AOSSG WG Financial Statement Presentation

AOSSG WG Financial Statement Presentation 5 November 2009 IL-Hong, Park Senior Researcher The Korea Accounting Standards Board

Contents Background Working Group Discussion Issues Summary

Joint Project of the IASB/FASB • Steps for the Financial Statement Presentation(FSP) Project • Discussion Paper(DP) published: in October 2008 • Field test performed: during the fourth quarter of 2008 • Comment period given: until April 2009 • ED expected to be issued: in the second quarter of 2010 • Final standards expected to be issued: in the mid-2011 3

The IASB DP Preliminary Views on FSP • The IASB DP Preliminary Views on FSP • Are well-organised, thanks to many years of effort by the IASB/FASB • Include almost all important issues related to FSP • Three Objectives of the DP • Portray a cohesive financial picture • Disaggregate information (useful in assessing future cash flows) • Present information about liquidity and financial flexibility 4

Purpose & Composition of Working Group (WG) on FSP • Purpose • To assist the AOSSG in preparing improvement proposals to the IASB regarding the DP Preliminary views on FSP • Members • Australia, Hong Kong, Japan, Macao, Malaysia, New Zealand • Co-lead Country • China • Lead Country • Korea 6

Chronology of Working Process • September 2, 2009: initial discussion report issued • October 7, 2009: WG FSP members’ comments on the initial discussion report • October 19, 2009: revised discussion report issued • October 22, 2009: all AOSSG members’ comments on the revised discussion report • November 5, 2009: 1st AOSSG meeting 7

Contents Summary Working Group Discussion Issues Summary

Key Issues to be discussed • Short-cut direct method for operating cash flows • Additional guidance for management judgement • Classification of dividends payable • Classification of a net post-employment benefit asset or liability • Additional guidance for the definition of the operating category • Disclosure standard 9

1. Short-cut Direct Method for Operating Cash Flows • The IASB DP’s Proposal • Operating cash flows are prepared only by a direct method • WG’s Initial Proposal: Short-cut Direct Method for Operating Cash Flows • Reducing preparation costs and effort • Cash flows by an indirect method can be converted to the cash flows by a direct method • Reconciling profit or loss adjustment items of an indirect method to the relevant items of the operating category in the statement of comprehensive income 10

1. Short-cut Direct Method for Operating Cash Flows • WG’s Opinions to the Initial Proposal • Almost all disagreed: inaccurate, inconsistent with disaggregation objective • Some agreed: reduces preparation costs and effort • Some noted: use as application guidance, not as standard • WG’s Opinions to the DP • Many doubted: the direct method provides more useful information than indirect method • Many concerned: the cost of preparing the information using the direct method is high 11

1. Short-cut Direct Method for Operating Cash Flows • WG’s Suggestion • Use short-cut direct method as a reasonable alternative for the direct method for operating cash flows 12

2. Additional Guidance for Management Judgement • The IASB DP’s Proposal • Adopt a management approach to classification rather than a prescriptive approach • WG’s Initial Proposal: Additional Guidance for Management Judgement • Concerned with loss ofinformation due to oversimplification • Additional guidance (materiality judgement or numerical limitation) 13

2. Additional Guidance for Management Judgement • WG’s Opinions to the Initial Proposal • Almost all disagreed: materiality is subject to management judgement and numerical limitation is overly rule-based • Some noted: the level of disaggregation in applying the direct method as proposed by the DP is too onerous • WG’s Suggestion • The IASB is expected to develop application guidance for groupings of information by management (IASB Update, Sept. 09’) • Address the issue of oversimplification or excessive disaggregation in the financial statements when the IASB develops application guidance 14

3. Classification of Dividends Payable • The IASB DP’s Proposal • Present them as liabilities under the financing section, which is an exception for cohesiveness objective(*) • (*) It is uncertain whether the IASB acknowledges it as an exception to the cohesiveness objective. This material is prepared under the assumption that the IASB acknowledges it as an exception. • WG’s Initial Proposal: Present them in Equity Section • Consistent with cohesiveness objective • Separate owner source of financing from non-owner source • The DP seems to follow proprietary view by segregating the equity section from the financing 15

