FINANCIAL ACCOUNTING AND REPORTING

FAR19.O2027-CONFRA
CONCEPTUAL FRAMEWORK.07. PRESENTATION AND DISCLOSURE

Tommy B. Buado
“Home of Topnotch Professionals!”
Knowledge Engineer / Reviewer:

CHAPTER 7—PRESENTATION AND DISCLOSURE

PRESENTATION AND DISCLOSURE AS

COMMUNICATION TOOLS 7.1

PRESENTATION AND DISCLOSURE

OBJECTIVES AND PRINCIPLES 7.4

CLASSIFICATION 7.7

Classification of assets and liabilities 7.9

Offsetting 7.10

Classification of equity 7.12

Classification of income and expenses 7.14

Profit or loss and other comprehensive income 7.15

AGGREGATION 7.20

Presentation and disclosure as communication

tools

7.1 A reporting entity communicates information about its assets,

liabilities, equity, income and expenses by presenting and disclosing
information in its financial statements.

7.2 Effective communication of information in financial statements

makes that information more relevant and contributes to a faithful

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representation of an entity’s assets, liabilities, equity, income and

expenses. It also enhances the understandability and comparability
of information in financial statements. Effective communication of
information in financial statements requires:

(a) focusing on presentation and disclosure objectives and

principles rather than focusing on rules;

(b) classifying information in a manner that groups similar items

and separates dissimilar items; and

(c) aggregating information in such a way that it is not obscured

either by unnecessary detail or by excessive aggregation.

7.3 Just as cost constrains other financial reporting decisions, it also

constrains decisions about presentation and disclosure. Hence, in
making decisions about presentation and disclosure, it is important
to consider whether the benefits provided to users of financial
statements by presenting or disclosing particular information are
likely to justify the costs of providing and using that information.

Presentation and disclosure objectives and

principles

7.4 To facilitate effective communication of information in financial

statements, when developing presentation and disclosure
requirements in Standards a balance is needed between:

(a) giving entities the flexibility to provide relevant information

that faithfully represents the entity’s assets, liabilities, equity,
income and expenses; and

(b) requiring information that is comparable, both from period to

period for a reporting entity and in a single reporting period
across entities.

7.5 Including presentation and disclosure objectives in Standards

supports effective communication in financial statements because

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such objectives help entities to identify useful information and to

decide how to communicate that information in the most effective
manner.

7.6 Effective communication in financial statements is also supported by

considering the following principles:

(a) entity-specific information is more useful than standardised

descriptions, sometimes referred to as ‘boilerplate’; and
(b) duplication of information in different parts of the financial
statements is usually unnecessary and can make financial
statements less understandable.

Classification

7.7 Classification is the sorting of assets, liabilities, equity, income or

expenses on the basis of shared characteristics for presentation and
disclosure purposes. Such characteristics include—but are not
limited to—the nature of the item, its role (or function) within the
business activities conducted by the entity, and how it is measured.

7.8 Classifying dissimilar assets, liabilities, equity, income or expenses

together can obscure relevant information, reduce understandability
and comparability and may not provide a faithful representation of
what it purports to represent.

Classification of assets and liabilities

7.9 Classification is applied to the unit of account selected for an asset or

liability (see paragraphs 4.48–4.55). However, it may sometimes be
appropriate to separate an asset or liability into components that
have different characteristics and to classify those components
separately. That would be appropriate when classifying those
components separately would enhance the usefulness of the resulting
financial information. For example, it could be appropriate to

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separate an asset or liability into current and non-current

components and to classify those components separately.

Offsetting

7.10 Offsetting occurs when an entity recognises and measures both an

asset and liability as separate units of account, but groups them into
a single net amount in the statement of financial position. Offsetting
classifies dissimilar items together and therefore is generally not
appropriate.

7.11 Offsetting assets and liabilities differs from treating a set of rights
and obligations as a single unit of account (see paragraphs 4.48–
4.55).

