Leash.
IFRS 18 Aggregation and Disaggregation Requirements - Grouping Financial Information
All Articles

IFRS 18 Aggregation and Disaggregation Requirements - Grouping Financial Information

On this page

Aggregation and Disaggregation Principles

Aggregation involves combining assets, liabilities, equity, income, expenses or cash flows that share similar characteristics into line items. Disaggregation involves separating items with dissimilar characteristics to prevent obscuring material information. These principles aim to balance information needs by providing detailed information without overwhelming users with excessive detail.

The key principles require entities to:

  • Aggregate items based on shared characteristics (similar characteristics)
  • Disaggregate items based on characteristics that are not shared (dissimilar characteristics)
  • Aggregate or disaggregate items to fulfil the distinct roles of primary financial statements and notes
  • Ensure that aggregation and disaggregation do not obscure material information

These enhanced requirements replace the less detailed guidance in IAS 1, potentially changing how entities group information in their financial statements.

Understanding the Balance

The IFRS 18 aggregation and disaggregation principles aim to strike a balance between providing sufficient detail for users to make informed decisions and avoiding information overload that obscures material information. The more similar the characteristics of items, the more appropriate aggregation becomes. Conversely, greater dissimilarity suggests disaggregation is necessary.

Primary Financial Statements vs Notes

IFRS 18 introduces defined and complementary roles for primary financial statements and notes to guide entities in determining where to provide material information.

Role of Primary Financial Statements

Primary financial statements provide useful structured summaries of an entity's assets, liabilities, equity, income, expenses and cash flows. The role is to:

  • Provide an understandable overview of the entity's financial position and performance
  • Make comparisons possible between entities and between reporting periods
  • Identify items or areas about which additional information is disclosed in the notes

Primary financial statements present more aggregated information than the notes. An entity is not required to present a line item separately in primary statements, even if material, if doing so would not fulfil the role of providing useful structured summaries. Conversely, entities may determine that presenting additional line items is necessary to provide these summaries.

Role of the Notes

The notes complement primary financial statements by providing more detailed, disaggregated information. The role of the notes is to provide material information necessary to:

  • Enable users to understand line items presented in primary financial statements
  • Supplement primary financial statements with additional material information to meet the objective of financial statements

For example, notes may disclose disaggregated information about inventory classifications (work in progress, finished goods), key assumptions and judgements used in measurements, or information about risk exposures that do not directly relate to specific line items.

Material Information Placement

Materiality continues to determine whether an entity is required to present or disclose information. However, entities must now consider the defined roles when determining whether material information is presented in primary statements or disclosed in notes. This represents enhanced guidance compared to IAS 1, which provided less direction on where to place information.

Did you know?

IFRS 18 explicitly includes 'non-recurring income and expenses' as potentially having sufficiently dissimilar characteristics to warrant separate presentation or disclosure. This addition may lead entities to provide more information about unusual or one-off items, improving transparency for users even though the IASB ultimately decided against formally defining 'unusual items'.

Characteristics for Grouping

IFRS 18 identifies characteristics that entities consider when determining whether items have similar or dissimilar characteristics for aggregation and disaggregation purposes.

Key Characteristics

Examples of characteristics to consider include:

  • Nature: The fundamental attributes or essence of the item
  • Function: The purpose or role the item serves within the entity
  • Measurement basis: How the item is measured (such as historical cost, fair value, amortised cost)
  • Size: The magnitude or materiality of the item
  • Geographical location: Where the item originates or operates
  • Regulatory environment: The legal or regulatory framework applicable to the item

Similarity and Aggregation

The more similar the characteristics of items are, the more likely aggregating those items will fulfil the role of primary financial statements or notes. Items aggregated and presented as line items in primary financial statements must have at least one similar characteristic.

For example, human resources, legal and accounting costs may share similar characteristics due to their administrative function within an entity, making aggregation appropriate. Similarly, commissions and marketing costs relating to selling activities may be sufficiently similar for aggregation.

Dissimilarity and Disaggregation

The more dissimilar the characteristics of items are, the more likely disaggregating the items will fulfil the roles of primary financial statements or notes. A single dissimilar characteristic may result in disaggregated information being disclosed in the notes.

Because primary financial statements provide useful structured summaries, line items are likely to include some items with dissimilar characteristics. This generally means further disaggregation in the notes is necessary to provide material information and enable understanding of those line items.

Process of Aggregation and Disaggregation

To apply the IFRS 18 aggregation and disaggregation principles and ensure financial statements fulfil their respective roles, entities follow a systematic three-step process.

Step 1: Identify

Identify assets, liabilities, equity, income, expenses or cash flows arising from individual transactions or events. This initial identification captures all financial information that must be considered for grouping.

