IAASA uses cookies so that you have the best possible browsing experience on our website. If you agree that we can store and use cookies just click "Accept and Close"
or you can learn more about cookies.

Background

The Income Statement (Profit and Loss account) is arguably the most important of the primary statements contained in a company’s financial statements and receives the most attention from commentators when a company publishes its results.

During the course of its first cycle of reviews undertaken between 2007 and 2012, IAASA identified a number of instances of non-compliance with the relevant financial reporting requirements relating to the presentation of the Income Statement by equity issuers under its remit (Section 3 of the Commentary). As a follow-up, IAASA has performed a desk top thematic review of selected Irish equity issuers’ application of the requirements of the relevant accounting standard IAS 1 Presentation of Financial Statements.

Based on the results of the thematic study, the Commentary has been prepared to highlight for users of Irish equity issuers’ annual financial statements the areas where divergent, but not necessarily non-compliant, approaches have been adopted in practice. Such divergent treatments reduce the comparability of issuers’ annual financial statements and in our view it is important that users be aware of this.

IAS 1 sets out the overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. The Commentary focuses only on aspects of IAS 1’s requirements in respect of the Income Statement.

Key findings and messages

The need for users to critically evaluate reported headline items in the Income Statement

The relevant accounting standard is not prescriptive in nature and issuers have adopted alternative presentation methodologies which appear to comply with the accounting standard.

Users of issuers’ financial statements such as investors and other finance providers are advised to critically evaluate reported headline items and the Income Statement presentation adopted by issuers.

Particular attention should be directed towards the items titled “operating profit” and “exceptional items”. These terms are not defined by the relevant accounting standard but their use is particularly prevalent amongst Irish and UK entities.

Users should consider the related explanatory note disclosures including the definitions used and the accounting policy adopted (if any) in respect of these items.

In this context, the following results from the study are noteworthy:

All ten selected equity issuers’ annual financial statements issuers presented a measure of “operating profit” or a similar line item.

This review identified 30 different items presented as “exceptional items” by the ten selected equity issuers in either their 2012 or 2011 annual financial statements.

The review determined that the cumulative amount presented as “exceptional items” before tax by the ten selected equity issuers over the five years amounted to €1.7bn comprising €2.1bn in exceptional costs and €0.4bn in exceptional income.

The costs presented as “exceptional” exceeded the income presented as “exceptional” by a factor of 5:1.

The review identified a range of practices in presenting and disclosing “exceptional items”.