International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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the asset derecognised and the interest retained by the entity) were different from
the fair value of the previously recognised asset as a whole. In that situation,
disclosure should be made of whether the fair value measurements included
significant inputs that were not based on observable market data; [IFRS 7.B38]
Financial
instruments:
Presentation and disclosure 4239
(b) income and expenses recognised, both in the reporting period and cumulatively,
from the entity’s continuing involvement in the derecognised financial assets (e.g.
fair value changes in derivative instruments); and
(c) if the total amount of proceeds from transfer activity (that qualifies for
derecognition) in a reporting period is not evenly distributed throughout the
reporting period (e.g. if a substantial proportion of the total amount of transfer
activity takes place in the closing days of a reporting period):
(i)
when the greatest transfer activity took place within that reporting period (e.g.
the last five days before the end of the reporting period);
(ii) the amount (e.g. related gains or losses) recognised from transfer activity in
that part of the reporting period; and
(iii) the total amount of proceeds from transfer activity in that part of the
reporting period.
This information should be provided for each period for which a statement of
comprehensive income is presented. [IFRS 7.42G].
7
PRESENTATION ON THE FACE OF THE FINANCIAL
STATEMENTS AND RELATED DISCLOSURES
Although it requires certain minimum disclosures, IFRS 7 provides little guidance as to
where financial instruments and related gains and losses should be presented on the
face of the financial statements nor how such items should be disaggregated. Further,
the disclosures required need not always reflect how items are presented on the face of
the statements. Therefore, for the time being at least, management must use its
judgement in deciding how best to present much of the information relating to financial
instruments, taking account of the minimum requirements of IFRS 7 and other related
standards such as IAS 1.
7.1
Gains and losses recognised in profit or loss
7.1.1
Presentation on the face of the statement of comprehensive income
(or income statement)
The effects of an entity’s various activities, transactions and other events (including
those relating to financial instruments) differ in frequency, potential for gain or loss and
predictability. Accordingly, IAS 1 explains, disclosing the components of financial
performance assists in providing an understanding of the financial performance
achieved and in making projections of future results. [IAS 1.86].
IAS 1 prescribes requirements for line items to be included on the face of the statement
of comprehensive income (or income statement) which include:
• revenue, presenting separately interest revenue calculated using the effective
interest method; [IAS 1.82(a)]
The IFRS Interpretations Committee clarified in March 2018 that only interest on
financial assets measured at amortised cost or on debt instruments measured at fair
value through other comprehensive income should be included in the amount of
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interest revenue presented separately (subject to the effects of qualifying hedging
relationships under IFRS 9). In particular, it should not include, for example,
interest revenue from financial assets measured at fair value through profit or loss;17
• gains and losses arising from the derecognition of financial assets measured at
amortised cost. [IAS 1.82(aa)]. In order to determine the amount of this gain or loss,
the carrying amount of the financial asset should, in principle, be updated to the
date of derecognition. It should, therefore, include a revised estimate of expected
credit losses determined as at the date of derecognition. However, considerations
of materiality would also need to be taken into account;18
There is no equivalent requirement to present separately gains and losses arising
from derecognition of debt instruments measured at fair value through other
comprehensive income. However, the amount of such gains and losses should be
determined in the same way as for financial assets measured at amortised cost, i.e.
by updating expected credit losses to the date of derecognition; [IFRS 9.5.7.11]
• impairment losses (including reversals of impairment losses or impairment gains)
determined in accordance with IFRS 9. [IAS 1.82(ba)]. This will include losses in
respect of loan commitments and financial guarantee contracts as well as
financial assets.
Some might argue this line item should also include modification gains or losses,
particularly if the reason for the modification was credit-related. However, a
summary of the April 2015 meeting of the Transition Resource Group for
Impairment of Financial Instruments, published on the IASB’s website, suggests
this would not be appropriate. Instead, it says that if disclosing gains and losses
from impairments and modifications on a net basis would provide relevant
information (for example, if the reason for the modification was credit-related),
this could be dealt with through additional disclosure in the notes.
The summary also says that modification gains and losses should be presented
separately if considered appropriate.19 Consequently, another way in which a net
figure could be presented on the face of the income statement involves presenting
modification gains and losses (or at least those arising from credit-related events)
in a separate line item that is adjacent to the one showing impairment losses and
gains, together with a subtotal that includes these two amounts.
