IFRS X Financial Statement Presentation – a boon or bane for the world of international financial reporting?

Table of contents

List of figures

List of abbreviations

1 Introduction

2 What are the deficiencies of IAS1 and IAS7?
2.1 Deficiencies related to the content of IAS1 and IAS7
2.1.1 Availability of too many options in IAS1 and IAS7
2.1.2 Lack of valuable information due to missing requirements in IAS1 and IAS7
2.2 Deficiencies related to the surrounding circumstances of IAS1 and IAS7
2.2.1 Piecemeal development of IAS1 and IAS7
2.2.2 Missing convergence between IFRS and US GAAP
2.3 Conclusion and summary

3 What are IFRSX’s major changes to the financial statement presentation?
3.1 Disaggregation principle
3.2 Cohesiveness principle
3.3 Structure of financial statements
3.4 Concept of cash and cash equivalents
3.5 Layout of the statement of financial position
3.6 Classification of assets and liabilities
3.7 Operating cash flow
3.8 Analyses of changes in assets and liabilities
3.9 Remeasurement disclosures
3.10 Conclusion and summary

4 What are the major criticisms on IFRSX and the consequences thereof?
4.1 Disaggregation principle
4.1.1 General idea of the disaggregation principle and disaggregation degree
4.1.2 Location of disaggregated information
4.1.3 Disaggregation of income and expenses
4.2 Cohesiveness principle
4.3 Structure of the financial statements
4.3.1 Classification into the sections, categories and subcategory
4.3.1.1 Classification principle: item’s link to the activities
4.3.1.2 Classification level: items’ classification at the segment level
4.3.2 Content and right to exist of the sections, categories and subcategory
4.3.2.1 Business section and financing section
4.3.2.1.1 Separation of the business activities from the financing activities
4.3.2.1.2 Assignment of specific groups of line items
4.3.2.1.2.1 Equity
4.3.2.1.2.2 Liabilities
4.3.2.2 Income tax section
4.3.2.3 Multi – category transaction section
4.3.2.4 Discontinued operation section
4.4 Cash, cash equivalents and short term investments
4.4.1 Concept of cash and cash equivalents
4.4.2 Assignment of cash and short term investments
4.5 Layout of the statement of financial position
4.5.1 Is the term balance sheet adequate for IFRSX’s statement of financial position?
4.5.2 Is the layout of IFRSX’s statement of financial position beneficial?
4.6 Classification of assets and liabilities
4.7 Operating cash flow
4.8 Analysis of changes in assets and liabilities
4.9 Remeasurement disclosures
4.10 Conclusion and summary

5 Overall conclusion and summary

6 Appendices
6.1 Sample financial statements
6.1.1 Spirit Food and Beverages International AG
6.1.2 Legend to the symbols used in chapter 6.1
6.1.3 Financial statements according to IAS1 and IAS7
6.1.3.1 Statement of financial position
6.1.3.2 Statement of comprehensive income
6.1.3.3 Statement of cash flows
6.1.3.4 Statement of changes in equity
6.1.4 Financial statements according to IFRSX
6.1.4.1 Statement of financial position
6.1.4.2 Statement of comprehensive income
6.1.4.3 Statement of cash flows
6.1.4.4 Statement of changes in equity
6.1.4.5 Analysis of changes in assets and liabilities
6.1.4.6 Remeasurement disclosures
6.1.5 Financial statements according to IFRSX as adjusted to reflect the conclusions drawn in chapter 4
6.1.5.1 Statement of financial position
6.1.5.2 Statement of comprehensive income
6.1.5.3 Statement of cash flows
6.1.5.4 Statement of changes in equity
6.1.5.5 Analysis of changes in assets and liabilities
6.1.5.6 Remeasurement disclosures
6.2 Definitions of the term balance sheet

Reference list

Literatures

Professional journal articles

Electronic sources

Statutory declaration

List of figures

figure 1: four step approach to reply to the key question

figure 2: topics of the proposed major changes to the financial statement presentation due to IFRSX

figure 3: structure comparison of the primary financial statements after IAS1/IAS7 and IFRSX

figure 4: proposed disaggregation locations

figure 5: presentation alternatives for multi – category transactions

figure 6: presentation ideas for the discontinued operation

figure 7: legend to the symbols used in chapter 6.1

figure 8: statement of financial position according to IAS1

figure 9: statement of comprehensive income pursuant to IAS1

figure 10: statement of cash flows under IAS7 (indirect method)

figure 11: statement of cash flows under IAS7 (direct method)

figure 12: statement of changes in equity in virtue of IAS1

figure 13: statement of financial position according to IFRSX (part one)

figure 14: statement of financial position according to IFRSX (part two)

figure 15: statement of comprehensive income pursuant to IFRSX (part one)

figure 16: statement of comprehensive income pursuant to IFRSX (part two)

figure 17: statement of cash flows under IFRSX (part one)

figure 18: statement of cash flows under IFRSX (part two)

figure 19: statement of changes in equity in virtue of IFRSX

figure 20: analysis of changes in trade payables after IFRSX

figure 21: analysis of changes in raw materials and unfinished/finished goods after IFRSX

figure 22: analysis of changes in trade receivables after IFRSX

figure 23: analysis of changes in property, plant, equipment and intangible assets other than goodwill after IFRSX

figure 24: analysis of changes in pension provisions after IFRSX

figure 25: analysis of changes in investment properties after IFRSX

figure 26: net debt information after IFRSX

figure 27: remeasurement disclosures as per IFRSX

figure 28: statement of financial position according to IFRSX as adjusted due to the conclusions drawn in chapter 4 (debit side)

figure 29: statement of financial position according to IFRSX as adjusted due to the conclusions drawn in chapter 4 (credit side)

figure 30: statement of comprehensive income with the by function disaggregation pursuant to IFRSX as adjusted due to the conclusions drawn in chapter 4 (part one)

figure 31: statement of comprehensive income with the by function disaggregation pursuant to IFRSX as adjusted due to the conclusions drawn in chapter 4 (part two)

figure 32: statement of comprehensive income with the by nature disaggregation pursuant to IFRSX as adjusted due to the conclusions drawn in chapter 4 (part one)

figure 33: statement of comprehensive income with the by nature disaggregation pursuant to IFRSX as adjusted due to the conclusions drawn in chapter 4 (part two)

figure 34: statement of cash flows under IFRSX as adjusted due to the conclusions drawn in chapter 4 (part one)

figure 35: statement of cash flows under IFRSX as adjusted due to the conclusions drawn in chapter 4 (part two)

figure 36: statement of changes in equity in virtue of IFRSX as adjusted due to the conclusions drawn in chapter 4

figure 37: analysis of changes in property, plant, equipment and intangible assets other than goodwill after IFRSX as adjusted due to the conclusions drawn in chapter 4

figure 38: analysis of changes in pension provisions after IFRSX as adjusted due to the conclusions drawn in chapter 4

figure 39: analysis of changes in investment properties after IFRSX as adjusted due to the conclusions drawn in chapter 4

figure 40: net debt information after IFRSX as adjusted due to the conclusions drawn in chapter 4

figure 41: remeasurement disclosures as per IFRSX as adjusted due to the conclusions drawn in chapter 4

List of abbreviations

illustration not visible in this excerpt

1 Introduction

Around ten years ago, the Financial Accounting Standards Board (FASB), the standard setters of the United States Generally Accepted Accounting Principles (US GAAP), and the International Accounting Standards Board (IASB), the standard setters of the International Financial Reporting Standards (IFRS), launched each their own performance reporting project. These projects were limited to the income statement. After two and half years of individual work, the FASB and the IASB (the boards) decided to cooperate. The project scope was extended to a complete set of financial statements. The project aim is to overcome the deficiencies of the current financial statement presentation. Recognition and measurement issues are not part of this joint project. (International Accounting Standards Committee Foundation [IASCF], 2008, p.26, 27; IFRS Foundation, 2010b).

