The changes introduced by AASB 18 Presentation and Disclosure in Financial Statements are mainly aimed at improving the consistency and comparability of performance reporting by entities. In practical terms, this means the income statement is about to undergo a facelift.

Current accounting requirements in AASB 101 Presentation of Financial Statements are not overly prescriptive when it comes to the structure of the income statement. New guidance in AASB 18 will promote a more standardised approach to presentation of financial performance which will support more meaningful analysis and improve comparability across entities.

In previous instalments of our AASB 18 series, we examined the more visible changes to financial statement presentation, including the new profit or loss categories, mandatory subtotals and management-defined performance measures. This instalment focuses on a change that may be less immediately noticeable but is likely to affect almost every set of financial statements.

AASB 18 introduces enhanced guidance on aggregation, disaggregation and labelling. While these concepts are not new, the new standard places greater emphasis on how information is grouped, described and presented to users. For many entities, the impact may be less about reporting new information and more about reconsidering how existing information is presented in their financial statements.

Aggregation and disaggregation

Aggregation refers to combining items that share similar characteristics, while disaggregation involves separating information where doing so provides more useful information to users.

Most entities already apply these concepts to some degree. For example, an entity may aggregate hundreds of individual sales transactions into a single revenue line item. Conversely, it may disaggregate property, plant and equipment into separate classes such as land, buildings, vehicles and machinery.

What is new under AASB 18 is the stronger emphasis on identifying the characteristics that make items similar or dissimilar and using those characteristics to determine how information should be aggregated, disaggregated and presented.

Examples of characteristics that may be relevant to grouping include:

  • Nature of the item;
  • Function within the business;
  • Measurement basis;
  • Geographic location; and
  • Regulatory environment.

The more similar the characteristics of items are, the more likely it is that aggregating those items will result in information that is useful to users of the financial statements. Conversely, the more dissimilar the characteristics are, the more likely it is that disaggregation will be required.

For example, grouping depreciation, employee benefits and impairment losses into a single line item may not provide useful information because those expenses have different characteristics and arise from fundamentally different economic phenomena.

A recurring theme throughout AASB 18 is that material information should not be obscured by excessive aggregation.

Consider an entity that presents a single line item labelled ‘other operating expenses’ of $25 million. If that balance contains a $10 million restructuring expense, users may struggle to understand the nature of the entity’s performance during the year.

Under AASB 18, entities need to assess whether information about individual components is material in its own right. Where it is, further disaggregation may be required either on the face of the financial statements or within the notes.

This does not mean every balance needs to be broken down into endless detail. Rather, the aim is to ensure users receive sufficient information to understand the significant drivers of financial performance.

Presentation on the face versus disclosure in the notes

AASB 18 also provides greater guidance on deciding where information belongs within the financial statements.

The primary statements (that is, the income statement, balance sheet, cash flow statement and statement of changes in equity) are intended to provide high-level, structured summaries of the entity’s financial performance, financial position and cash flows. Detailed explanations and disaggregation are often more appropriate in the notes.

This means preparers should think of the primary financial statements and the notes as working together: the statements provide the headline story, while the notes provide the supporting detail.

The challenge for preparers is determining how much information belongs in each location. Too much information on the face of the primary statements or in the notes may overwhelm users. Too little information may conceal information that is important to a user’s understanding of the entity’s results.

Labelling matters

Good aggregation and disaggregation can be undermined by poor labelling.

AASB 18 introduces more detailed guidance around the descriptions used for line items, subtotals and note disclosures. Labels should faithfully represent the items they describe and avoid being overly generic or potentially misleading.

For example, a line item labelled ‘extraordinary costs’ may create confusion because users may not understand precisely which expenses have been included. A more descriptive label such as restructuring expenses or business acquisition costs generally provides more useful information.

Similarly, where an entity presents a line item called ‘other operating expenses’, users should be able to understand what types of expenses are included within that balance.

The overall objective is that a knowledgeable user should be able to understand the nature of the information without needing to guess what management intended.

Using ‘other’ to describe line items

Many financial statements contain line items labelled ‘other income’, ‘other expenses’, ‘other assets’ or similar descriptions. While AASB 18 does not prohibit these labels, it does place greater scrutiny on their use.

The standard views ‘other’ as a residual category. In other words, it should generally contain only those items that cannot be more meaningfully presented elsewhere.

Where an entity uses ‘other’ to describe a line item, additional information may be required to explain what sits within that balance. This is particularly important where the amount is material or contains items that users may reasonably expect to be disclosed separately.

For many preparers, this may be one of the more visible practical impacts of the new requirements. Large balances currently buried within ‘other expenses’ may need to be revisited before AASB 18 becomes effective.

Materiality remains the overarching principle

Importantly, AASB 18 does not change the role of materiality in financial reporting. Materiality remains the overarching principle in determining what information should be presented or disclosed in the financial statements.

The standard is therefore not primarily concerned with introducing new information requirements. Rather, it provides more explicit guidance on how material information should be aggregated, disaggregated, labelled and presented to users. In many cases, the challenge for preparers will not be identifying additional information to disclose, but determining whether existing information is being communicated in the most useful way.

The principles of aggregation, disaggregation and labelling all work together to support this objective. Information that is material should not be obscured through excessive aggregation, hidden within broad categories such as “other expenses”, or described using labels that fail to clearly communicate its nature. Equally, materiality acts as an important safeguard against unnecessary detail, ensuring financial statements remain understandable and focused on information that matters to users.

From compliance to communication

At its core, AASB 18 is trying to improve communication rather than increase disclosure for the sake of disclosure.

Often, financial statements contain material information hidden within broad categories, generic labels or large aggregated balances. The enhanced aggregation, disaggregation and labelling guidance aims to address this issue by making financial statements easier to navigate and understand.

For preparers, the challenge will be moving beyond compliance thinking and viewing financial statements as a communication tool. The most successful implementations of AASB 18 are likely to be those that focus not only on what information is disclosed, but also on how clearly that information is presented.

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This article is part of our series exploring the key changes introduced by AASB 18 and what they mean for entities.

Click the links below to explore the rest of the series:

Part 1: An overview of the new disclosure standard

Part 2: Categorising income and expenses

Part 3: New subtotals and operating expense analysis requirements

Part 4: Management-defined performance measures