ED 91 Financial Report Disclosures

4 September 1998

The Executive Director
Australian Accounting Research Foundation
211 Hawthorn Road
Caulfield VIC 3162

Dear Sir

ED 91 – Financial Report Disclosures

We are pleased to respond to your invitation to comment on ED 91. Our submission comprises overall general comments and comments relating to the specific matters raised in the exposure draft.

General Comments

The Group of 100 supports the proposed additional disclosure requirements of ED 91 based on its consistency with IAS1. However, we believe that the draft introduces new and additional disclosure requirements to the face of the profit and loss and balance sheet that will reduce the comparability of financial statements. The increased flexibility provided by the draft, particularly with respect to changing the definition of current assets and liabilities will introduce a level of ambiguity and inconsistency into the financial statements.

We are concerned that the Boards have decided to defer consideration of disclosures relating to executive remuneration. The Group of 100 believes that the present disclosures are onerous to preparers and do not provide useful information to users because it is not clear what purpose they are intended to serve.

Recommendation

The Group of 100 recommends that the Boards should review the disclosure requirements relating to executive remuneration and the usefulness of the current requirements as part of its consideration of ED 91.

Specific Matters for Comment

apply the disclosure requirements to reporting entities that apply the AAS series of Standards
The release of an AAS equivalent to AASB1034 for the purposes of comparability with IAS1 ‘Presentation of Financial Statements’ is supported by the Group of 100. Consistency in presentation between entities subject to the Corporations Law and those that are not is seen as necessary to improve the overall quality of financial reporting in Australia.
provide the entity with a choice, depending on the nature of its operations, of whether to classify assets and liabilities between current and non-current or on a liquidity basis
Classification of assets and liabilities in the balance sheet in order of liquidity by financial institutions is supported by the Group of 100. We believe that deviation from the current/non-current classification of assets and liabilities to the proposed more flexible liquidity presentation will result in less comparability between individual company balance sheets for other types of entities.
classification of current assets and current liabilities based on the entity’s operating cycle for items circulating as working capital and on a twelve month basis for other items
The Group of 100 believes that current assets should be determined on the basis of a time period of 12 months.
The definition of operating cycle which is "the average time between the acquisition of materials entering into a process and the realisation in cash or an instrument that is readily converted into cash" while providing greater flexibility in reporting is quite ambiguous and open for abuse. An appropriate upper limit may need to be placed on "normal operating cycle" to ensure entities do not use excessive periods and thus distort current measures of a company’s liquidity.
Although this approach may provide a greater insight into the nature of certain assets and liabilities presented in the balance sheet, in practice, disclosure on this basis could prove quite impractical, particularly for diversified companies with a spread of products and geographical locations. In these circumstances, the assessment of the normal operating cycle of a company’s working capital assets and liabilities will be made by many individuals based on varying assumptions.
continue to classify long term interest bearing liabilities as non-current where they are due to be settled within twelve months if their original term was for more than twelve months and there is an intention to re-finance on a long term basis……
The Group of 100 supports this approach based on a substance over form argument. Liabilities that are considered to form part of an entity’s long term financing and which include agreements which provide an option to re-finance the facilities, should be classified as non-current.
require the items set out in paragraph 6.1 to be disclosed separately on the face of the balance sheet
The Group of 100 believes disclosure of those items identified in paragraph 6.1 separately in the balance sheet, particularly, such items as equity accounted investments, advances to associates and tax assets is appropriate.
We agree with paragraph 6.4.1 that it is appropriate to disclose items on the face of the balance sheet when they are material to the entity’s financial position.
removal of the requirement to disclose the separate components of outside equity interest on the face of the balance sheet
The Group of 100 agrees with the proposal to transfer disclosure of the individual components of minority interests from the face of the balance sheet to the notes.
require the disclosure of the length of the operating cycle where it is longer than twelve months
As discussed in paragraph (c) above, the Group of 100 agrees that if the operating cycle approach is adopted the length of the operating cycle should be disclosed where it is longer than twelve months
require additional disclosures to AASB 1034 in relation to shares, units and reserves
Details required in relation to shares in the entity held by associates of the entity are already required to be disclosed by paragraph 6.1(d) of AASB 1016 "Accounting for Investments in Associates. Paragraph 9.1(a)(vii) should also be removed as the information is of little relevance.

The requirements of paragraph 9.1(c)(i)-(iv) should be consistent with the requirements of UIG Abstract 16 "Accounting for Share Buy-Backs" to the extent that they apply to par value shares and should recognise that a no par value regime now exists.
require items set out in paragraph 10.1 to be disclosed separately on the face of the profit and loss account
The Group of 100 believes that the information currently disclosed on the face of the profit and loss account is appropriate. The inclusion of additional disclosure requirements on the face of the profit and loss account is likely to result in excessive detail being included on the face of the statement. We believe that disclosure requirements detailed in paragraph 10.1 should be presented by way of notes to the financial statements.
require an analysis of expenses to be disclosed either on the basis of their nature or their function
The heading for paragraph 11 should be reworded as follows: "Disclosures of Revenues and Expenses either on the face of the ~~Balance Sheet~~ Profit and Loss or in the Notes".

The level of disclosure required by paragraph 11 is extensive and impractical in its application. The Group of 100 believes that disclosure of this additional information will not provide users with information that will drive improved decisions about the allocation of scarce resources. In addition, entities may be justifiably concerned about the usefulness of disclosing cost of sales information to users particularly in a diversified group and the effect of competitive position
require the disclosure of the remuneration for other services provided by a related practice of the auditor in relation to the entity
The Group of 100 agrees with the proposed disclosure. Remuneration of a "related practice" of the auditor of the parent entity for other services should be disclosed irrespective of its perceived materiality.

Yours sincerely,

Bryce JH Denison
National President