Step 2: Aggregate

Aggregate assets, liabilities, equity, income, expenses or cash flows into items based on similar characteristics. Apply the characteristic considerations (nature, function, measurement basis, size, geographical location, regulatory environment) to group items appropriately.

For primary financial statements, aggregation provides the summarisation necessary to create useful structured summaries. For notes, aggregation may be less extensive to provide more detailed information.

Step 3: Disaggregate

Disaggregate items based on dissimilar characteristics. By following this process, an entity disaggregates items whenever the resulting information is material. If an entity determines not to present material information separately in primary financial statements, it must disclose the information in the notes.

Judgement Required

Determining how to group information requires significant judgement about whether items have similar or dissimilar characteristics. The process aims to prevent obscuring material information whilst providing appropriate levels of summarisation and detail in the right locations within the financial statements.

Labelling and Describing Items

After applying aggregation and disaggregation guidance, IFRS 18 requires entities to determine how to label and describe items presented and disclosed in financial statements.

Faithful Representation

Entities must label and describe items in a way that faithfully represents them. Labels and descriptions need to provide users with sufficient information to understand the items. Because items presented or disclosed are often aggregations of items from individual transactions or events, finding informative labels can be challenging.

Informative Labels

When an item comprises a material item and other immaterial items, labelling the item by describing only the material item may result in an informative label. If an item comprises immaterial items, using a label that describes the similar or dissimilar characteristics considered when grouping the items may also result in an informative label.

Using 'Other' Labels

IFRS 18 discourages entities from using 'other' as a label by requiring evaluation of whether more informative labels exist and additional disclosures for amounts labelled as 'other'.

When an entity cannot find a more informative label than 'other':

  • The entity uses a label that describes the aggregated item as precisely as possible (such as 'other operating expenses' or 'other finance expenses')
  • The entity provides disaggregated information in the notes if material

Large 'Other' Amounts

For aggregations comprising only immaterial items, entities must consider whether the aggregated item is sufficiently large such that users could reasonably question whether it includes material items. If so, information to resolve that question is material and the entity discloses further information, such as:

  • Explanation that the aggregated item includes only immaterial items
  • The nature and amount of the largest item within the aggregated item

This additional guidance aims to improve transparency and reduce the use of uninformative 'other' labels in financial statements.

Practical Examples

Example 1: Grouping Operating Expenses

Company A evaluates which expense line items to present in the operating category of its income statement. A decides to present operating expenses by function as this provides the most useful structured summary.

A classifies production-related expenses (raw materials, employee costs, depreciation) into a 'cost of sales' line item. For other operating expenses, A observes:

  • Human resources, legal and accounting costs relate to administrative activities
  • Commissions and marketing costs relate to selling activities

A determines that administrative expenses share similar characteristics due to their function and aggregates these expenses into an 'administrative expenses' line item. Similarly, A aggregates selling-related expenses into a 'selling expenses' line item.

A then evaluates whether further aggregation of administrative and selling expenses into a single 'selling and administrative expenses' line item would provide a useful structured summary. A determines the characteristics are sufficiently dissimilar and that presenting separate line items is necessary. Separate presentation provides users with a more understandable overview and may facilitate comparison with peers.

A provides additional information in the notes about the nature of expenses related to cost of sales, administrative and selling activities and other material information necessary for users' understanding.

Example 2: Trade Payables Subject to Reverse Factoring

Company B enters into a reverse factoring arrangement (supplier finance arrangement) related to some of its trade payables. Under the arrangement, a finance provider agrees to pay amounts owed by B to B's suppliers. B then pays the finance provider on the same date or at a later date.

When considering what information to present in the balance sheet and disclose in the notes, B determines that trade payables subject to the reverse factoring arrangement share sufficiently similar characteristics with other trade payables (nature, function, measurement basis, size). B determines that presenting a separate line item for payables subject to reverse factoring is not necessary to provide a useful structured summary.

B presents a single 'trade payables' line item in the balance sheet that aggregates all trade payables, including those subject to reverse factoring and those that are not.

However, B determines that characteristics of payables subject to reverse factoring are sufficiently dissimilar from other payables such that providing disclosure in the notes results in material information. B discloses in the notes:

  • Disaggregated amounts subject to reverse factoring arrangements
  • Terms and conditions of the arrangements
  • Due dates applying IAS 7 requirements
  • Other relevant information

This example demonstrates how items can be appropriately aggregated in primary statements whilst requiring disaggregated disclosure in notes.

Example 3: Investment Property Valuation

Company C holds investment properties measured at fair value. C holds properties in three geographical regions: Europe (£45 million), Asia (£32 million) and Americas (£18 million). C also categorises properties by type: office buildings (£60 million) and retail centres (£35 million).

C determines that presenting a single 'investment property' line item in the balance sheet provides a useful structured summary, as all properties share the similar characteristics of nature (investment property) and measurement basis (fair value).