To achieve project’s goal, the so called financial statement presentation project has been structured as follows:

1. Phase A handled the definition of a complete set of financial statements and the time – related scope of comparable information displayed in the financial statements (FS).

2. Phase B has been dealing with the basic matters of the financial statement presentation; this phase consists of three subprojects:

a. discontinued operation,
b. presentation of the other comprehensive income (OCI) and
c. the replacement of IAS1 Presentation of Financial Statements and IAS7 Statement of Cash Flows. Interim and segment reporting do not belong to this subproject – the latter is only excluded by the IASB, but not by the FASB –, because their improvements were not viewed as the most urgent. IFRS8’s post employment review is planned for 2011.

3. Phase C will cover interim financial reporting. (IASCF, 2008, p.19, 26; IFRS Foundation, 2010a; IFRS Foundation, 2010c, p.37; IFRSX.144; IFRSX.145; IFRSX.262 – IFRSX.267).

The replacement of IAS1 and IAS7 by the proposed rules of the boards’ Staff Draft of Exposure Draft IFRSX Financial Statement Presentation (IFRSX) is the topic of this master thesis with the focus on the following question:

Is IFRSX a boon or bane for the world of international financial reporting?

IFRSX, accessible since July 1, 2010, summarizes the boards’ project decisions made till April 2010. These decisions might be changed before the issue of an exposure draft. (IFRSX, p.1). Suggestions included in the Discussion Paper Preliminary Views on Financial Statement Presentation, published on October 16, 2008, and not transferred to IFRSX are not taken into account (e.g. reconciliation schedule).

IFRSX distinguishes between three types of regulations:

- rules applicable for IFRS – users and US GAAP – users,
- rules only applicable for IFRS – users as well as
- rules only applicable for US GAAP – users.

This work is based on the rules applicable for IFRS – users and on industrial entities. No consideration is given to financial service entities (banks and insurance entities).

A four step approach, introduced in figure 1, is employed to answer the key question.

figure 1 : four step approach to reply to the key question

illustration not visible in this excerpt

Remark. Own figure.

Based on the four step approach, the next chapter shows the deficiencies of IAS1 and IAS7.

2 What are the deficiencies of IAS1 and IAS7?

This chapter provides an overview of the deficiencies of IAS1 and IAS7 arising from their content (à 2.1, p.3) respectively from their surrounding circumstances (à 2.2, p.5).

2.1 Deficiencies related to the content of IAS1 and IAS7

2.1.1 Availability of too many options in IAS1 and IAS7

It is criticized that IAS1 and IAS7 include too many options. The following types of options exist:

1. options with a given selection range (= preparers choose one of the proposed options) and
2. options without a given selection range, i.e. discretion is made available to the preparers (Defren & Pilhofer, 2011, p.15).

Examples to number 1 are:

- the opportunity to deploy either the direct method (DMOCF) or the indirect method for presenting the operating cash flow (IMOCF) (IAS7.18),
- dividends and interests paid are classified in the operating or financing activities of the statement of cash flows (SCF), while dividends and interests collected are allocated to the investing or operating activities in the SCF (IAS7.33; IAS7.34) or
- the expenses in the statement of comprehensive income (SCI) are presented at the cost of sales method or nature of expenses method (IAS1.99).

The following illustrations are related to number 2:

- The disaggregation degree and the subtotal requirements leave autonomy to the preparers (IAS1.55; IAS1.85). A study conducted by Defren and Pilhofer (2011) highlighted significant differences between the disaggregation degrees on FS’ face of non financial service entities of the Deutscher Aktien Index (DAX) 30 (p.16, 19–25).
- The choice of the line item names offers great freedom to the preparers (Heintges & Wulbrand, 2011, p.6).
- IAS 7.18 and IAS 7.20 do not specify the starting point for the IMOCF. In practice, different profits/losses are used as a starting point. For example, profit/loss after income tax is employed by Südzucker, while Lufthansa deploys profit/loss before income tax (Lufthansa, 2011, p.155; Südzucker, 2011, p.83).

Due to the options in IAS1 and IAS7, many different presentation alternatives comply with IFRS. Thus, a complete comparability between different entities is not possible. (IFRS Foundation, 2010c, p.4).

2.1.2 Lack of valuable information due to missing requirements in IAS1 and IAS7

Users complain that the following valuable information is missing in the FS:

1. As it can be viewed from the statement of financial position (SFP), SCI and SCF forming the primary financial statements (pFS), demonstrated in chapter 6.1.3 (àp.62), their structure is not identical (IASCF, 2008, p.13):

a. Cash flows are assigned to the operating, investing or financing activities (IAS7.10).
b. The SFP is divided into assets, liabilities and equity (IAS1).
c. The SCI does not possess a structure related to those of the SCF and SFP (IAS1).

This circumstance is called lack of consistency or inconsistency in presentation (IASCF, 2008, p.13). Concluding, the relationship across the pFS is not clearly identifiable.

2. In general, the IMOCF is applied today, what is seen as an information gap. Users state that the information displayed in the DMOCF is more useful for their purpose than that of the IMOCF, as it allows performing better cash flow forecasts (CFA Institute, 2009, p.4). Nevertheless, due to the reconciliation of profit/loss to the operating cash flow and the information about asset’s and liability’s changes, the IMOCF has its right to exist (Fülbier, Maier & Sellhorn, 2009, p.408; IFRS Foundation, 2010c, p.45). The core difference between the DMOCF and IMOCF can be vouched in chapter ‎6.1.3.3 (àp.64).

3. The information in the FS is too much aggregated, for instance

a. the adjustments made within the IMOCF (e.g. changes in net working capital may not be illustrated at SFP line item level),

b. income’s and expenses’ information, for example

i. cost of goods sold are not disaggregated by nature plus
ii. no adequate separation of one – time as well as remeasurement income and expenses from other income and expenses (PricewaterhouseCoopers [PwC], 2007a, p.5, 10; PwC, 2007b, p.6; PwC, 2011b, p.1) and

c. missing reconciliations of the opening balance (OB) of important balance sheet (BS) line items to its closing balance (CB). It is crucial to be aware how those changes affect the other FS. (PwC, 2011a, p.2). At present, users find it difficult to collect that information at a desired level (IFRSFoundation, 2010c, p.50).

In order to sum up, current information is not transparent^[1], because it

- is highly aggregated,
- does not limpidly highlight the relationship among the pFS and
- does not point out certain key information, such as cash flows from customers.

2.2 Deficiencies related to the surrounding circumstances of IAS1 and IAS7

2.2.1 Piecemeal development of IAS1 and IAS7

IAS1 and IAS7 are the product of a historical piecemeal approach. This means that the development of the SFP, SCI and SCF results from situation specific demands and is not based on a process aiming at the generation of a self contained financial reporting system (IFRS Foundation, 2010c, p.21). This ends in non transparent FS, since the relationship between the pFS cannot be gathered. This is the case, as they are not identically structured.

