messages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.2
Key aspects of IAS 1 relevant to this Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.3
Summary of findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Detailed findings
5.1
Analysis of expenses recognised in profit or loss using a classification
based on either their nature or their function within the entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.2
Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.3
“Exceptional items” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 – 16
5.4
Accounting policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.5
Other comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
IAASA Publications referred to in this Commentary are available on our website at www.iaasa.ie/publications
DISCLAIMER
Whilst every effort has been made to ensure the accuracy of the information contained in this Commentary, the Irish
Auditing & Accounting Supervisory Authority accepts no responsibility or liability howsoever arising from any errors,
inaccuracies, or omissions occurring. The Irish Auditing & Accounting Supervisory Authority reserves the right to take
action, or refrain from taking action, which may or may not be in accordance with this Commentary.
Section 1 - Introduction
The objective of financial statements prepared under IFRS1 is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders and other creditors in making
decisions about providing resources to the entity.
However, preparers of financial statements exercise judgement in the preparation of financial statements
with the result that reported headline figures may not be comparable from one entity to another. Users of
such financial statements need to study the financial statements carefully to fully understand the entity’s
results and preparers need to provide sufficient disclosures to aid users’ understanding. For example,
“operating profit” is not a term defined by the accounting standards and items included in that figure can
vary between entities. Similarly, many entities include “exceptional items” in their Income Statement either
as line items or separate columns with such items normally not included in “operating profit”. The use of
“exceptional items” appears to be particularly prevalent amongst UK and Irish entities. Entities in
jurisdictions such as France, Belgium and Denmark use variations of these and highlight non recurring
or “special” items. These items are not defined in the accounting standards and what one entity judges
to be “exceptional” may not be judged as “exceptional” by other entities.
In preparing financial statements under IFRS, IAS2 1 Presentation of Financial Statements (‘IAS 1’) sets out
overall requirements for the presentation of financial statements, guidelines for their structure and
minimum requirements for their content. It prescribes the basis for presentation of general purpose
financial statements to ensure comparability both with the entity's financial statements of previous periods
and with the financial statements of other entities.
IAS 1 is not prescriptive in nature. Rather, IAS 1 acknowledges that judgement is required in determining
the best manner in which information is presented. In applying IAS 1, entities are required to exercise
judgement in presenting information, including accounting policies, in a manner that provides relevant,
reliable, comparable and understandable information. Entities should provide additional disclosures to
enable users to understand the impact of particular transactions, other events and conditions on the
entity's financial position and financial performance3.
This Commentary is limited to consideration of aspects of IAS 1’s requirements in respect of the Income
Statement. The other components of a full set of financial statements (statement of financial position,
statement of changes in equity, statement of cash flows, notes, and comparative information) are outside
the scope of this Commentary.
1
2
3
International Financial Reporting Standards
International Accounting Standard
IAS 1.17 refers
5
Section 2 - Purpose of this Commentary
IAASA has previously engaged with issuers on IAS 1 related matters some of which is set out in Section 3 of this
Commentary. As a consequence of this past activity, IAASA has undertaken a thematic review of the 2012
annual financial reports of ten equity issuers4 to determine those issuers’ approach to the following four matters:
• analysis of expenses using a classification based on either their nature or their function;
• disclosure of operating profit or a similar line item;
• use of “exceptional items”; and
• disclosure of accounting policies addressing “exceptional items” and operating profit.
The ten annual financial reports of equity issuers sampled for review were selected judgementally. The sample
objective was to cover a cross section of industry sectors and to review issuers ranging from the larger issuers
in terms of market capitalisation to smaller sized entities.
The ten annual financial statements selected for inclusion in this review are set out in the table below.
Issuer
Annual financial statements
in r espect o f the year ended
1.
Aer Lingus Group plc
31 December 2012
2.
Aminex plc
31 December 2012
3.
CRH plc
31 December 2012
4.
DCC plc
31 March 2013
5.
Glanbia plc
29 December 2012
6.
Greencore Group plc
28 September 2012
7.