3. Classification of Dividends Payable • WG’s Opinions to the Initial Proposal • Some disagreed: financial liabilities in substance • Some agreed: consistent with cohesiveness objective • Some noted: classification is fundamentally related to ‘entity view’ vs. ‘proprietary view’ • WG’s Suggestion • The IASB’s tentative decision(IASB Update, Sept. 09’) • “Define the financing section as financial liabilities used as part of an entity’s capital raising activities that have an agreed-upon schedule of repayments with an interest component” 16

3. Classification of Dividends Payable • WG’s Suggestion(cont.) • Not financial liabilities under the IASB’s tentative decision • Classification depends on which perspective is taken, either • - definition of liabilities in the Framework or • - presenting owner-source of financing separately from non-owner source • Until fundamental issue is addressed, the following should be maintained • - the exception should be removed • - they are presented under the equity section 17

4. Classification of Net Post-employment Benefit Asset or Liability • The IASB DP’s Proposal • Present it in a single category • WG’s Initial Proposal: Operating Category • Not related to the substance of financing activities • Treat it in a manner similar to that of the prepaid or unpaid employee compensations that arise from business operations, which are classified in the operating category 18

4. Classification of Net Post-employment Benefit Asset or Liability • WG’s Opinions to the Initial Proposal • Some agreed: generally classified in the operating category • Some disagreed: inappropriate to restrict the classification and is just a matter of professional judgement • WG’s Suggestion • The IASB is expected to develop application guidance for the business section (TheIASBUpdate, Sept. 09’) • This issue needs to be considered for developing application guidance for the business section 19

5. Additional Guidance for Definition of Operating Category • The IASB DP’s Proposal • The operating category includes assets and liabilities that management views as related to the central purposes for which the entity is in business • WG’s Initial Proposal: The operating category includes assets and liabilities related to the central purpose of ‘current business’ • Value creating activities as proposed by the DP are too uncertain • Investing activities might be classified to the operating category, which could distort operating performance 20

5. Additional Guidance for Definition of Operating Category • WG’s Initial Proposal: The operating category includes assets and liabilities related to the central purpose of ‘current business’(cont.) • By excluding items related to the future business from the operating category, the financial statements provide decision-useful information for sustainable operational performance and cash flows from continuing operations • WG’s Opinions to the Initial Proposal • Some disagreed: too restrictive and inconsistent with the management approach to classification • Some agreed: improve comparability between entities’ financial statements 21

5. Additional Guidance for Definition of Operating Category • WG’s Suggestion • The IASB is expected to develop application guidance for the business section (IASB Update, Sept. 09’), • Therefore, decide to drop the initial proposal • Instead, suggest that the central purpose of ‘current business’ be considered as one of the examples in the application guidance on the operating category within the business section 22

6. Disclosure Standard • Conceptual Framework for Disclosure • Many pointed out the defects of financial statements due to the absence of disclosure framework • Phase E(Presentation and Disclosure) of the Conceptual Framework has not yet begun and its timing is uncertain • It would be ideal all disclosure requirements in standards reflect the disclosure principles by developing the Conceptual Framework. • Some conceptual issues are addressed as part of an individual standard project and the Conceptual Framework project simultaneously • ex) ‘Financial Instruments with Characteristics of Equity’: the concept of liability and equity 23

6. Disclosure Standard • WG’s Suggestion • Include a disclosure as significant part of the FSP projects • IAS 1 Presentation of Financial Statements is best relevant standard that addresses disclosure 24

Summary • WG’s suggestion • Short-cut direct method for operating cash flows • ☞ use as a reasonable alternative for direct method • Additional guidance for management judgement • Classification of a net post-employment benefit asset or liability • Additional guidance for the definition of the operating category • ☞ reflect these issues in developing application guidance • Classification of dividends payable • ☞ until fundamental issue is addressed, present them in the equity section • Disclosure standard • ☞ include a disclosure in the FSP project 26

Thank you !! 27

AOSSG WG Financial Statement Presentation