2.2.2 Missing convergence between IFRS and US GAAP

This chapter explains the importance of a convergence in general plus between IFRS and US GAAP as well as deals with the differences between IFRS and US GAAP.

Two questions have to be answered in connection with the convergence:

1. Why is a convergence helpful?

Gros and Unrein (2010) mentioned the following benefits of harmonized international accounting standards:

- cost reduction^[2],
- improved global comparability of entity’s FS,
- simplification of foreign investments,
- enhanced understanding of FS by potential and existing foreign investors plus
- a more efficient resource allocation.

However, challenges are associated with those advantages, for instance cultural differences or the influence of security exchange commissions (p.464).

2. Why should a convergence between IFRS and US GAAP take place?

A harmonization of IFRS and US GAAP is favored, because they are currently at least for stock listed entities the dominating global accounting standards (Gros & Unrein, 2010, p.464). According to Heintges (2006), entities preparing their FS in virtue of US GAAP represent 50% of the global market capitalization (p.1569). In contrary, IFRS is applied in at least 99 jurisdictions (Deloitte Global Service Limited, 2010).

As a convergence between IFRS and US GAAP is promoted, it is given notation to the numerous differences between those reporting standards, some examples are:

- Both accounting standards permit the DMOCF or IMOCF. But, in case of the selection of the DMOCF, only US GAAP additionally requests reconciling the operating cash flow to profit/loss. (GrantThornton, 2010, p.21; IAS7.18).
- In IFRS, bank overdrafts can be part of cash and cash equivalents, while US GAAP excludes them from cash and cash equivalents (GrantThornton, 2010, p.20; IAS7.8).
- IFRS prescribes the disclosures of certain line items on SFP’s face. US GAAP does not possess similar rules. (GrantThornton, 2010, p.13; IAS1.54).
- IAS1.87 prohibits the classification of income and expenses as extraordinary items. US GAAP demands the presentation of extraordinary items, being unusual and infrequently appearing transactions. Extraordinary items occur rarely. (KPMG, 2010a, p.111).

Concluding, US GAAP–FS are not comparable with IFRS–FS. In addition, IFRS is not IFRS. Some jurisdictions adjusted IFRSs as issued by the IASB, for example the European Union. (Deloitte Global Service Limited, 2010).

2.3 Conclusion and summary

The following deficiencies of IAS1 and IAS7 were discovered: Both standards

- contain too many options,
- do not require the publication of all valuable information,
- were developed in stages plus
- differ from the corresponding US GAAP rules.

These deficiencies result in non transparent information and harm the comparability between different entities. Based on these deficiencies, the project scope (à point 2.c, p.1) was ideally defined, as IAS1’s and IAS7’s deficiencies could theoretically be solved. But, from a holistic financial reporting perspective, the project scope (à point 2.c, p.1) is not optimal, as it neglects interim and segment reporting. The inclusion of interim and segment reporting is preferred, as it prevents temporary respectively permanent philosophy differences in the financial reporting. Similar ideas regarding the project scope were expressed towards the boards (IASCF, 2008, p.26). In the next chapter, the boards’ working results are discussed.

3 What are IFRSX’s major changes to the financial statement presentation?

This chapter explains the major amendments to the financial statement presentation resulting from IFRSX and the related rules being necessary to understand the positive and negative comments, together the criticisms, discussed in chapter ‎4 (à p.19). IAS1’s regulations related to the statement of changes in equity (SCE) are transferred to IFRSX (IFRS Foundation, 2010c, p.48). The proposed major modifications concern nine topics, summed up in figure 2.

figure 2 : topics of the proposed major changes to the financial statement presentation due to IFRSX

illustration not visible in this excerpt

Remark. Own figure.

In the appendix, very simple FS with limited notes prepared under the terms of the new and actual rules are shown (à ‎6.1.3, p.62 respectively ‎6.1.4, p.67).

3.1 Disaggregation principle

The disaggregation principle intends

- to clarify what the entity does plus
- to ensure a faithful display of
- the links between assets or liabilities and their changes across the pFS and
- its cash flows (IFRSX.46).

To fulfill this target, IFRSX.47 notes

- function (= “the primary activities (and assets and liabilities used in those activities) in which the entity is engaged, such as selling goods, providing services, manufacturing, advertising, marketing, business development or administration” (IFRSX.48)),
- nature (= the economic characteristics or attributes differentiating assets, liabilities, income and expense items as well as cash flows not reacting likely to alike economic events, such as “wholesale revenues, retail revenues; materials, labor, transport and energy costs; or fixed – income investments and equity investments” (IFRSX.49)) and
- measurement base (= method applied, e.g. historical costs or fair value (IFRSX.50)) as the relevant disaggregation criteria. The materiality is closely linked to those criteria. It determines the disaggregation degree within the current and proposed rules. Material classes of similar assets, liabilities, equity, income, expenses and cash flows (items) are not aggregated. If items are dissimilar based on their function, nature or measurement base, they are illustrated separately, except if they are not material. An item might not be enough material to be mentioned on FS’ face, but sufficient material to be disclosed in the notes. The size and/or the context of the surrounding circumstances define materiality. (IAS1.29; IAS1.30; IFRSX.51; IFRSX.52; IFRSX.65).

Besides the biggest impact of the disaggregation principle – the disaggregation of income and expenses –, introduced later on in this chapter, further disaggregations are the by function^[3], by nature and by measurement base disaggregation of assets and liabilities in the SFP (IFRSX.119), the by nature disaggregation of cash flows (IFRSX.178; IFRSX.181), the analysis of changes in assets and liabilities (AoCiAaL) (à3.8, p.16) as well as the remeasurement disclosures (RD) (à 3.9, p.17).

The idea of disaggregated information is not new. It is traced back to IAS1 and IAS7. (IAS1.58; IAS1.59; IAS1.77; IAS1.78; IAS1.85; IAS1.86; IAS7.21; IFRSX.46; IFRSX.47). The practical implementation of IFRSX’s disaggregation principle ends in the publication of more information (FASB & IASB, 2009e, p.6) and in a change of the structure of the pFS as described in chapter 3.3 (àp.11). This can be easily caught by looking at the FS shown in chapter 6.1.3 (àp.62) and 6.1.4 (àp.67). Entities with more complex business scopes demonstrate more information than the FS presented in chapter 6.1.4 (àp.67) (KPMG, 2010b, p.28–34).

Normally, the most significant consequence of this principle requires that income and expenses are disaggregated by function and by nature within the function (= two step disaggregation (TSD)). For example, the cost of goods sold are split into material expenses, employee benefits costs and so on. (IFRSX.140; IFRSX.142; IFRSX.143). Its practical realization is illustrated in figure 15 (àp.69). The TSD was implemented, as the by function disaggregation helps to get an understanding of the exercised activities and the by nature disaggregation within the function considers the different reaction of the elements captured within those functions to identical environment and market situations (IFRS Foundation, 2010c, p.36).

This disaggregation is provided in the notes or on SCI’s face. If the by nature disaggregation within the function is supplied in the notes; the by function disaggregation is demonstrated on SCI’s face. The by nature disaggregation of income and expenses on SCI’s face is only allowed, if the application of the by function disaggregation is not beneficial. This is the case, if the by function disaggregation is not meaningful in understanding entity’s activities and assessing the amount, uncertainty and timing of future cash flows. (IFRSX.142; IFRSX.146; IFRSX.147; IFRSX.148). Generally speaking, after IFRSX.149, the by function disaggregation is not useful in evaluating the timing, uncertainty and volume of future cash flows for service entities, since the resource transformation into cash happens nearly at the same time.