Independent News & Media plc
31 December 2012
8.
Kerry Group plc
31 December 2012
9.
Paddy Power plc
31 December 2012
10.
Ryanair Holdings plc
31 March 2012
The review comprised a desk top review of the published annual financial statements and thus additional
information was not sought from issuers.
The IASB5’s Conceptual Framework states that ‘To a large extent, financial reports are based on estimates,
judgements and models rather than exact depictions’ and ‘The usefulness of financial information is enhanced
if it is comparable [bold emphasis added], verifiable, timely and understandable.’
The IASB has identified users of financial statements as existing and potential investors, lenders and other
creditors of the entity. This Commentary has been prepared to highlight for users of Irish equity issuers’ annual
financial statements the areas where divergent, but not necessarily non-compliant, approaches have been
adopted in practice. The Commentary also aims to stimulate debate amongst preparers, auditors, and other
stakeholders as to whether and, if so, how existing approaches could be modified to provide enhanced
comparability with similar information about other entities and with similar information about the same entity
for another reporting period.
While this Commentary is primarily directed at the users of annual and half-yearly financial statements of issuers
falling within IAASA’s financial statement review remit, users, preparers, auditors, and other stakeholders of the
financial statements of entities not within IAASA’s financial statement review remit may also find the
Commentary of interest.
4
5
At the time this review was undertaken there were 24 equity issuers falling under IAASA’s financial statement review remit
International Accounting Standards Board
6
Section 3 - Previous IAASA activity relating to IAS 1
IAS 1.82 prescribes a minimum content for the face of the Income Statement. IAS 1.85 provides that
additional line items, headings and subtotals shall be presented on the face of the Income Statement when
such presentation is relevant to an understanding of the entity’s performance. The inclusion of a line item
called “operating profit” and “exceptional” items, many of which are not included in the operating profit
line, seems more prevalent in Ireland and the UK than in other European jurisdictions. While IAS 1 neither
requires nor precludes disclosure of a line item “operating profit” on the face of the Income Statement,
IAS 1.BC 56 clearly states that where an entity discloses the results of operating activities or similar line
items, it should be representative of activities that would normally be considered to be ‘operating’.
It further states that it would be misleading and would impair comparability if items of an operating
nature were excluded from the results of operating activities, even if that had been industry practice.
IAASA has previously engaged with issuers on IAS 1-related matters, as a consequence of which:
(a)
an issuer was required to amend the basis on which it determined “operating profit” as IAASA
deemed that it was not in compliance with the requirements of IAS 1;
(b) certain issuers have been required to include an explicit accounting policy dealing with the definition
of “operating profit”;
(c)
certain issuers have been required to include an explicit accounting policy dealing the identification
and classification of items as “exceptional” in nature; and
(d) issuers’ rationales for separately disclosing or not disclosing “exceptional items” has been challenged
by IAASA.
Each year IAASA publishes Observations on Selected Financial Reporting Issues which seeks to assist
issuers’ management and those charged with issuers’ governance in the preparation of high quality
financial reports by offering observations on selected financial reporting issues to coincide with the
preparation of issuers’ annual financial statements.
Readers’ attention is drawn to the following matters included in such Observations documents.
(a) Presentation of “exceptional items” in the Income Statement
In applying the requirements of IAS 1, issuers should carefully consider:
-
how the presentation and disclosure of “exceptional items” is best achieved;
the disclosure of an accounting policy in respect of “exceptional items” setting out the basis
on which “exceptional items” are identified and presented;
-
the treatment in subsequent reporting periods of items which were presented as “exceptional”
in earlier periods but which, based on materiality of the item in the current period, is considered
no longer material; and
-
both income and costs to determine whether they constitute “exceptional items” and apply their
“exceptional item” accounting policy consistently.
[Item 9 on pages 12 and 13 of IAASA’s 2012 Observations document];
7
(b) “Exceptional items” and non-recurring items
IAASA has challenged issuers as to the presentation of such items in their financial reports, including
issuers’ rationale for separately disclosing or not disclosing such items.
