Chapter 7: Disclosure
Objective
IAS 34 requires an entity to include, in its interim financial report, an explanation of events and transactions that are significant to an understanding of the changes in the entity’s financial position and performance since the end of the last annual reporting period. The information disclosed in relation to those events and transactions should update the relevant information presented in the most recent annual financial report.
The disclosures that are required to be included in the notes to an entity’s interim financial report are intentionally brief. It is recognised that the users of the interim financial report will have access to the entity’s most recent annual financial statements. Users will not be interested in insignificant updates to information that has already been reported or more minor events that have occurred during the interim period. However, the note disclosures should be sufficient to enable users to appreciate the main factors influencing the entity’s performance during the interim period and its position at the period end.
IAS 34 includes a list of illustrative events or transactions that could be significant.
What examples of events that might require disclosure are included in IAS 34?
Examples of events or transaction that would require disclosure if significant include:
· The write-down of inventories to net realisable value and the reversal of such a write-down.
· Recognition of a loss from the impairment of financial assets, property, plant and equipment, intangible assets, assets arising from contracts with customers, or other assets, and the reversal of such an impairment loss.
· The reversal of any provisions for the costs of restructuring.
· Acquisition, disposal or commitment to the purchase of property, plant or equipment.
· Litigation settlements.
· Correction of prior period errors.
· Changes in the business or economic circumstances that affect the fair value of the entity’s financial assets and financial liabilities, whether those assets or liabilities are recognised at fair value or amortised cost.
· Any loan default or breach of a loan agreement that has not been remedied by the end of the reporting period. Related party transactions.
· Transfers between levels of the fair value hierarchy used in measuring the fair value of financial instruments.
· Changes in the classification of financial assets as a result of a change in the purpose or use of those assets.
· Changes in contingent assets or liabilities.
Where an event or transaction is significant to an understanding of the changes in an entity’s financial position or performance since the last annual reporting period, an interim financial report should update the relevant information that was included in the last full year financial statements.
IAS 34 specifies certain information that should be included on a year-to-date basis in interim financial statements. This includes disclosure of segment information (if IFRS 8 requires that entity to disclose segment information in its annual financial statements), business combination information (for a transaction within the scope of IFRS 3) and information relating to financial instruments and revenues as well as details specific to the interim reporting. The disclosure of the information could either be made in the interim financial statements or be incorporated by a cross-reference from the interim financial statements to some other statement (such as management commentary or risk report) that is available to users of the financial statements on the same terms as the interim financial statements and at the same time.
What segment disclosures should be included in condensed interim financial statements?
IAS 34 requires disclosure of the following information in the interim financial report if IFRS 8 requires an entity to disclose segment information in its annual financial statements:
· Revenues from external customers, if included in the measure of segment profit or loss reviewed by the chief operating decision maker (CODM) or otherwise regularly provided to the CODM.
· Inter-segment revenues, if included in the measure of segment profit or loss reviewed by the CODM or otherwise regularly provided to the CODM.
· A measure of segment profit or loss.
· A measure of total assets and liabilities for a particular reportable segment, if such amounts are regularly provided to the CODM and if there has been a material change from the amount disclosed in the last annual financial statements for that reportable segment.
· A description of differences from the last annual financial statements in the basis of segmentation or in the basis of measurement of segment profit or loss.
· A reconciliation of the total of the reportable segments’ measures of profit or loss to the entity’s profit or loss before tax expense (tax income) and discontinued operations. However, if an entity allocates to reportable segments items such as tax expense (tax income), it can reconcile the total of the segments’ measures of profit or loss to profit or loss after those items. Material reconciling items should be separately identified and described in that reconciliation.
Should segment disclosures be provided for the interim period, or only for the year-to-date, where these are different?
IAS 34 requires segment information to be included in interim reports for the year-to-date. IAS 34 does not specifically require the disclosure of segment information for additional periods for which a summarised income statement is presented in an interim report, but we believe that such disclosure would be helpful to the users of the interim report and is likely to be consistent with the management commentary. Management should, therefore, consider providing segmental information for each period for which the summarised income statement is presented, including comparative figures.
Changes in segment reporting to the CODM
An entity should consider, at each reporting date, whether the current segment disclosure continues to be appropriate. If an entity changes its internal organisation in the interim period, such that the composition of its reportable segments’ changes, and this new segment structure is reported to the CODM, the segment disclosure in the interim report should reflect this reorganisation. The entity should restate the corresponding information for prior periods, including interim periods, unless the information is not available and the cost to develop it would be excessive.
What financial instrument disclosures relating to fair value are required in interim financial statements?
An entity should make in its interim report the disclosures about fair value required by IFRS 13, and IFRS 7. Upon the application of IFRS 17 for annual reporting periods beginning on or after 1 January 2021, IFRS 7 will be removed.
What disclosures are required related to business combinations during the period?
Where the composition of the reporting entity has changed during the interim period as a result of a business combination, IAS 34 requires the interim financial report to give the disclosures required by paragraphs 59– 63 of IFRS 3 individually for each material business combination (the disclosure can be made in aggregate for immaterial business combinations).
