IFRS 18 agenda decision: Scope of requirement to disclose expenses by nature
IFRS 18 agenda decision: Scope of requirement to disclose expenses by nature
IFRS Interpretations Committee (the Committee) agenda decisions are those issues the Committee decided not to include on its agenda. Although not authoritative guidance, these decisions are regarded as being highly persuasive in practice. All entities reporting under IFRS® Accounting Standards should be aware of these decisions, as they could impact how specific transactions and balances are accounted for. Entities are generally expected to implement any resulting changes in accounting policies in the first set of financial statements following an agenda decision, although this timeframe may be extended where detailed systems and process changes are required.
Background
In the statement of profit or loss prepared applying IFRS 18 Presentation and Disclosures in Financial Statements, entities must present line items for:
- Operating expenses (paragraph 75(a)(ii))
- Amounts required by IFRS 9 Financial Instruments (paragraph 75(b)), and
- Amounts required by IFRS 17 Insurance Contracts (paragraph 75(c)).
When operating expenses are presented in the statement of profit or loss ‘by function’, paragraph 83 also requires disclosure of granular information about the nature and amount of specified expenses such as depreciation, amortisation, employee benefits, impairments and any reversals of impairments that are included in each function line item. For example, the cost of sales function may include amounts for depreciation and employee benefits expense.
Question put to the Committee
The Committee was asked whether the requirements for additional disclosure of certain expenses by nature in paragraph 83 apply:
- Only when an entity presents operating expenses listed in paragraph 75(a)(ii) of IFRS 18 by function in the operating category of the statement of profit or loss (Approach A), or
- When an entity presents any expense by function in the operating category of the statement of profit or loss, including expenses listed in paragraph 75(b)–(c) of IFRS 18 (Approach B)?
For Approach B, the request to the Committee stated that these expenses might include amounts recognised as part of an asset’s carrying amount. For example, insurance service expense recognised in the statement of profit or loss might include the amortisation of insurance acquisition costs that were previously capitalised as part of insurance contract assets.
Committee’s analysis of IFRS 18 requirements
The Committee noted that:
- There are no exceptions or exclusions to the requirement in paragraph 83. Entities must disclose the amount of specified expenses, such as depreciation, amortisation, employee benefits, impairments, etc, when expenses in the operating category are classified by function.
- It makes no difference whether an entity applies judgement to disclose expenses by function, or whether it is required to do so by an IFRS® Accounting Standard such as IFRS 9 or IFRS 17.
- Paragraph 83 will apply whenever an entity presents a line item in the operating category of the statement of profit or loss that comprises expenses classified by function.
- Paragraph B84 of IFRS 18 states that the amounts disclosed in accordance with paragraph 83 of IFRS 18 need not be the amounts recognised as an expense in the period but could include amounts that have been recognised as part of the carrying amount of an asset.
- If the entity discloses amounts by nature that are not the amounts recognised as an expense in the period (i.e. it includes amounts capitalised to assets), paragraph 83(b)(ii) requires it to disclose a qualitative explanation of that fact, identifying the assets involved.
Examples 4.4.3 and 4.4.4 of our IFRS 18 in Practice publication illustrate examples for disclosing the paragraph 83(a) expenses by nature, where expenses are either shown as what was expensed during the year or incurred.
Committee’s conclusion
The Committee concluded that the principles and requirements in IFRS 18 provide an adequate basis for an entity to determine the scope of the disclosure requirements in paragraph 83. Therefore, the Committee decided not to add a standard-setting project on this topic to the work plan.