Classification of equity

7.12 To provide useful information, it may be necessary to classify equity

claims separately if those equity claims have different characteristics
(see paragraph 4.65).

7.13 Similarly, to provide useful information, it may be necessary to

classify components of equity separately if some of those
components are subject to particular legal, regulatory or other
requirements. For example, in some jurisdictions, an entity is
permitted to make distributions to holders of equity claims only if
the entity has sufficient reserves specified as distributable (see
paragraph 4.66). Separate presentation or disclosure of those
reserves may provide useful information.

Classification of income and expenses

7.14 Classification is applied to:

(a) income and expenses resulting from the unit of account

selected for an asset or liability; or

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(b) components of such income and expenses if those

components have different characteristics and are identified
separately. For example, a change in the current value of an
asset can include the effects of value changes and the accrual
of interest (see Table 6.1). It would be appropriate to classify
those components separately if doing so would enhance the
usefulness of the resulting financial information.

Profit or loss and other comprehensive income

7.15 Income and expenses are classified and included either:

(a) in the statement of profit or loss;11 or

(b) outside the statement of profit or loss, in other comprehensive income.

7.16 The statement of profit or loss is the primary source of information

about an entity’s financial performance for the reporting period.
That statement contains a total for profit or loss that provides a
highly summarised depiction of the entity’s financial performance
for the period. Many users of financial statements incorporate that
total in their analysis either as a starting point for that analysis or as
the main indicator of the entity’s financial performance for the
period. Nevertheless, understanding an entity’s financial
performance for the period requires an analysis of all recognised
income and expenses— including income and expenses included in
other comprehensive income—as well as an analysis of other
information included in the financial statements.

7.17 Because the statement of profit or loss is the primary source of

information about an entity’s financial performance for the period,
all income and expenses are, in principle, included in that statement.
However, in developing Standards, the Board may decide in
exceptional circumstances that income or expenses arising from a
change in the current value of an asset or liability are to be included
in other comprehensive income when doing so would result in the
statement of profit or loss providing more relevant information, or
providing a more faithful representation of the entity’s financial
performance for that period.

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7.18 Income and expenses that arise on a historical cost

measurement basis (see Table 6.1) are included in the statement of
profit or loss. That is also the case when income and expenses of
that type are separately identified as a component of a change in the
current value of an asset or liability. For example, if a financial asset
is measured at current value and if interest income is identified
separately from other changes in value, that interest income is
included in the statement of profit or loss.

11 The Conceptual Framework does not specify whether the statement(s) of financial
performance comprise(s) a single statement or two statements. The Conceptual
Framework uses the term ‘statement of profit or loss’ to refer to a separate
statement and to a separate section within a single statement of financial
performance. Likewise, it uses the term ‘total for profit or loss’ to refer both to a
total for a separate statement and to a subtotal for a section within a single
statement of financial performance.

7.19 In principle, income and expenses included in other comprehensive

income in one period are reclassified from other comprehensive
income into the statement of profit or loss in a future period when
doing so results in the statement of profit or loss providing more
relevant information, or providing a more faithful representation of
the entity’s financial performance for that future period. However,
if, for example, there is no clear basis for identifying the period in
which reclassification would have that result, or the amount that
should be reclassified, the Board may, in developing Standards,
decide that income and expenses included in other comprehensive
income are not to be subsequently reclassified.

Aggregation

7.20 Aggregation is the adding together of assets, liabilities, equity,

income or expenses that have shared characteristics and are included
in the same classification.

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7.21 Aggregation makes information more useful by summarising a large

volume of detail. However, aggregation conceals some of that detail.
Hence, a balance needs to be found so that relevant information is
not obscured either by a large amount of insignificant detail or by
excessive aggregation.

7.22 Different levels of aggregation may be needed in different parts of

the financial statements. For example, typically, the statement of
financial position and the statement(s) of financial performance
provide summarised information and more detailed information is
provided in the notes.

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