[Item 13 on page 18 of IAASA’s 2011 Observations document];
(c) Operating profit
In instances where issuers present items outside of the results of operating activities, IAASA’s clear
expectation is that such issuers will provide detailed narrative explaining their analysis of what
constitutes ‘operating activity’ and the basis upon which amounts have been presented outside the
results of operating activities.
[Item 2.8 on page 13 of IAASA’s 2009 Observations document]; and
(d) Operating profit
Given the prominence attributed to the line item “operating profit” in financial reports and the degree
of judgement required in relation to the classification of items within and outside of operating profit,
issuers should give consideration as to whether it is necessary to include an accounting policy
disclosure explaining judgements and rationales.
[Item 9 on page 7 of IAASA’s 2008 Observations document].
8
Section 4 - Key messages and summary of findings
4.1 KEY MESSAGES
IAS 1 is not prescriptive in nature and acknowledges that judgement is required in determining the best
manner in which information is presented.
This review has identified that issuers have adopted alternative permitted presentation methodologies and
have exercised judgement in presenting information. While there is no indication that these methodologies
and judgments are not in compliance with IFRS, they do reduce the extent to which one issuer’s financial
statements are comparable with another issuer’s.
Consequently, users of issuers’ financial statements are advised to critically evaluate reported headline
items and the Income Statement presentation adopted by issuers. Users should consider the related
explanatory note disclosures including the definitions used and the accounting policy adopted in respect
of items including “exceptional items” and “operating result”.
Preparers of issuers’ financial statements should carefully consider the presentation and disclosure of the
Income Statement on a regular basis to ensure the decision making needs of users are met.
The effectiveness of IAS 1 as a financial reporting standard meeting the needs of users of financial
statements is a matter which the standard setter, the IASB, is reviewing as part of its short and medium
term projects. As part of its medium-term projects, the IASB intends to explore whether IAS 1, IAS 7
Statement of Cash Flows and IAS 8 Accounting Policies, Changes in Estimates and Errors should be
replaced with a single Standard on presentation and disclosure, in effect creating a disclosure framework
for IFRS. This IASB research project will incorporate a review of the work previously done on the Financial
Statement Presentation project. Given our past experience in examining this issue and the results of this
survey, IAASA intends to provide feedback to the IASB on this matter.
4.2 KEY ASPECTS OF IAS 1 RELEVANT TO THIS COMMENTARY
In presenting the Income Statement, entities:
1.
shall provide an analysis of expenses using a classification based on either their nature or their function
within the entity (IAS1.99);
2. are not prevented from using a line item called “operating profit” in that an issuer is allowed to present
additional line items, headings and subtotals in the Income Statement by virtue of IAS 1.85;
3. are not prevented from including “exceptional” items in the Income Statement by virtue of IAS 1.85 and
IAS 1.97 which states that when items of income or expense are material, an entity shall disclose their
nature and amount separately;
4. select a form of presentation for “exceptional items” (e.g. disclosure in the accompanying explanatory
notes, disclosure as a separate line item on the face of the Income Statement or presentation
as a separate column on the face of the Income Statement); and
5. shall disclose the accounting policies used that are relevant to an understanding of the entity’s financial
statements (IAS 1.117).
9
4.3 SUMMARY OF FINDINGS
The following Table summarises the results of this thematic review in the context of the matters
outlined above. Details findings are set out in Section 5 below.
Finding
1.
Section
Five issuers adopted the “nature of expense” method of classification and the remaining
5.1
five issuers adopted the “function of expense” or “cost of sales” method of classification.
2. All ten selected equity issuers’ annual financial statements issuers presented a measure
of “operating profit” or a similar line item.
5.2
In all instances, the measure of the results of operating activities, or a similar line item,
has been disclosed before finance income, finance expenses and the share of results
of associates and joint ventures.
By virtue of the use of a columnar presentation for “exceptional items”, those six issuers
electing a columnar presentation disclosed a measure of the results of operating
activities, or a similar line item, before and after “exceptional items”.