Today, in compliance with IAS1.99, expenses are disaggregated by nature or by function on SCI’s face. If the cost of sales method is employed, IAS1.104 requires the disclosure of by nature expenses without an allocation to the functions. Revenue disclosures for the major revenue categories are demanded. A TSD is not requested. (IAS18.35(b)). In conclusion, the new rules result in giant changes, especially for production entities, because service entities can easier opt out from the TSD.

3.2 Cohesiveness principle

The cohesiveness principle is new. IFRSX.57 defines it as follows: “An entity shall present information in its financial statements so that the relationship among items across the financial statements is clear”. I.e., disaggregated information shall be displayed in a consistent way in sections, categories and subcategory across the pFS (IFRSX.58). Line items should be named in a way that the connections between the line items across the pFS are identifiable (IFRSX.60). It is not obligatory to fulfill the cohesiveness principle at the line item level. It is sufficient if this principle is reached at the category level. (IFRSX.61). This principle has a major impact on pFS’ structure, being explained in the next chapter.

3.3 Structure of financial statements

This chapter describes the modified structure of the pFS influenced by the disaggregation and cohesiveness principle. Within figure 3, the old and new structure are compared. A practical structure comparison is available in the appendix in chapter 6.1.3 (àp.62) and 6.1.4 (àp.67).

figure 3 :
structure comparison of the primary financial statements after IAS1/IAS7 and IFRSX

illustration not visible in this excerpt

Remark. In accordance with: IAS1; IAS7; IFRSX.

As highlighted in figure 3, both SCF include similar terms. I.e., the smallest structure change takes place in the SCF. However, some of these terminologies differ in their meaning within IAS7 and IFRSX. The operating cash flow according to IAS7 is more or less related to any type of income and expenses, whereas the operating cash flow in virtue of IFRSX consists of cash flows related to the operating income, operating expenses, operating assets and operating liabilities. By and large, investing activities’ cash flow is linked as per IAS7 to purchases and sales of long term assets as well as investments. In contrast, the cash flow from investing activities under IFRSX comprises all cash flows connected to the investing income, investing expenses, investing assets and investing liabilities. The basic idea of financing activities’ cash flow has not altered. But, financing activities’ cash flow within IAS7 and IFRSX are not identical. Payments concerning financial leasing liabilities have moved from IAS7’s financing activities to IFRSX’s operating category. (IAS7.6; IAS7.33; IAS7.34; IFRSX.72; IFRSX.76; IFRSX.80; IFRSX.81 IFRSX.83).

Within the following paragraphs,

- the sections, categories and subcategory noted in figure 3,
- items’ classification principles into the sections, categories and subcategory as well as
- the rules regarding the subtotals and headings are introduced.

The business section, divided into an operating and investing category, elucidates how an entity generates value (Ernst & Young [EY], 2010a, p.20; IFRSX.71). Items related to the operating activities are classified in the operating category. Operating activities create revenue through a process requiring the combined utilization of entity’s resources. The following line items are part of the operating category: cash, trade payables, revenue from the sale of manufactured products or cash collected from customer. (IFRSX.73; IFRSX.117).

The operating category possesses a subcategory which is named operating finance subcategory (IFRSX.62(a)(i)(1)). After IFRSX.75, the operating finance subcategory includes all obligations

- linked to entity’s operating activities in a direct way respectively to a liability increase as a result of a receipt of a service, a good or a right of use,
- possessing a time value element and
- being originally long term orientated.

Two examples for that subcategory are: Lease obligations and net post employment benefit obligations (IFRSX.76).

Assets or liabilities employed to create a return are classified into the investing category. Even if those assets respectively liabilities are linked to other resources, no remarkable synergies are generated. The changes in those assets or liabilities belong to the investing category. Fixed income securities, equity securities, dividend income or interest income are allocated to this category. (IFRSX.81; IFRSX.82).

All activities linked to the raise respectively repayment of capital are part of the financing section (IFRSX.83). The financing section consists of a debt and an equity category (IFRSX.84). Borrowing agreements aiming at getting and repaying capital plus their corresponding income effects are shown in the debt category (IFRSX.86). Besides others, mortgages, loans, bonds or their interest expenses are categorized in the debt category (IFRSX.87). Assets and liabilities arising from own equity activities and their income effects adhere to the debt category, such as dividends payables (IFRSX.93; IFRSX.94).

All equity items as defined in IFRSs are classified into SFP’s equity category. Changes in equity are displayed in the SCE. Cash flows related to equity transactions are integrated in SCF’s financing section. (IFRSX.95).

SCI’s income tax section consists of income tax expenses and income as far as they are not presented somewhere else after IFRSs, e.g. within the OCI and discontinued operation (IFRSX.98). All deferred and current income tax assets and liabilities are demonstrated in the income tax section regardless where the related income tax income and expenses are illustrated. Income tax payments and refunds are assigned to SCF’s income tax section without considering where the corresponding income tax income and expenses are highlighted. (IFRSX.97).

The multi – category transaction section contains all expenses and income as well as cash flows of acquisition or disposal transactions originating from the recognition respectively derecognition of assets and liabilities in more than one section or category, unless they represent a discontinued operation (IFRSX.100). The dominant examples are the business combination or the sale of a subsidiary (IFRSX.101; IFRSX.102).

The discontinued operation section comprises all assets, liabilities, income, expenses and cash flows connected to the discontinued operation as defined in IFRSs as long as they do not fall into the income tax section (IFRSX.97; IFRSX.99). IFRSX does not supply any further disaggregation requirements for the discontinued operation, as the overall disaggregation principle (à 3.1, p.8) is applied. The entity decides which information provides the necessary insights. (FASB & IASB, 2009h, p.5; FASB & IASB, 2010b, p.5).

Items’ relation to entity’s activities is the base for their classification into the sections, categories plus subcategory (IFRSX.65). An entity with more than one reportable segment as specified in IFRS8 allocates the items at the reportable segment level (IFRSX.68). The classification at the segment level respects different items’ usages within the segments. If, alternatively, a classification was based on the entity level, an item would be assigned in the same section, category and subcategory across the entity without considering different deployments of the same item within the entity. (Enevoldsen, 2009, p.10). If an asset or a liability meets the definition of more than one category, the so called multi function assets respectively liabilities, its main use determines the classification (IFRSX.106).

Subtotals and headings are presented for each section, category and subcategory on the face of the pFS. If supplemental headings and subtotals ameliorate the comprehension of the financial position and performance, they shall be added. (IFRSX.112).

3.4 Concept of cash and cash equivalents

Within IAS1 and IAS7, the concept of cash and cash equivalents is anchored (IAS1.54(i); IAS7.6). IFRSX.118 abolishes this concept having implications on the SFP and SCF.

IAS1.54(i) requests the presentation of cash and cash equivalents on the face of the SFP. With coming into effect of IFRSX, they are no longer displayed as one line item. Cash is part of the operating category, while cash equivalents are generally included in the investing category. (IFRSX.82; IFRSX.117; IFRSX.120).

