How will the IAS 1 'Primary Financial Statements' update affect your financial statements?

The IFRS Accounting Standards are regularly reviewed, and updated when necessary. The IASB has been working on an IAS 1 (Presentation of Financial Statements) update, the 'Primary Financial Statements' project for many years. It may be one of the most critical amendments to date, as IAS 1 defines the very basis of financial statements presentation. Focus on this update planned for 2024.

Marc Houllier

Marc Houllier

September 28, 2023
6 min read
How will the IAS 1 'Primary Financial Statements' update affect your financial statements?

Since the release of an exposure draft in 2019, the International Accounting Standards Board (IASB) has been diligently working on an update to IAS 1, which is commonly known as the Primary Financial Statement (PFS) project. This may be one of the most critical amendments to date, since IAS 1 lays the foundation for how financial statements are presented. In this article, we will delve into the details of this upcoming update, set to significantly enhance the structure of financial statements starting from early 2024.

The IAS 1 Update: Enhancing Comparability Across ESEF Statements

For European publicly listed companies that issue International Financial Reporting Standards (IFRS) consolidated statements, comparability is an even more of a key focus since the introduction of digitalised reporting through the European Single Electronic Format (ESEF) in 2020. the pursuit of comparability has become even more crucial since the implementation of digitalized reporting through the ESEF in 2020. The IASB is acutely aware of the impact of digital reporting and takes it into consideration when reviewing and adapting accounting standards.

In particular, the challenge lies in striking the right balance between granting companies the flexibility to represent their financial situation accurately and the growing need for data comparability. The IFRS Accounting Standards are often described as principle-based, offering issuers some latitude in presenting their financial statements in a manner that best reflects their specific circumstances. While this flexibility is beneficial, it can also result in significant disparities in reporting between companies, even within the same sector and with similar business models. This variance poses a challenge for investors seeking to make meaningful comparisons.

Most reporting entities are in favor of promoting comparability but not at the cost of misrepresenting their financial status and performance. The advent of digital reporting exacerbates this dilemma, as it requires issuers to align their line items in financial statements with a predefined list provided in the IFRS taxonomy. This list encompasses both items precisely defined in the standards and commonly reported details in financial statements and their accompanying notes. The expectation is that when two companies report the same line item, such as total assets, the definition of this data should be similar enough to facilitate a meaningful comparison.

However, when the item is a common practice item, by definition it lacks a precise definition, and there is potential for significant divergence in the interpretation of data points reported as the same line item by two different companies. In some cases, it might even be preferable to designate such line items as unique to the reporting entity, the so-called 'extensions'.

The proposed update aims to enhance the consistency of frequently used metrics, which are also commonly employed as comparative benchmarks by end users. Additionally, apart from benefiting digital formats, this update promises to significantly enhance the quality of traditional paper financial statements.

Harmonising Income Statements and Operating Profit

Let's use the income statement as an example to illustrate the changes brought about by this update. The primary objective is to enhance precision and comparability by introducing a structured framework that includes defined subtotals. For instance, companies will now be required to clearly specify whether income and expense components fall under operating profit, which will make it easier for users to assess the need for adjustments.

New categories will limit the necessity for ESEF extensions

Furthermore, the update introduces new predefined categories for classifying items: Operating, Investing, Financing, and so on. In cases where it's common practice to report a line item in different categories, the digital taxonomy will include distinct items for each category. As a consequence, if an entity needs to indicate whether amortization pertains to operating expenses or investment, it will use the specific item designated for that purpose.

- A more precise Operating Profit

The update also mandates (unless irrelevant) new subtotals, such as Operating profit or loss, Profit or loss before financing and income tax. While issuers retain the freedom to present additional subtotals, these new 'universal' elements will establish a standardized structure for all income statements, setting a minimum benchmark for comparability. This will not only make the components of income statements more understandable and comparable but will also align them with cash flow presentations, further enhancing comparability.

It's important to note that these changes are mandatory, and many income statements will need to adapt to comply with the new standards. Similar improvements in comparability are also anticipated in other financial statements.

Navigating Categorization Challenges

Changing requirements is the initial step towards improving data quality. Much of the effort to achieve this will be on the issuers themselves. They will need to review the structure of their statements, ensure alignment with the digital taxonomy, and diligently construct their digital reports.

Several options are available to deal with these challenges smoothly:

- 1: review the IFRS taxonomy

A lot of the work performed by the IASB in examining common practice will be condensed in the taxonomy. Looking at the updated taxonomy first, and only then deciding how to reorganise a statement could save considerable effort later.

- 2 : review specific common practice

While the taxonomy condenses insights from common practice, it does so from a global point of view. Companies in sectors have their own specific common practice will benefit from reviewing their peers statements, especially those that anticipate the update. Digitalised financial statements have made it easy to consult European issuers’ statements and compile statistical data from those. Companies should thus seize this opportunity to benchmark their competitors’ data and use it to make strategic reporting choices.

Making the required revision in this fashion will not only ease the creation of the digital report - it will also make it much easier for the entity to compare its performance to that of its peers in the future.

Benchmarking the company against different group of peers can also contribute to strategic presentation decisions. A company's national peers may have very different presentation practices compared to its European peers. To take an example of a current issue that the update should solve, clear disparity in reporting the share of profit and loss from equity investments would make a Swedish capital goods company's operating profit directly comparable to 74% of its peers in Sweden if it included that line item in its operating profit; this rate however drops to 22% at the European level, and so a company seeking investment from investors with an international reach would gain from presenting it outside.

Improve your knowledge of your peers’ practices

Whether you’re talking compliance or strategy, knowledge is power. That’s where Corporatings comes in: to help you access the market data that is so crucial to making informed reporting choices.

Since 2020, all European listed companies are required to file ESEF reports. This data is a treasure trove for anyone who wants to understand current reporting trends! And it can be easily accessed through  Lens, Corporatings’ proprietary database which was designed to help issuers and users alike make the most of this data.

By ‘make the most of it’, we mean that:

- Users access the data freely and are provided with several options to format the data as they prefer. They are free to benchmark data from a few companies, a specific sector or an entire country, according to their needs.

- They access raw data, sourced directly from the issuers’ statements. Raw data provides a more accurate and objective view of the market, since it guarantees that no information has been altered by any selection process – thus eliminating data provider bias.

Request a demo and free access to Lens to stay ahead of regulatory trends and explore themore strategic uses of digital reporting!In order to ensure the accuracy and comparability of financial statements across the world, the IFRS Accounting Standards are regularly reviewed and if necessary updated– which sometimes entail significant changes for financial statements stakeholders, whether they be regulators, investors or accountants.

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Marc Houllier
Marc Houllier
Cofounder & CTO