This review identified instances of inconsistent treatment of certain items of expense
(e.g. foreign exchange gains/losses and amortisation of intangible assets) by issuers
in presenting a measure of the results of operating activities, or a similar line item.
3. This review identified 30 different items presented as “exceptional items” by the ten
selected equity issuers in either their 2012 or 2011 annual financial statements.
5.3
The review determined that the cumulative amount presented as “exceptional items”
before tax by the ten selected equity issuers over the five years amounted to €1.7bn
comprising €2.1bn in exceptional costs and €0.4bn in exceptional income. The costs
presented as “exceptional” exceeded the income presented as “exceptional” by a factor
of 5:1.
Three of the selected equity issuers have presented restructuring and rationalisation
costs as “exceptional” in each of the past five years.
4. The review identified a range of practices in presenting “exceptional items”:
5.3
- disclosure in the accompanying explanatory notes without the items being highlighted
on the face of the Income Statement (two issuers);
- disclosure as a separate line item on the face of the Income Statement (seven issuers);
- presentation as a separate column on the face of the Income Statement
(six issuers); and
- a combination of these practices.
5. Seven of the ten selected equity issuers disclosed an accounting policy relating
to “exceptional items”.
10
5.4
Section 5 - Detailed findings
The following are the findings arising from this review:
5.1 ANALYSIS OF EXPENSES RECOGNISED IN PROFIT OR LOSS USING A CLASSIFICATION
BASED ON EITHER THEIR NATURE OR THEIR FUNCTION WITHIN THE ENTITY
Requirements of IAS 1
99
An entity shall present an analysis of expenses recognised in profit or loss using a classification
based on either their nature or their function within the entity, whichever provides information
that is reliable and more relevant.
100 Entities are encouraged to present the analysis in paragraph 99 in the statement(s) presenting
profit or loss and other comprehensive income.6
101
Expenses are subclassified to highlight components of financial performance that may differ
in terms of frequency, potential for gain or loss and predictability. This analysis is provided
in one of two forms.
102
The first form of analysis is the 'nature of expense' method. An entity aggregates expenses within
profit or loss according to their nature (for example, depreciation, purchases of materials,
transport costs, employee benefits and advertising costs), and does not reallocate them among
functions within the entity. This method may be simple to apply because no allocations of
expenses to functional classifications are necessary. An example of a classification using the
nature of expense method is as follows:
Revenue
Other income
Changes in inventories of finished goods and work in progress
Raw materials and consumables used
Employee benefits expense
Depreciation and amortisation expense
Other expenses
Total expenses
Profit before tax
103
X
X
X
X
X
X
X
(X)
X
The second form of analysis is the 'function of expense' or 'cost of sales' method and classifies
expenses according to their function as part of cost of sales or, for example, the costs of
distribution or administrative activities. At a minimum, an entity discloses its cost of sales under
this method separately from other expenses. This method can provide more relevant information
to users than the classification of expenses by nature, but allocating costs to functions may
require arbitrary allocations and involve considerable judgement. An example of a classification
using the function of expense method is as follows:
Revenue
Cost of sales
Gross profit
Other income
Distribution costs
Administrative expenses
Other expenses
Profit before tax
X
(X)
X
X
(X)
(X)
(X)
X
104
An entity classifying expenses by function shall disclose additional information on the nature of
expenses, including depreciation and amortisation expense and employee benefits expense.
105
The choice between the function of expense method and the nature of expense method depends
on historical and industry factors and the nature of the entity. Both methods provide an indication
of those costs that might vary, directly or indirectly, with the level of sales or production of the
entity. Because each method of presentation has merit for different types of entities, this Standard
requires management to select the presentation that is reliable and more relevant. However,
because information on the nature of expenses is useful in predicting future cash flows, additional
disclosure is required when the function of expense classification is used. In paragraph 104,
'employee benefits' has the same meaning as in IAS 19.