Currently, the SCF explains the changes in cash and cash equivalents (IAS7.6; IAS7.10). In contrast, IFRSX’s SCF illustrates the reasons for the change in cash (IFRSX.168). Thence, purchases and disposals respectively repayments of cash equivalents are cash flows. If cash equivalents are received or delivered in a transaction without cash involvement, this transaction is a non cash flow transaction under IFRSX.

The practical impacts of the elimination of the cash and cash equivalent concept on the sample entity can be gathered on the face of the SFPs and SCFs as presented in the chapters 6.1.3 (à p.62), 6.1.4 (àp.67) and 6.1.5 (àp.78). They are highlighted by red arrows.

3.5 Layout of the statement of financial position

A comparison of the SFP layout according to IAS1 and IFRSX highlights that the layouts significantly differ. This fact can be facilely discovered by looking at the SFP shown in chapter 6.1.3.1 (àp.62) and 6.1.4.1 (àp.67). At the moment, assets are demonstrated apart from liabilities and equity. IFRSX’s SFP is based on the idea of subtracting liabilities from assets classified in the same section or category. It focuses on net assets. (IFRS Foundation, 2010d, p.22). Both SFPs can be named BS instead of SFP (IAS1.10; IFRSX.10).

3.6 Classification of assets and liabilities

The rules regarding the time pattern classification of assets and liabilities are subject to a major change. Besides a minor adjustment to the terminologies, current/non current à short term/long term (IAS1.60; IFRSX.115), a bigger modification was made to the classification guidelines. Currently, assets and liabilities realized respectively settled within the operating cycle or one year from the reporting date are current assets/liabilities (IAS1.66; IAS1.69). I.e., if the operating cycle exceeds twelve months, assets and liabilities related to the operating activities and realized or settled after one year from SFP date are current assets/liabilities (IAS1.68; IAS1.70). IFRSX.122’s classification principle is restricted to a one year cut off.

This amendment impacts entities with a normal business cycle lasting for more than a year. It may result in a movement of the relative proportions between short term assets/liabilities and long term assets/liabilities for entities with an operating cycle being longer than twelve months. For instance, inventory currently classified as current assets might be split between short term assets and long term assets.

3.7 Operating cash flow

IAS7.18 permits the DMOCF and the IMOCF, whereas one of them has to be selected. In contrast, IFRSX.170 and IFRSX.172 obligate the DMOCF and a reconciliation of operating profit/loss to the operating cash flow as an integrated element of the SCF. Thus, IFRSX asks for the direct and indirect method. Moreover, IMOCF’s starting point, not precisely defined in IAS7 (à 2.1.1, p.3), was specified. The cash flow information after IAS7 and IFRSX can be compared by looking at chapter 6.1.3.3 (àp.64) and 6.1.4.3 (àp.71).

3.8 Analyses of changes in assets and liabilities

The preparation of an analysis explaining the changes between the OB and CB of selected SFP line items respectively groups of line items is requested. Such an analysis shall be published for line items or groups of line items being crucial in management’s eyes to obtain a comprehension about the development of entity’s financial situation within the current period. (IFRSX.243). Some criteria for choosing the line items or groups of line items are set out, for example the relative proportion of line item’s OB and CB to total assets respectively liabilities (IFRSX.244). If other IFRSs demand for reconciliations from the OB to the CB, such as IAS16.73(e) for every class of property, plant and equipment (PPE), they shall comply with AoCiAaL’s rules (IFRSX.245). The difference between the OB and CB is split into several sources, for instance cash flow related changes or non cash flow related changes arising from regular transactions (IFRSX.246). The AoCiAaL can be disclosed with the other disclosures linked to a corresponding asset or liability (IFRSX.253). Chapter 6.1.4.5 (àp.73) illustrates sample AoCiAaLs.

To a certain extent, such disclosures do currently not exist. As an example, a reconciliation of inventory’s OB to its CB might be shown. IAS1 does not have alike rules.

3.9 Remeasurement disclosures

The RD described in this chapter are not available in this form within the effective IFRSs. A practical example is displayed in chapter 6.1.4.6 (àp.77). Remeasurement amounts included in the SCI line items are disclosed together at one location in the notes. Sections, categories respectively subcategory headings and line item descriptions of the RD correspond to them of the SCI. (IFRSX.233).

Remeasurement is defined as income and expenses recognized in the SCI leading to a change in asset’s or liability’s net carrying amount and resulting from:

- “a change in (or a realization of) a current price or value;
- a change in an estimate of a current price or value; or
- a change in any estimate or method used to measure the carrying amount of an asset or a liability” (IFRSX.234).

This definition is specified by examples provided in IFRSX. For example, though the margin realization resulting from an inventory sale is a remeasurement, it is excluded from the RD. (IFRSX.235 – IFRSX.237). Fair value changes or gains/losses on sale of PPE are remeasurements, while depreciation and amortization are not seen as remeasurements (IFRSX.238; IFRSX.239).

3.10 Conclusion and summary

The following key changes are implemented by IFRSX:

- the publication of more disaggregated information, such as income’s and expenses’ TSD (IFRSX.46 – IFRSX.51; IFRSX.140; IFRSX.142; IFRSX.148),
- a clear relationship between the items across the pFS (IFRSX.57),
- an identical structure of the pFS (IFRSX.62),
- the abolishment of the cash and cash equivalents concept (IFRSX.118),
- a net asset based layout of the SFP (IFRS Foundation, 2010d, p.22),
- the time pattern classification of assets and liabilities based on a one year cut off in place of the duration of the operating cycle and a one year cut off (IAS1.66; IAS1.68 – IAS1.70; IFRSX.122),
- the mandatory publication of the DMOCF and the reconciliation of the operating profit/loss to the operating cash flow (IFRSX.170; IFRSX.172),
- the explanation of changes in core SFP line items (IFRSX.243) and
- the display of RD (IFRSX.233).

Concluding, the content deficiencies of IAS1 and IAS7 (à2.1, p.3) have not been completely eliminated. The information gaps stated in chapter 2.1.2 (àp.4) are closed. But, many options are still present, such as the determination of the disaggregation degree or the location of the by nature disaggregation of income and expenses within the function. In the next chapter, it is discussed, whether selected options can be further narrowed and if the information gaps are terminated in a convincing way.

Furthermore, the deficiencies regarding the surrounding circumstances (à 2.2, p.5) have not been utterly solved. A piecemeal development of the SCI, SCF and SFP was prevented, as they were all part of the project and considered together. A total convergence between the US GAAP–version and the IFRS–version of IFRSX was not reached. Besides other distinctions, in contrast to the IFRS–version, the US GAAP–version

- does not possess rules regarding going concern or accrual basis (IFRSX.29; IFRSX.31),
- does not require the disclosure of net debt information (IFRSX.255) or
- alters the segment disclosures (IFRSX.144; IFRSX.145; IFRSX.262 – IFRSX.267).

4 What are the major criticisms on IFRSX and the consequences thereof?

This chapter illustrates the criticisms expressed on IFRSX’s main amendments to the financial statement presentation (à 3, p.8) and the consequences thereof.

4.1 Disaggregation principle

This chapter has a closer look at the comments about the disaggregation principle. These comments are divided into the following issues:

- disaggregation principle’s general idea and disaggregation degree (à 4.1.1, p.19),
- location of disaggregated information (à 4.1.2, p.20) plus
- disaggregation of income and expenses (à 4.1.3, p.23).