Example – Disclosure of an acquisition during interim period Entity A is publicly traded, and it publishes quarterly financial information in accordance with IAS 34. During the third quarter, the entity acquires a competitor in a similar line of business. This acquisition is accounted for under IFRS 3. The information required by IFRS 3 should be disclosed in the condensed interim financial report, irrespective of the size of the goodwill. Management should disclose the information required by IFRS 3 in the condensed interim report if the goodwill relating to the acquisition, is material. Management should use judgement to determine the level of information to be presented. The disclosure in this case should enable the user to gauge the effect of the changes in the carrying amount of goodwill on the entity’s financial position and income statement. Where it is impracticable to make disclosures of the acquiree’s revenue and profit or loss since the date of acquisition and the revenue and profit or loss of the combined entity for the current reporting period, as though the acquisition date had been at the beginning of the annual reporting period, this fact should be stated, together with an explanation of why it is the case. Where the initial accounting for a business combination for which disclosure is required has been determined provisionally, as permitted by IFRS 3, this fact should be disclosed, together with an explanation of why this is the case. Sufficient disclosure is required to enable users of the interim financial report to understand the impact of any adjustments made in the period in respect of business combinations effected in prior periods (either in a previous financial year or in a previous interim period in the current financial year). Such disclosure might include:
· Adjustments to provisional values of assets, liabilities, noncontrolling interests, items of consideration or equity interests previously held by the acquirer that were determined provisionally in the period in which the acquisition was made.
· Information about contingent liabilities recognised in a business combination.
· Changes in estimates of contingent consideration.
· A reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period.
· The amount, and an explanation, of gains or losses recognised in respect of identifiable assets acquired or liabilities assumed in a business combination, where this information is of such a size, nature or incidence that disclosure is relevant to understanding the entity’s financial statements.
What disclosures are required in relation to restructuring?
Where an entity has commenced a restructuring programme during the interim period, the notes to the interim financial report should disclose information surrounding that restructuring that is sufficient for the reader to obtain an understanding of the nature of the restructuring, the reasons for it and its likely impact on the group. Where an entity has already announced the details of a restructuring in its annual report or in a previous interim report in the current period, the new disclosure need consider only the changes to the restructuring that have occurred since the last balance sheet date. These would include changes in the scope and strategy of the restructuring, as well as information about the progress of the restructuring and any change in a restructuring provision. Where a restructuring has been announced, during either the current interim period or a prior period, there could be accounting impacts on the interim financial report, such as impairments of assets or provisions that should be recognised or re-assessed in accordance with the measurement and recognition provisions contained in IFRS.
What disclosures related to business combinations after the end of the reporting period are required?
Where a business combination has an acquisition date after the end of the interim period, but before the interim financial report is authorised for issue, disclosure of the information required by IFRS 3 is not required by IAS 34. In annual financial statements, IFRS 3 requires full disclosure of a business combination occurring during or after the end of the reporting period, but before the financial statements are authorised for issue. The requirement in IAS 34 to provide IFRS 3 disclosures in condensed interim financial reports applies only to a business combination occurring during the interim period. However, IAS 34 does require disclosure of significant events occurring after the end of the interim period, and this might include some information on material post balance sheet business combinations (but not necessarily full IFRS 3 disclosure).
Are there other required disclosures?
In addition to disclosing significant events and transactions in accordance with IAS 34, the following information is required by IAS 34 to be included either in the interim financial statements or incorporated by cross-reference from the interim financial statements to some other statement (such as management commentary or risk report) that is available to the users of the financial statements on the same terms as the interim financial statements and at the same time:
· A statement that the accounting policies and methods of computation used in the interim financial statements are the same as those used in the most recent annual financial statements or, if this is not the case, a description of the nature and effect of the change.
· Explanatory comments about seasonality or cyclicality of interim operations.
· The nature and amount of any items affecting assets, liabilities, equity, net income or cash flows that are unusual because of their size, nature or incidence.
· The nature and number of changes in estimates of amounts reported in prior periods (either interim periods within the current financial year or in prior financial years).
· Issues, repurchases and repayments of debt and equity securities.
· Dividends paid (aggregate or per share), separately for ordinary shares and other shares.
· Events that have occurred after the end of the interim period that have not been reflected in the interim financial report. For example, losing control of subsidiaries and long-term investments and discontinued operations.
· For entities becoming, or ceasing to be, investment entities, as defined in IFRS 10, the disclosures in IFRS 12.
If users of the financial statements do not have access to the information incorporated by cross-reference on the same terms and at the same time, the interim financial report is incomplete.
What disclosures are required in relation to IFRS 15?
The issue of IFRS 15 made consequential amendments to IAS 34. The amendments require the disclosure of:
· the recognition or reversal of an impairment loss from assets arising from contracts with customers, as an additional example for the events and transactions for which disclosures would be required if they are significant; and
· the ‘disaggregation of revenue from contracts with customers’ required by IFRS 15.