Another view is that because modification gains and losses are determined
consistently with the effective interest method, they could be presented as a
component of interest revenue. However, if the amounts included were material,
we would expect separate disclosure of the amounts involved;
• where a financial asset previously measured at amortised cost is reclassified so that
it is measured at fair value through profit or loss, any gain or loss arising from a
difference between the previous carrying amount and its fair value at the
reclassification date; [IAS 1.82(ca)]
• where a financial asset previously classified at fair value through other
comprehensive income is reclassified as measured at fair value through profit or
loss, any cumulative gain or loss previously recognised in other comprehensive
income that is reclassified to profit or loss; [IAS 1.82(cb)] and
Financial
instruments:
Presentation and disclosure 4241
• finance costs. [IAS 1.82(b)].
The implementation guidance to IFRS 7 explains that this caption includes total
interest expense (see 4.2.2 above) but may also include amounts associated with
non-financial liabilities, for example the unwinding of the discount on long-term
provisions (see Chapter 27 at 4.3.5). [IFRS 7.IG13].
The IFRS Interpretations Committee concluded that it is not permissible to present
a line item ‘net finance costs’ (or a similar term) on the face of the statement without
showing the finance costs and finance revenue composing it. However, the
presentation of finance revenue followed immediately by finance costs and a
subtotal, e.g. ‘net finance costs’, is allowed.20
The demand for safe investments can sometimes result in a negative yield on very high
quality financial assets (e.g. certain government bonds or reserve bank deposits). The
Interpretations Committee has considered this phenomenon and in January 2015 noted
that interest resulting from a negative effective interest rate on a financial asset does not
meet the definition of interest revenue because it reflects a gross outflow, not a gross
inflow, of economic benefits. Consequently, such expenses should not be presented as
interest revenue, but in an appropriate expense classification.21 This might be a separate
line item titled, for example, ‘financial expenses on liquid short term assets’ or ‘other
financial expenses’ or using another appropriate description. Alternatively, it could be
appropriate to include within another expense line, for example, ‘other expenses’.
Similarly, we believe negative interest on financial liabilities, which will represent a
form of income, should not be offset against positive interest expense.
Additional line items, headings and subtotals should be presented on the face of the
statement of comprehensive income (or income statement) when such presentation is
relevant to an understanding of the elements of an entity’s financial performance.
Factors that should be considered include materiality and the nature and function of the
components of income and expenses. For example, a financial institution may amend
the descriptions to provide information that is relevant to the operations of a financial
institution. [IAS 1.85, 86]. This may also be relevant where an entity recognises negative
interest on financial assets or financial liabilities.22
Any additional subtotals presented should: [IAS 1.85A]
• comprise line items made up of amounts recognised and measured in accordance
with IFRS;
• be presented and labelled in a manner that makes the line items that constitute the
subtotal clear and understandable;
• be consistent from period to period, as required by IAS 1 (see Chapter 3 at 4.1.4); and
• not be displayed with more prominence than the subtotals and totals required in
IFRS for the statement(s) presenting profit or loss and other comprehensive income.
The following items should also be disclosed on the face of the statement of
comprehensive income (or income statement) as allocations of profit or loss for the
period: [IAS 1.81B(a)]
• profit or loss attributable to non-controlling interests; and
• profit or loss attributable to owners of the parent.
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7.1.2
Further analysis of gains and losses recognised in profit or loss
As noted at 4.2.2 above, entities are required to disclose total interest income and total
interest expense, calculated using the effective interest method, for financial assets and
financial liabilities that are not at fair value through profit or loss. Whilst leases are
included within the scope of IFRS 7, strictly they are not accounted for using the
effective interest method (although for many leases the method prescribed in IAS 17 or
IFRS 16 results in a very similar treatment). Accordingly, where material, it appears that
finance income (charges) arising on leases should be disclosed separately from the
interest income (expense) disclosed above. In fact, it will sometimes be appropriate to
include such items within the same caption on the face of the statement of
comprehensive income (or income statement) and include a sub-analysis in the notes,
albeit having regard to the restrictions on what may be presented within the separate
line item containing interest revenue calculated using the effective interest method –
see 7.1.1 above.
