In essence, an appropriate level of aggregation in the financial statements helps to avoid two pitfalls in financial reporting:
- omitting material information by providing insufficient detail; and
- obscuring material information by providing too much detail.
Let’s dive in.
Principles of aggregation
IFRS 18.41 sets out the following principles of aggregation:
- Assets, liabilities, equity, income, expenses and cash flows are classified and aggregated into items based on shared characteristics.
- Items are disaggregated based on characteristics that are not shared.
- Items are aggregated or disaggregated to present line items in the primary financial statements that fulfil their role of providing useful structured summaries. If an entity does not present material information in the primary financial statements, it must disclose that information in the notes (IFRS 18.42).
- Items are aggregated or disaggregated to disclose information in the notes that fulfils the role of the notes.
- Aggregation and disaggregation in the financial statements must not obscure material information.
IFRS 18.41 explains that a ‘line item’ is an item presented separately in the primary financial statements. The process of aggregation and disaggregation is outlined in IFRS 18.B17-B18.
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Applying judgement
IFRS 18 doesn’t specify a quantitative threshold for disaggregation, so judgement is required. The more similar the characteristics of assets, liabilities, income, expenses or cash flows arising from individual transactions and other events, the more likely it is that aggregation will fulfil either the role of the primary financial statements in providing useful structured summaries or the role of the notes in disclosing material information.
Items aggregated and presented as line items in the primary financial statements should share at least one characteristic beyond merely meeting the definition of an asset, liability, item of equity, income, expense or cash flow. However, given the role of the primary financial statements, line items will inevitably aggregate items with sufficiently dissimilar characteristics that information about the disaggregated items is material and must therefore be disclosed in the notes.
Nevertheless, an entity should disaggregate items with dissimilar characteristics when the resulting information is material. See IFRS 18.B19-B23 for further discussion.
Labels and descriptions
IFRS 18 requires an entity to label and describe items presented or disclosed in a way that faithfully represents their characteristics. Those items will often comprise aggregations of items arising from individual transactions or other events. An aggregation may include items for which information is material, items for which information is immaterial, or both (IFRS 18.43, B24).
An entity may use the label ‘other’ only when it cannot identify a more informative description. When an item for which information is material is aggregated with items for which information is not material, the entity should ordinarily use a label that describes the material item.
When an aggregation comprises only items for which information is not material, the entity should consider whether those items share similar characteristics. If they do, the label should faithfully describe those shared characteristics. If they don’t, the description should instead reflect the dissimilar nature of the items included in the aggregation.
If no label is more informative than ‘other’, the entity is required to describe the aggregation as precisely as possible. A generic label such as ‘other expenses’ would therefore be less informative than one identifying the relevant category or function, such as ‘other operating expenses’ or ‘other finance expenses’.
Additional consideration is required when an amount labelled ‘other’ comprises only items for which information is not material. If the aggregated amount is sufficiently large, users might reasonably question whether it includes items for which information could be material. Information that resolves that question is itself material. In those circumstances, the entity should provide further information about the composition of the amount. This might include a statement that the aggregation contains no items for which information would be material. Alternatively, the entity might explain that the amount comprises several individually immaterial items and indicate the nature and amount of the largest item (IFRS 18.B25-B26).
Offsetting
A distinct concept in the context of aggregation and disaggregation is offsetting.