Of the ten annual financial statements selected for inclusion in this review, five issuers adopted the “nature
of expense” method of classification and the remaining five issuers adopted the “function of expense” or
“cost of sales” method of classification.
6
IAS1.100 was amended by Presentation of Items of Other Comprehensive Income (Amendments to IAS 1) (issued June
2011) and effective 1 July 2012. The previous requirements were “Entities are encouraged to present the analysis in
paragraph 99 in the statement of comprehensive income or in the separate income statement (if presented). ”
11
5.2 OPERATING PROFIT
“Operating profit” is not a term defined by accounting standards and items included in that figure can vary
between entities. IAS 1 does not require disclosure of “operating profit”. However, entities may elect to
disclose the results of operating activities, or a similar line item.
The results of the review of the ten selected equity issuers’ annual financial statements regarding the
disclosure of the results of operating activities noted that all ten issuers presented such a measure. In all
ten instances, the measure of the results of operating activities, or a similar line item, has been disclosed
before finance income, finance expenses and the share of results of associates and joint ventures. By virtue
of the use of a columnar presentation for “exceptional items”, all six issuers electing a columnar
presentation disclosed a measure of the results of operating activities, or a similar line item, before and
after “exceptional items” (i.e. those six issuers presented a measure of the results of operating activities,
or a similar line item, before charging/crediting such “exceptional items” and after charging/crediting such
“exceptional items”).
However, the review detected a number of instances of inconsistent treatment of other items by issuers in
presenting a measure of the results of operating activities, or a similar line item. Such inconsistent
treatments reduce the comparability of issuers’ annual financial statements. Six examples are set out below.
Foreign exchange gains/losses
One issuer charged/credited foreign exchange gains/losses in arriving at a measure of the results of
operating activities, or a similar line item. However, another issuer, operating in the same sector, presented
a measure of the results of operating activities, or a similar line item, before charging/crediting such foreign
exchange gains/losses. Certain other issuers presented foreign exchange gains/losses as part of finance
income/expenses and, therefore, excluded such gains/losses from the measure of the results of operating
activities, or a similar line item.
Gain/loss on disposal of property, plant and equipment
One issuer disclosed the results of operating activities before and after gain/loss on disposal of property,
plant and equipment.
Gain/loss on the disposal of subsidiaries, joint ventures, associate and other investments,
and other non-current assets
One issuer disclosed the results of operating activities before the gain/loss on the disposal of subsidiaries,
joint ventures, associate and other investments, and other non-current assets. Another issuer disclosed the
results of operating activities after the gain/loss on the disposal of subsidiaries, joint ventures, associate
and other investments, and other non-current assets.
Amortisation of intangible assets
Two issuers disclosed the results of operating activities before and after amortisation
of intangible assets. Two other issuers disclosed the results of operating activities after amortisation
of intangible assets.
Acquisition integration and restructuring costs
One issuer disclosed the results of operating activities before acquisition integration
and restructuring costs.
Impairment loss on AfS financial asset
One issuer disclosed the results of operating activities after an impairment loss on AfS financial asset.
12
5.3 “EXCEPTIONAL ITEMS”
Many entities include “exceptional items” in their Income Statement either as line items or separate
columns. While the use of “exceptional items” is not envisaged by IAS 1, the Standard requires additional
line items, headings and subtotals to be used when such presentation is relevant to an understanding
of the entity's financial performance. The Standard leaves the decision about what to present and the
presentation method to management judgement rather than prescribing a format.
Provisions of IAS 1
85
An entity shall 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.
97
When items of income or expense are material, an entity shall disclose their nature
and amount separately.
98
Circumstances that would give rise to the separate disclosure of items of income and expense
include:
(a) write-downs of inventories to net realisable value or of property, plant and equipment
to recoverable amount, as well as reversals of such write-downs;
(b) restructurings of the activities of an entity and reversals of any provisions for the costs
of restructuring;
(c) disposals of items of property, plant and equipment;
(d) disposals of investments;
(e) discontinued operations;
(f) litigation settlements; and
(g) other reversals of provisions.
