What is the most important disclosure definition under IAS 1?

What is the disclosure definition under IFRS?

Disclosure definition – one of the best ways to explain the need for disclosures is provided in IAS 1.119 ‘management considers whether disclosure would assist users in understanding how transactions, other events and conditions are reflected in reported financial performance and financial position. Each entity considers the nature of its operations and the policies that the users of its financial statements would expect to be disclosed for that type of entity.‘

Let us point to some IFRS disclosure particularities

In IAS 1 Presentaion of Financial Statements the overall disclosure requirements are provided. Other IAS/IFRSs set out the recognition, measurement and disclosure requirements for specific transactions and other events (IAS 1.3).

An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes or explanatory material (IAS 1.18).

Some IAS/IFRSs specify information that is required to be included in the financial statements, which include the notes. An entity need not provide a specific disclosure required by a IFRS if the information resulting from that disclosure is not material. This is the case even if the IFRS contains a list of specific requirements or describes them as minimum requirements.

An entity shall also consider whether to provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users of financial statements to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance (IAS 1.31).

Minimum comparative information

In some cases, narrative information provided in the financial statements for the preceding period(s) continues to be relevant in the current period. For example, an entity discloses in the current period details of a legal dispute, the outcome of which was uncertain at the end of the preceding period and is yet to be resolved. Users may benefit from the disclosure of information that the uncertainty existed at the end of the preceding period and from the disclosure of information about the steps that have been taken during the period to resolve the uncertainty (IAS 1.38B).

Structure and content

IAS 1 requires particular disclosures in the statement of financial position or the statement(s) of profit of or loss and other comprehensive income, or in the statement of changes in equity and requires disclosure of other line items either in those statements or in the notes (IAS 1.47).

IAS 1 sometimes uses the term ‘disclosure’ in a broad sense, encompassing items presented in the financial statements. Disclosures are also required by other IFRSs. Unless specified to the contrary elsewhere in this Standard or in another IFRS, such disclosures may be made in the financial statements (IAS 1.48).

Realisation of assets and liabilities

Information about expected dates of realisation of assets and liabilities is useful in assessing the liquidity and solvency of an entity. IFRS 7 Financial Instruments: Disclosures requires disclosure of the maturity dates of financial assets and financial liabilities.

Financial assets include trade and other receivables, and financial liabilities include trade and other payables. Information on the expected date of recovery of non-monetary assets such as inventories and expected date of settlement for liabilities such as provisions is also useful, whether assets and liabilities are classified as current or as non-current. For example, an entity discloses the amount of inventories that are expected to be recovered more than twelve months after the reporting period (IAS 1.65).

Materiality and separate disclosure

When items of income or expense are material, an entity shall disclose their nature and amount separately (IAS 1.97).

Circumstances that would give rise to the separate disclosure of items of income and expense include:

1. 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;
2. restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring;
3. disposals of items of property, plant and equipment;
4. disposals of investments;
5. discontinued operations;
6. litigation settlements; and
7. other reversals of provisions (IAS 1.98).

Nature of expense and function expense profit or loss statement

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, IAS 1 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 (IAS 1.105).

Analysis of expenses by function and by nature

The nature of expense method provides information about expenses arising from the main inputs that are consumed in order to accomplish an entity’s business activities—such as expenses related to materials (raw material purchases), employees (labour and other employee benefits), equipment (depreciation) or intangibles (amortisation)—without reference to how these are allocated to functions within the business.

The function of expense method allocates and combines expense items according to the activity from which the item arises.

For example, cost of sales is a functional line item that may combine the following natural line items: raw material costs, labour and other employee benefit costs, depreciation or amortisation. These expenses all arise from the entity’s production activities.

Nature of expense	Function of expense

Some industries (eg manufacturing entities) find a ‘function of expense’ method more useful because this method is generally more descriptive of the entity’s overall operations and provides useful information about the allocation of resources to the various activities (functions) of an entity.

Other entities (eg banks) have only one main function (eg a financing activity) and, hence, preparers find it more obvious to have a more detailed analysis of expenses using a ‘nature of expense’ method because this reflects better the nature of their business.

A closer look at ‘Nature’

The Oxford Dictionary defines ‘nature’ as follows – The basic or inherent features, character, or qualities of something.

The notion of ‘nature’ could be linked to the ‘inputs’ that an entity uses to operate its business. The definition of ‘inputs’ could be translated as the main categories of resources (ie employees, raw materials) that are used within an entity’s operations (such as a manufacturing process) to obtain a

desired output in terms of profits and cash flows. Consequently, ‘nature’ could be described as the ‘major categories of inputs, consumed as expenses, required to accomplish an entity’s business activities’.

A closer look at ‘Function’

The Oxford Dictionary defines ‘function’ as folows – An activity that is natural to or the purpose of a person or thing.

An entity’s functions would result from the aggregation of different natural items of income and expense on the basis of a common activity (eg selling function or research function).

Other activities could include discontinued operations, which IFRS 5 Non-current Assets Held for Sale and Discontinued Operations requires to be reported separately; or a restructuring event (as required by IAS 1.98).

Industry trends

The EFRAG Secretariat study (2016) reflected the following trend for the following industries:

1. preference for presentation by function: Consumer Staples, Healthcare and Information Technology;
2. ‘mixed basis’ some information by nature and some by function: Energy; and
3. preference for presentation by nature: Telecommunication Services and Utilities.

Disclosure of accounting policies

An entity shall disclose its significant accounting policies comprising:

1. the measurement basis (or bases) used in preparing the financial statements, and
2. the other accounting policies used that are relevant to an understanding of the financial statements (IAS 1.117).

It is important for an entity to inform users of the measurement basis or bases used in the financial statements (for example, historical cost, current cost, net realisable value, fair value or recoverable amount) because the basis on which an entity prepares the financial statements significantly affects users’ analysis.

When an entity uses more than one measurement basis in the financial statements, for example when particular classes of assets are revalued, it is sufficient to provide an indication of the categories of assets and liabilities to which each measurement basis is applied (IAS 1.118).

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IFRS disclosure particularities IFRS disclosure particularities IFRS disclosure particularities