Dividends classified as an expense (for example those payable to holders of redeemable
preference shares) may be presented either with interest on other liabilities or as a
separate item. Such items are subject to the requirements of IAS 1. In some
circumstances, because of the differences between interest and dividends with respect
to matters such as tax deductibility, it is desirable to disclose them separately in the
statement of comprehensive income (or income statement). [IAS 32.40].
The following gains and losses reported in profit or loss should also be disclosed:
• the amount of dividends recognised from equity investments designated at fair
value through other comprehensive income, showing separately the amounts
arising on investments derecognised during the reporting period and those related
to investments held at the end of the reporting period; [IFRS 7.11A(d)]
• changes in fair value that relate to instruments at fair value through profit or loss
(see 4.2.1 above).
Little guidance is given on disaggregating gains and losses from instruments
classified as at fair value through profit or loss. For example, the components of
the change in fair value of a debt instrument can include:
• interest accruals;
• foreign currency retranslation;
• movements arising from changes in the issuer’s credit risk; and
• changes in market interest rates.
An entity is neither required to disaggregate, nor prohibited from disaggregating,
these components on the face of the statement of comprehensive income (or income
statement) provided the minimum disclosure requirements are met (e.g. see 4.2
above) and the restrictions on what may be presented within the separate line item
containing interest revenue calculated using the effective interest method are
followed (see 7.1.1 above). Accordingly, in our view the interest accrual component,
say, of a financial liability may be included separately within an interest expense
caption or it may be included within the same caption as other components of the
Financial
instruments:
Presentation and disclosure 4243
gain or loss such as dealing profit. As noted at 4.1 above, whatever the entity’s
approach, it should be explained in its accounting policies; and
• the amount of exchange differences recognised in profit or loss under IAS 21
except for those arising on financial instruments measured at fair value through
profit or loss. [IAS 21.52(a)].
In IAS 1 it is explained that when items of income and expense are material, their nature
and amount are required to be disclosed separately. [IAS 1.97]. Circumstances that can
give rise to separate disclosure include the disposal of investments [IAS 1.98] and the early
settlement of liabilities. However, gains and losses should not be reported as
extraordinary items, either on the face of the statement of comprehensive income (or
income statement) or in the notes. [IAS 1.87].
7.1.3
Offsetting and hedges
IAS 1 explains that income and expenses should not be offset unless required or permitted
by another standard. This is because offsetting detracts from the ability of users to
understand fully the transactions, other events and conditions that have occurred and to
assess the entity’s future cash flows (except where it reflects the substance of the transaction
or other event). [IAS 1.32, 33]. It goes on to explain that gains and losses on the disposal of non-
current investments (such as many debt instruments measured at fair value through other
comprehensive income) are reported by deducting the carrying amount of the asset and
related selling expenses from the proceeds on disposal rather than showing gross proceeds
as revenue [IAS 1.34] – in the case of debt instruments measured at fair value through other
comprehensive income the profit or loss on disposal will also include any gains and losses
that are reclassified from equity. It also explains that gains and losses arising from groups of
similar transactions should be reported on a net basis, for example gains and losses arising
on financial instruments held for trading or foreign exchange differences. The individual
transactions should, however, be reported separately if they are material. [IAS 1.35].
Whilst IAS 32 prescribes when financial assets and liabilities should be offset in the statement
of financial position (see 7.4.1 below) it contains no guidance on when related income and
expenses should be offset. However, IFRS 9 is more prescriptive, specifying the following:
• if a group of hedged items in a cash flow hedge contains no offsetting risk positions
and will affect different line items in profit or loss, the gains or losses on the hedging
instrument should be apportioned to the line items affected by the hedged items
when reclassified to profit or loss.
This might be the case, for example, if a group of foreign currency expense
transactions are hedged for foreign currency risk and those expenses will affect,
say, both distribution costs and administrative expenses.
The basis of apportionment between line items should be systematic and rational
and not result in the grossing up of net gains or losses arising from a single hedging
instrument; [IFRS 9.B6.6.13, B6.6.14]
• if a group of hedged items contains offsetting risk positions, i.e. a net position is
hedged and the hedged risk affects different line items in profit or loss, the gains or
losses on the hedging instrument should be presented in a line separate from those
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