In applying these requirements, the selected equity issuers adopt diverse practices:
(a) disclosure of the nature and amount income or expense amount only in the notes to the financial
statements (e.g. in the operating profit note);
(b) disclosure of the nature and amount income or expense amount as a separate line item on the face
of the Income Statement with or without an accompanying explanatory note;
(c) disclosure of the nature and amount income or expense amounts in a separate column in the Income
Statement with an accompanying explanatory note; and
(d) a combination of two or more of (a) to (c) above.
13
Nature of “exceptional items”
This review identified 30 different items presented as “exceptional items” by the ten selected equity
issuers in either their 2012 or 2011 annual financial statements. Those items presented as “exceptional”
by more than one issuer and the frequency of their occurrence are set out in the following table.
Nature
Frequency
of occurr ence
Restructuring and rationalisation costs
6
Impairment of property, plant and equipment
4
7
Amortisation of intangible assets
4
Impairment of goodwill and intangible assets
3
Gain/loss on disposal of property, plant and equipment
3
Gain/loss on disposal of subsidiaries, joint ventures, associate and other investments,
and other non-current assets
3
Acquisition-related costs
2
Amendments to and/or restructuring of defined benefit pension schemes
2
Impairment of associate company investment
2
Gain on disposal of business
2
Integration costs
2
In addition, many items presented as “exceptional” are issuer specific. The following list shows examples
of items presented as “exceptional” by the ten selected equity issuers in either their 2012 or 2011 annual
financial statements:
1.
Adjustments to deferred and contingent
9. Mark-to-market of swaps and related debt
acquisition consideration
10. Payment to discharge profit share obligation
2. Airspace closure costs associate with
11. Provision against onerous contracts
Eyjafjallajokull volcanic eruption
12. Re-classification of cash flow hedging reserve
3. Costs associated with re-financing
13. Reduction of impairment provision
arrangements
4. Costs relating to former activities
14. Sales tax refund receivable
5. Gain on revision of customer loyalty scheme
15. Statutory redundancy – Government refund
terms and conditions
16. Revenue adjustment
6. Gain on surrender of lease agreement
7.
17. Takeover defence costs
Insurance claim settlement
18. Tax authority settlement
8. Legal claim settlement
7
Amortisation of intangible assets relates to amortisation of brands/know-how, customer relationships, computer and software
costs, contract-related intangibles
14
Presentation of “exceptional items”
Eight of the ten equity issuers’ annual financial statements selected for this review present
“exceptional items”. This review revealed that Irish equity issuers adopt differing approaches to the
presentation of “exceptional items” as set out in the following paragraphs.
(a)
Disclosure of the nature and amount of income or expense amounts as a separate line item
on the face of the Income Statement with or without an accompanying explanatory note
Three issuers presented “exceptional items” as a single line item on the face of the Income Statement
and did not use a columnar format for the Income Statement. Of these three issuers:
-
one aggregated a number of “exceptional items” into that single line item on the face
of the Income Statement and provided additional information on the nature and amount
of the “exceptional items” in the accompanying explanatory notes; and
-
two presented the gain/loss on disposal of property, plant and equipment and the gain/loss on the
disposal of subsidiaries, joint ventures, associates and other investments, and other non-current
assets as separate line items on the face of the Income Statement. In one of these cases, the
composition of the item was detailed in the accompanying explanatory notes.
(b) Disclosure of the nature and amount of income or expense amounts in a separate column
in the Income Statement with an accompanying explanatory note
Two issuers adopted a columnar format in the Income Statement showing “exceptional items”
in a separate column. In these two cases, no additional lines items were used in the Income Statement
and the “exceptional items” were detailed in the accompanying explanatory notes.
(c)
A combination of approaches
The remaining four issuers adopted a combination of approaches to the presentation of “exceptional
items”. In addition to presenting amortisation of intangible assets as a separate line item on the face
of the income statement, these four issuers also adopted a columnar format in the Income Statement
showing the remaining “exceptional items” in a separate column. In each case, the remaining
“exceptional items” were detailed in the accompanying explanatory notes.