Entities within the scope of IAS 33 are required by IAS 34 to disclose their basic and diluted earnings per share (EPS) on the face of their (condensed) income statement. These numbers, which could include EPS from continuing operations, discontinued operations and for profit or loss for the period attributable to the ordinary equity holders, should be calculated as required by IAS 33.
Should alternative EPS measures be included in an interim financial report?
Where entities routinely publish alternative EPS numbers in their annual financial statements, we would expect these to be included in the notes to the interim financial report with no greater prominence than the required numbers calculated in accordance with IAS 33. Furthermore, where a component of income is used to calculate the alternative EPS number and this is not included as a line item in the condensed income statement, we expect a reconciliation to be provided between the component of income used and a line item that is reported as required by IAS 33.
Where an entity does not publish an interim financial report for the last interim period in a financial year, management should disclose the nature and effect of any significant change in estimates during the last interim period in the notes to the annual financial statements.
Periods to be included (comparatives)
Balance sheet information should be given as at the end of the current interim period, with comparative information as at the end of the previous full financial year.
Which statements have to be included in half-yearly condensed interim financial statements for an entity reporting as at 30 June 2016?
Statement Current Comparative Balance sheet at 30 June 2016 31 December 2015 Statement of comprehensive income (and separate income statement, where applicable): – 6 months ended 30 June 2016 30 June 2015 Statement of changes in equity: – 6 months ended 30 June 2016 30 June 2015 Cash flow statement: – 6 months ended 30 June 2016 30 June 2015
The requirement for comparatives is unaffected by an election by the entity to present full primary statements, rather than condensed primary statements. There is no requirement under IAS 34 for a balance sheet to be presented for the previous interim period in the current financial year (for example, the previous quarter of the current period) or for a balance sheet at the same date in the previous financial year.
For the income statement and statement of comprehensive income, IAS 34 requires the current interim period and the current year-to date information to be disclosed, together with comparative information for the equivalent periods in the previous year. Where an entity is presenting its first interim report of a financial year, the period and year to-date information will be the same, both for the current and for the previous year, and need not be given twice.
The statement of changes in equity and cash flow statement should be presented for the current period on a year-to-date basis, with comparative information for the equivalent period in the previous financial year.
Materiality
An entity should assess separate materiality in relation to the interim period financial data. The overriding goal is to ensure that an interim financial report includes all information that is relevant to understanding an entity’s financial position and performance during the interim period presented. This is consistent with treating interim periods as discrete periods in their own right and ensures that items that are material to the entity’s results for the period presented are appropriately reported. This might result in items being separately disclosed in interim financial reports, but not necessarily in the next annual financial statements. Paragraphs 84 to 88 of IFRS Practice Statement 2 also provide nonmandatory guidance on how to make materiality judgements in the context of interim reporting.
Assessment of materiality in interim financial reports
An entity is preparing its interim financial report in accordance with IAS 34 for the second quarter of its financial year. During the second quarter, the entity incurred significant restructuring costs that were material in the context of the interim financial result but are unlikely to be material based on the projected year-end result. The interim financial report should include all information that is relevant to understanding the entity’s financial position and performance during the interim period. An entity should disclose the nature and impact of the restructuring costs on the result for the interim period in the notes to the interim financial report.
Additional line items should be included in the condensed income statement and cash flow statement where their omission would make those statements misleading. The assessment of materiality should take into consideration the interim period being presented and not the year-to-date or the projected year-end financial statements. Therefore, the interim financial report should disclose the nature of the restructuring costs and an indication of whether additional costs of this nature are expected to be incurred later in the year and, where relevant, the expected amount of those future costs. At the year end, the restructuring expense might not be considered material in the context of the full year’s results and might not therefore warrant separate presentation or disclosure, either on the face of the income statement or in the notes.
Management commentary
IAS 34 contains no requirement for entities to present a separate management commentary as part of their interim financial report. However, due to regulatory requirements and pressure from investors and analysts, it has become commonplace for one to be included. IFRS Practice Statement 1 provides non-mandatory guidance for the presentation of such a commentary where entities elect to include one, or where they are required to do so by local regulators.
Management commentary
For interim reporting, the content of any management commentary presented should be sufficient to enable users to appreciate the main factors influencing the entity’s performance during the interim period and its position at the period end, and it should focus on areas of change since the last annual financial statements. IAS 34 highlights a number of specific areas where narrative disclosure should be given in addition to the required numerical disclosures. In particular, explanations should be given of:
· The effects of seasonality on the interim financial report.
· The nature of changes in estimates.
· Material events that have occurred since the balance sheet date but that have not been reflected in the interim financial report.
· Changes in the reporting entity’s composition.
Where additional information is presented on the face of the condensed primary statements, we would expect some explanation of the item to be included in the notes to the interim financial report.
The management commentary should not be restricted to just the information that is required to be presented by IAS 34. In addition to these requirements, we would expect the management commentary to give a balanced view of the entity’s performance during the interim period.
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