4.1.1 General idea of the disaggregation principle and disaggregation degree

The general idea of the disaggregation principle and the disaggregation degree are dealt within this chapter. This principle may enable users to better comprehend the FS, as items acting miscellaneously to economical situations are disaggregated. It facilitates cash flow forecasts, the performance and management evaluation, income sources’ sustainability analysis as well as the ratio calculation. Hence, the decision quality is sharpened up. (Pronobis & Zülch, 2009, p.565; PwC, 2009, p.6; Wild, 2009, p.1).

The heightened disaggregation eases the detection of distinctions between different entities (EY, 2009, p.6). In contrast, the disaggregation could disadvantageously affect FS’ comparability, since it is influenced by preparers’ subjectivity (KPMG, 2009, p.6). Thus, Breker and Fieseler (2009) plus KPMG (2009) suggest the incorporation of industry specific minimum disaggregation standards for the disaggregation on FS’ face respectively industry specific samples developed in cooperation with industry representatives (p.3; p.6).

The general idea of the disaggregation principle illustrates a boon, because it provides helpful insights into the entity. The benefits thereof were expressed by the supporters. Its usefulness is backed up by users’ demand for further information (à point ‎3, p.5) delivered as a result of the disaggregation principle.

To maximize its positive features, an appropriate degree of subjectivity is inevitable, as it supplies the flexibility for the adaption on the individual situation and the base for an adequate representation of the business model. This is crucial for optimal comparisons, since entities’ differences have to be taken into account, when comparing different entities. Hence, ideas reducing the subjectivity while maintaining an appropriate level of autonomy are countenanced. Industry specific disaggregation requirements or industry samples are not espoused, because they are too rigid to take entity specific aspects into consideration.

An interesting idea to minimize the subjectivity was raised by FASB’s and IASB’s staff (staff). They proposed the implementation of similar threshold criteria for the disaggregation as mentioned in IFRS8.13 et seq. for the identification of reportable segments (FASB & IASB, 2010c, p.5). Such criteria are promoted, as they reduce preparer’s subjectivity respectively specify the size component of the materiality concept and consider entity specific circumstances. In addition, these criteria render more precise the boundaries of the disaggregation degree. In order to create a consistency within IFRSs, threshold criteria based on the underlying idea of IFRS8.13 et seq. shall be developed for the disaggregation within the FS. Concluding, IFRSX’s disaggregation degree rules indicate a bane.

4.1.2 Location of disaggregated information

When talking about the disaggregation, one topic cannot be omitted. This is the place of disaggregated information. The display of information on the face of the FS is advantageously, since it is pointed out in the context (IFRS Foundation, 2010c, p.35). If more information is illustrated on FS’s face instead of in the notes, users do not need to switch so often between the notes and the pFS (IASCF, 2008, p.58). Ratio calculations are simplified, as users must not search the input factors throughout the FS (FASB & IASB, 2009b, p.3).

In a study, financially supported by the Financial Accounting Standards Research Initiative (FASRI)^[4], credit analysts evaluated the FS of an entity operating in one industry and more than one geographical area. Based on this research, the classification by activities, item’s assignment into the sections and categories, plus the TSD on FS’ face was the most beneficial presentation alternative^[5] for the predictions and judgments made. This option is thought to be more transparent than the others. (Bloomfield et al., 2010, cover sheet, p.14, 16, 27, 28).

It is averred that the disaggregation principle results in too much information demonstrated on the face of the FS. The notes shall include more disaggregated information. This augments the comprehension of the FS and avoids an information overflow on the face of the FS respectively an obscuration of the core message. Moreover, decision useful information is generated by the entire FS and not solely by the pFS. (Breker & Fieseler, 2009, p.2; Enevoldsen, 2009, p.2, 4, 16; Knorr, 2009, p.4, 11; PwC, 2009, p.2, 6). The following disaggregations shall be moved to the notes: the measurement base disaggregation of assets and liabilities, the short term/long term disaggregation of assets and liabilities and income’s and expenses’ by nature disaggregation within the function (FASB & IASB, 2009d, p.15; Knorr, 2009, p.4, 11).

The critical analysis of the above cited study revealed:

- Experiment’s FS were brief and simple in comparison to those prepared by KPMG. The latter included much more line items than these of the researchers. (Bloomfield et al., 2010, p.30–32; KPMG, 2010b, p.28–34).
- The research results might be affected by the fact that this concept is new, as Chambers et al. (2006) concluded in their study that the biggest attention to information is given, if it is reported at the expected place (p.3). For example, since US GAAP – followers majorly report OCI in the SCE; investors made greater notation of it, when it is shown in the SCE in lieu of the SCI (Chambers et al., 2006, p.3; Pandit & Phillips, 2004, p.41).
- Wilkins and Zimmer (1983) found that different ways of leasing reporting had no impact on credit analysts’ reaction regarding entities possessing different leverages. Their findings could be influenced by the extensive consideration of leasing in bank manuals, forms and literatures plus the controversial discussions of the leasing topic at that time in the media and business world (p.761). What does this mean for the analyzed study? If IFRSX was more discussed, study’s result might have changed.
- If, aside from or in place of credit analysts, others participated in this study, the outcome may have been different.

Thence, these research conclusions have to be interpreted carefully. Nonetheless, information shown on pFS’s face is beneficial, as users’ working activities are lightened (à p.20). The disaggregation locations introduced in figure 4 are recommended, if they are applicable according to IFRSX.115 and IFRSX.148, to the extend that the related information is material.

figure 4 : proposed disaggregation locations

illustration not visible in this excerpt

Remark. Own figure.

These disaggregation locations are welcomed for the following reasons:

- The display of all sections, categories and subcategory on the face ensures an identical structure of the pFS. The importance of an identical structure, i.e. permitting to anchor the cohesiveness and disaggregation principle, is proven in chapter 4.1.1 (àp.19) and ‎4.2 (àp.27).
- To achieve a holistically structured SFP, the short term/long term classification is also presented on the face.
- The sole display of the sections, categories, subcategory and the short term/long term distinction on the face results in too strongly aggregated information on the face. Thus, further disaggregation is requested on the face of the pFS.
- The suggested disaggregation on the face does not end in an information overflow, as the information is well structured. Therefore, the information gives facilely an overview of the financial situation and performance respectively of the composition of the by function SCI line items combined with the profit/loss figures. Finally, it simplifies users’ working tasks.
- The suggestion complies with the findings of Chambers et al., since there is no option available regarding the disaggregation location.

IFRSX’s disaggregation location rules are a bane, because there is an option concerning the location of income’s and expenses’ by nature disaggregation.

4.1.3 Disaggregation of income and expenses

This chapter covers income’s and expenses’ disaggregation. Disadvantageously, the proposed TSD may lead to too much complexity and hide certain key information (à 4.1.2, p.20) (Grimmig, Klein & Scherr, 2010, p.601).

The by nature disaggregation within the function equals more or less a distinction between variable and fix elements. This supports the decision procedures. (FASB & IASB, 2009i, p.22; Kitamura, 2009, p.3). The TSD fosters

- users’ understanding why the cost structure differs among entities,
- the execution of trend analysis and breakeven point calculations as well as
- the prediction of cash flows and profit/loss (FASB & IASB, 2009d, p.15; FASB & IASB, 2011a, p.4, 5, 8).