It was not apparent as to those issuers’ rationale for distinguishing the presentation adopted for the
totality of “exceptional items” as between those presented as a separate line item and those
presented in the “exceptional items” column.
In the case of one issuer, it presented a columnar format for the current year amounts and only a
single column for the prior year comparative amounts even in instances where those prior year
comparative amounts had been presented in columnar format in the prior period.
(d) Disclosure of the nature and amount of income or expense only in the notes
to the financial statements
One issuer, while presenting an “exceptional item” in the notes to the financial statements, elected
not to classify the items as “exceptional” on the face of the Income Statement.
However, the issuer presented supplementary information in the front end narrative accompanying its
IFRS-based annual financial statements. This supplementary information presented the issuer’s
Income Statement in columnar format disclosing an “exceptional item” in a separate column. The
issuer stated in that narrative that any amounts deemed exceptional for narrative discussion purposes
had been classified for the purposes of the IFRS-based Income Statement in the same way as nonexceptional amounts of the same nature.
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Scale of “exceptional items”
An examination of the ten selected equity issuers’ annual financial statements for each of the past five
years revealed that, for those issuers presenting “exceptional items” on the face of the Income
Statement (either in a separate column or as a separate line item):
(a)
the cumulative amount presented as “exceptional items” before tax by the ten issuers over
the five years amounted to €1.7bn comprising €2.1bn in exceptional costs and €0.4bn
in exceptional income;
(b) the costs presented as exceptional exceeded the income presented as exceptional by a factor
of 5:1; and
(c)
overall, net “exceptional items” before tax amounted to 16% of the issuers’ profit before tax before
“exceptional items”.
5.4 ACCOUNTING POLICIES
Requirements of IAS 1
117 An entity shall disclose in the summary of significant accounting policies:
(a) the measurement basis (or bases) used in preparing the financial statements, and
(b) the other accounting policies used that are relevant to an understanding
of the financial statements.
IAASA has in the past engaged with a number of issuers on the apparent absence of an accounting policy
addressing “exceptional items”.
Of the ten issuers’ annual financial statements included in the review, seven disclosed and three did not
disclose an accounting policy relating to “exceptional items”.
Features of the accounting policy disclosed by those seven issuers were:
-
reference was made to the exercise of judgement by management in assessing the particular items
which should be disclosed in the Income Statement as “exceptional items” in six of seven instances.
The seventh issuer did not explicitly refer to the exercise of judgement in its accounting policy;
-
five of the seven issuers included examples of the types of items that may be disclosed as
“exceptional items”. The other two issuers did not provide examples in the accounting policy; and
-
only one issuer explicitly referred to the tax element of “exceptional items” in its accounting policy.
Of the remaining three issuers not disclosing an accounting policy relating to “exceptional items”, two have
presented the gain/loss on disposal of property, plant and equipment and the gain/loss on the disposal of
subsidiaries, joint ventures, associate and other investments, and other non-current assets as separate line
items on the face of the Income Statement. The third issuer, while disclosing “exceptional items” in the
relevant note to the financial statements has chosen not to classify such items as “exceptional items” on
the face of the Income Statement.
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5.5 OTHER COMMENTS
This thematic review identified a report in which the issuer presented, in the narrative forming part of the
Annual Report, (which narrative falls outside IAASA’s financial reporting review remit), a summary income
statement data in columnar format showing the issuer’s results before “exceptional items”, “exceptional
items” and the IFRS results. However, in its financial statements prepared under IFRS a columnar format
was not adopted.
The issuer, in that narrative, explained that it presents certain items, which are unusual by virtue of their
size and incidence, separately in the context of the issuer’s operations, as the directors believe this
presentation represents the underlying business more accurately and reflects the manner in which
investors typically analyse the issuer’s results. The issuer also stated that any amounts so presented in the
narrative have been classified for the purposes of the income statement in the same way as nonexceptional amounts of the same nature.
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