However, based on the following arguments, the realization of the above listed advantages is questioned, especially for multi product entities:

- There might be different levels of vertical integration (FASB & IASB, 2009e, p.11). For instance, Deutsche Bahn’s segment DB Schenker Logistics has a different cost structure than the segment DB Schenker Rail. The latter has its own transportation equipment, while the other acquires the transportation capacity. (Deutsche Bahn, 2011, p.90, 91, 178).
- Consequences of a particular economical situation may not be identical for all segments which have to be considered in reliable forecasts (FASB & IASB, 2009k, p.12, 13).
- Different by nature expenses might have different importance for each segment. For example, freight expenses are less meaningful for a service segment than for a trading segment. (Archambault & Sharp, 2009, p.15).

TSD’s preparation is not easy, but expensive. Intercompany allocations are responsible for the high costs. Currently, internal invoices do not split the amount charged to the internal customer into expenses’ nature. A discrete presentation of by nature and by function disaggregation is not as costly as the TSD. (FASB & IASB, 2011a, p.2, 3; Enevoldsen, 2009, p.18).

Different notable presentation proposals were identified during criticisms’ analysis:

1. A display of a by nature or by function disaggregation on SCI’s face and an option for a second disaggregation within the first disaggregation in the notes should be permitted. Within those options, entities ought to opt for the disaggregation best fitting its business practice. (KPMG, 2009, p.11).
2. In March 2011, the staff published an idea consisting of a by function disaggregation on SCI’s face and a by nature disaggregation in the notes, except if the by nature disaggregation is made on SCI’s face (FASB & IASB, 2011a, p.9).
3. Breker and Fieseler (2009) would like to keep IAS1’s rules, as IFRSX’s proposal might be too complex and end in too much information (p.11). It is claimed that the existing rules result in adequate decision useful information (FASB & IASB, 2009k, p.4).
4. Knorr (2009) alleges that by nature or by function information may not be taken into account by the executives, when they steer their entity. In such situations, by nature respectively by function disaggregation does not supply relevant information. I.e., only the disaggregation being used internally shall be disclosed maximizing the decision usefulness. Due to the previously stated justifications, it is not voted for the TSD. Even if both disaggregation types are used internally, by nature or by function disaggregation should be published. Otherwise the clarity and understandability are negatively impacted, since it ends in too much and possibly redundant information. The executives ought to select the alternative best reflecting their internal control (p.13).

This argumentation is partially acknowledged as a valid reason, because the management and users do not possess similar information levels, intentions with the information and working habits for forecasting activities. This means, information is valuable for somebody, whereas it is not relevant for others.

The criticisms are analyzed on the base of the available alternatives for the income and expenses disaggregation (à point 1 to 4, p.24 and chapter 3.1, p.8). They are divided into two groups:

1. combined disaggregation (i.e. a secondary disaggregation within a primary disaggregation) including the following alternatives:

a. primary and secondary disaggregation as defined in IFRSX’s TSD plus
b. primary and secondary disaggregation are determined by the preparers, if two disaggregations are used (à point 1, p.24);

2. non combined disaggregation (i.e. by function disaggregation and by nature disaggregation are illustrated separately) covering two alternatives:

a. both disaggregations, i.e. by function and by nature disaggregation, have to be obligatorily presented, thereafter called option 2.a (àpoint 2, p.24), as well as
b. the option to choose between the by function and by nature disaggregation, thereafter named option 2.b (àpoint 3 and 4, p.24).

Firstly, the best option within each group is identified. Secondly, the best options of each group are compared to draw a final verdict about IFRSX. Group 1 is studied first.

By function disaggregation is the primary disaggregation, while by nature disaggregation is the secondary disaggregation. Why this strict order? An entity has to execute certain tasks represented by the by function disaggregation to achieve its aim. However, these activities can be performed differently. This is reflected by the by nature disaggregation. Hence, by function disaggregation goes before by nature disaggregation. Or, in other words, it follows the entity’s break down from a broad level to a detailed level. Concluding, IFRSX’s approach is superior.

To come to a decision within group 2, the merits of the by function and by nature disaggregation are studied:

- The by function disaggregation illustrates the functional resource allocation better reflecting the relationship between expenses and revenue than the by nature disaggregation (Diehm & Kerkhoff, 2005, p.348). It delivers a tendency about entity’s focus.
- The by nature disaggregation builds a relationship between the SCI and the numbers of employees – ameliorating the prediction of the related expenses –, the SFP as well as the SCF (Diehm & Kerkhoff, 2005, p.348). Amounts aggregated in the by nature disaggregation tend to have alike cost behaviors compared to the amounts aggregated in a by function disaggregation (IASCF, 2008, p.67).

As a result of the previously mentioned merits, users’ performance analysis, forecasting activities and verdict about management’s quality are facilitated by the display of both methods. For example, they permit performing different types of efficiency analysis, such as sales expenses in relation to the revenue or employee benefits costs in relation to the revenue, which provide information employed to fulfill users’ activities.

Due to the fact that both disaggregation methods support users’ tasks with different information ending in as preliminary indicated notable advanced benefits, today’s availability of at least one of the two disaggregation methods and the normally sophisticated accounting systems of the target users of IFRS, it is assumed that, with a moderate amount of additional costs, a substantial increase of the benefits is achieved by the implementation of option 2.a. This means, the cost – benefit – ratio of option 2.a is better than that of option 2.b. However, if the by function disaggregation does not end in reliable figures, the by nature disaggregation is only presented. Overall, option 2.a outperforms option 2.b.

For a final verdict, the TSD is compared with option 2.a. These methods are visualized in chapter 6.1.4.2 (àp.69) and 6.1.5.2 (àp.80). Within this comparison, the criticisms related to the TSD are considered:

- Preparers cost concerns are credible, as they adequately reflect the reality and the standard setters did not oppose to preparers’ argumentation (FASB & IASB, 2011a, p.2, 3, 8). Inappropriate comments are rectified by the staff (FASB & IASB, 2011d, p.2).
- The criticisms expressed regarding the doubts of the realization of TSD’s benefits are justified, as opponents’ arguments appropriately reflect the reality, in particular for multi segment entities. These facts limit its benefits, but do not abolish them.

The key question is: Which option possesses the better cost – benefit – ratio? The lower costs are associated with option 2.a, as the problem of intercompany allocations is prevented. The higher benefits are provided by the TSD, since it supplies the by nature information within the related context. For example, it might be that function’s expenses did not change, but their composition did. Overall, option 2.a reaches a better cost – benefit – ratio, because its cost advantage compensates its benefit disadvantage. This is the case, as

- TSD’s potential benefits cannot unfold its full value at the group level of multi segment entities,
- the entities deliver already half of the required information of option 2.a and
- IFRS target users normally possess accounting systems allowing them generating the missing disaggregation of option 2.a at reasonable costs.

Concluding, IFRSX’s rules regarding income’s and expenses’ TSD are a bane. But, the published option 2.a (àpoint 2, p.24) could still be made more useful, if both disaggregations are presented next to each other, as users can quickly switch between them.

4.2 Cohesiveness principle

This chapter draws the attention on the general idea of the cohesiveness principle. Advantageously, this principle ends in evident links between the pFS improving and lightening information’s comprehension and transparency (Archambault & Sharp, 2009, p.2; PwC, 2009, p.2). At the moment, users need a while to understand the relationship between the pFS (IFRS Foundation, 2010c, p.19). What is more, the cohesiveness principle provides users in a quicker way with an overall picture about entity’s financial situation and performance (Fischer & Zülch, 2007, p.1769). Due to the extended cohesiveness and disaggregation, differences between the entities can be easier detected (EY, 2009, p.6). The sustainability of cash flows and earnings can be simply detected as a result of the consistent segregation of the operating activities from the other activities (IFRS Foundation, 2010c, p.18).

Based on the above mentioned convincing facts and the non exorbitant costs of the preparers (FASB & IASB, 2011e, p.3), the cohesiveness principle delivers with an appropriate cost – benefit – ratio needed information to enhance FS’ transparency. Proponents’ statements are convincing, since the FS are more perspicuously than at the moment. Concluding, its implementation is welcomed and makes IFRSX to a boon on this matter.

4.3 Structure of the financial statements

Criticisms related to the structure of the financial statements are handled in this chapter. This includes:

- items’ classification into the sections, categories and subcategory (à 4.3.1, p.28) plus
- sections’, categories’ and subcategory’s content and right to exist (à 4.3.2, p.31).

4.3.1 Classification into the sections, categories and subcategory

The classification guidelines dealing with items’ assignment into the sections, categories and subcategory are critically analyzed from two perspectives:

- classification principle: item’s link to the activities (à 4.3.1.1, p.28) and
- classification level: items’ classification at the segment level (à 4.3.1.2, p.29).

4.3.1.1 Classification principle: item’s link to the activities

The comments about the classification principle, being items’ link to the activities, are the focus of this chapter. Positively, entity’s uniqueness is explained to the users, as space is left for considering entity specific aspects (Archambault & Sharp, 2009, p.9; EY, 2009, p.7). Insiders are able to perform better assignments than outsiders (FASB & IASB, 2009i, p.13). The classification principle eases users’ comprehension of the business model needed for effective information utilization (Enevoldsen, 2009, p.9). Further, meaningful insights into entity’s resources and business management are delivered (KPMG, 2009, p.6).

The classification tends to be objective, because items’ relation to entity’s activities is given notation (EY, 2009, p.6). The comparability between different entities is ameliorated, as a different classification of the same item employed differently by different entities creates helpful insights into the financial flexibility (Archambault & Sharp, 2009, p.9). In contrary, it is claimed that the outcome of the classification approach leads to less comparable FS, since judgment is involved in the allocation. Individuals could draw other conclusions on the same matter. This affects the comparability between different entities respectively reporting periods of the same entity. Or, it ends in classification inconsistencies within the same entity and period. (BDO Global Coordination B.V. [BDO], 2009, p.5; Wild, 2009, p.1).

Due to the subjectivity, the classification approach offers the opportunity for an intentional false presentation (Wild, 2009, p.2). E. g., derivatives performing as expected are classified in the operating category and, if they do not, they were officially acquired for speculative purposes assigned to the investing category. This allows manipulating the operating results.

The subjectivity is responsible for representing entity’s view in the FS and, thence, its reality, if it is applied factually and ethically correctly. However, the subjectivity could negatively influence the comparability. Realistically, different individuals might draw other conclusions on the same facts, reflecting entity’s reality from their perspective. The benefits of a presentation of entity’s reality are indicated by the critics as rational advantages. Is there a possibility to decline the subjectivity, while ensuring the display of entity’s reality? Any alternative approach heightening the comparability – a standard driven approach or uniform classification prescriptions for the items by the boards (FASB & IASB, 2009g, p.5) – prohibits an adequate reflection of entity’s reality, as no space is supplied for considering different item’s utilization.^[6] Thus, the decision boils down to a trade off between comparability and entity’s reality. Entity’s reality is stronger weighted than the comparability, because comparability improvements may end in a non adequate reflection of entity’s reality. If those figures do not appropriately represent entity’s reality, they are misleading. The fact that comparability is not guaranteed does not result in misleading figures, because they still represent entity’s view from its perspective. This means, IFRSX’s classification approach is a boon.

4.3.1.2 Classification level: items’ classification at the segment level

Within this chapter, the remarks about the classification level (e.g. segment level) are taken into consideration. An assignment at the segment level may result in FS being not absolutely clear (FASB & IASB, 2009d, p.8), since the same line item might be found in more than one category.^[7] Classification problems arise, when entities with more than one segment have to allocate their assets and liabilities at the entity level (EY, 2009, p.7), because the different employments of assets and liabilities within the entity cannot be considered. In contrast, if the assignment is carried out in accordance with assets’ and liabilities’ utilization in the respective segments, different deployments of assets and liabilities are taken into account (Archambault & Sharp, 2009, p.10).7 The disregard of usage differences of an item is responsible for misleading information. Therefore, it is welcomed that item’s allocation at the entity level is forbidden. If some assets or liabilities are not assigned to a segment, it is difficult to assign these assets and liabilities at the segment level (KPMG, 2009, p.7). For example, Volkswagen did not allocate all assets to a segment (Volkswagen, 2010, p.230). In this situation, they should be classified at the group level. Group level, applicable for consolidated and single FS of multi segment entities, means that the classification is based on the employment of each individual asset, liability, income, expense and cash flow from a group perspective. I.e., in contrast to the entity level as defined on page14, it reflects different usages of an item.

The proposed classification level is definitely appropriate for segment reporting, as it respects item’s usage in the segment. But, its adequacy for consolidated and single FS of multi segment entities is doubted. This is explained in the following paragraph.

One segment owns a building aiming at generating income from renting offices to others and creating a return independently from other assets. Hence, it is part of the investing category with regard to IFRSX.68 and IFRSX.81. This property is wholly lent to another group entity of another segment locating its administration and sales department in it. From a group perspective, the building should be included in the operating category. Due to IFRSX.68, it is displayed in the investing category in the consolidated FS. This results in misleading information. As a consequence of the previous explanations, the entity should classify the property in the segment reporting within the segment owning the building in the investing category and in the consolidated FS in the operating category. Such a different handling is not requested by IFRSX. (Heintges, phone call, May 6, 2011). The different classification in the segment reporting and consolidated FS is in line with IAS40.15. IAS40.15 requires that properties are treated distinguishably in consolidated and single FS, if they have other utilizations from a group perspective than from a single entity view.

Thus and due to the fact that not all assets and liabilities might be assigned to a segment, a modification of IFRSX is recommended. It results in the following classification levels:

[...]

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^[1] Transparent information is clear, understandable, not misleading and complete, including appropriately disaggregated FS and a clear relationship across the pFS.

^[2] For examples, American entities can be listed on many different stock exchanges and may prepare a complete set of FS based on US GAAP and IFRS, since other accounting standards are asked by the stock exchanges (Cheng, 2009, p.34).

^[3] By function disaggregation for assets and liabilities means their allocation into the sections, categories and subcategory (FASB & IASB, 2009c, p.4).

^[4] FASRI’s goal is to support the FASB in its standard setting procedures. FASRI’s funding is supplied by the Financial Accounting Foundation (FAF) which finances, observes and administrates the FASB. (FASB, 2011; FASRI, 2011).

^[5] Four alternatives were tested as part of this study: classification and disaggregation on the face, classification and disaggregation in the notes, classification on the face and disaggregation in the notes as well as classification in the notes and disaggregation on the face (FASB & IASB, 2009j, p.3).

^[6] For example, investment properties can be classified in the operating or investing category depending on the related context (KPMG, 2010b, p.28).

^[7] For instance, financial liabilities might be classified in the operating category and debt category of an entity depending on the segment to which they belong. A production segment shows them into the debt category, whereas the financial service segment may allocate them into the operating category. (IFRSX.69).