In the notes, C provides disaggregated information based on dissimilar characteristics:

  • Geographical disaggregation showing the three regions, as different regulatory environments and market conditions affect valuations
  • Property type disaggregation showing office buildings and retail centres, as these have different functions and risk profiles
  • Valuation assumptions and techniques used for each category
  • Sensitivity analysis showing impacts of reasonable changes in key assumptions

This disaggregated information in the notes enables users to understand the investment property line item presented in the balance sheet and provides additional material information about risks and uncertainties.

Practical Insight

When evaluating whether to aggregate expenses by nature or function, consider which approach provides the most useful structured summary for your entity's circumstances. Manufacturing entities often find function (cost of sales, selling, administrative) more useful, whilst service entities may prefer nature (employee costs, depreciation, professional fees). IFRS 18 requires disclosure of the analysis not presented on the face of the income statement.

Implementation Considerations

Judgement Areas

Implementing IFRS 18 aggregation and disaggregation requirements involves significant judgement in several areas:

  • Determining which characteristics are similar or dissimilar for specific items
  • Assessing whether aggregating or disaggregating items provides useful structured summaries
  • Deciding whether material information should be presented in primary statements or disclosed in notes
  • Evaluating whether amounts labelled as 'other' are sufficiently large to require additional explanation

Changes from Current Practice

Entities may need to reconsider their current aggregation and disaggregation approaches. IFRS 18 introduces consistent principles that may change how entities group information compared to the less detailed IAS 1 guidance. Specific changes may include:

  • Presenting fewer or more line items in primary financial statements depending on whether they contribute to useful structured summaries
  • Providing more disaggregated information in notes to enable understanding of aggregated line items
  • Improving labels and descriptions to faithfully represent items rather than using generic 'other' labels
  • Explicitly considering non-recurring items for separate presentation or disclosure

Documentation and Policies

Entities should document their aggregation and disaggregation policies, including:

  • Characteristics considered when grouping specific items
  • Rationale for determining items have similar or dissimilar characteristics
  • Assessment of whether line items provide useful structured summaries
  • Basis for labels and descriptions used

This documentation supports consistent application and facilitates discussions with auditors and regulators.

Comparative Information

When first applying IFRS 18, entities must consider whether comparative information presented in primary financial statements continues to provide useful structured summaries under the new requirements. Entities may need to re-present comparative line items to ensure consistency and comparability.

Systems and Processes

Entities should evaluate whether systems and processes support the information needs created by enhanced aggregation and disaggregation requirements. This may involve:

  • Capturing additional characteristics data to support grouping decisions
  • Developing capabilities to disaggregate information in various ways for notes disclosures
  • Implementing controls over labelling and descriptions to ensure faithful representation
  • Training financial reporting teams on applying the new principles and exercising appropriate judgement

Conclusion

IFRS 18 aggregation and disaggregation requirements establish comprehensive principles for grouping financial information based on shared and dissimilar characteristics. Entities aggregate items with similar characteristics to provide useful structured summaries in primary financial statements whilst disaggregating items with dissimilar characteristics to provide detailed information in the notes. These enhanced requirements, combined with defined roles for primary statements and notes, aim to improve the usefulness of financial statements by ensuring appropriate levels of summarisation and detail. Implementing these requirements requires significant judgement about characteristics, appropriate grouping, and faithful representation through informative labels and descriptions.

For clarification, guidance, or feedback on our article, please reach out to us at insight@leash.co.za.

Have a Question?

Ask us anything about this article

Frequently Asked Questions

Common questions about this topic

IFRS 18 aggregation and disaggregation requirements establish principles for grouping financial information. Entities aggregate items with similar characteristics (such as nature, function, or measurement basis) and disaggregate items with dissimilar characteristics. The objective is to provide useful structured summaries in primary financial statements whilst disclosing additional material information in the notes.

Aggregation under IFRS 18 involves combining assets, liabilities, equity, income, expenses or cash flows that share similar characteristics into line items. Disaggregation involves separating items with dissimilar characteristics to prevent obscuring material information. Aggregation provides summarised overviews in primary statements, whilst disaggregation provides detailed information in the notes.

IFRS 18 identifies six key characteristics for aggregation and disaggregation: nature of the item, function within the entity, measurement basis used, size of the item, geographical location, and regulatory environment. The more similar these characteristics are between items, the more appropriate aggregation becomes. Conversely, dissimilar characteristics suggest disaggregation is necessary.

The role of primary financial statements under IFRS 18 is to provide useful structured summaries of an entity's assets, liabilities, equity, income, expenses and cash flows. They present more aggregated information to give users an understandable overview, facilitate comparisons between entities and reporting periods, and identify items requiring additional information in the notes.

The notes under IFRS 18 provide material information necessary to enable understanding of line items presented in primary financial statements and supplement them with additional material information. The notes contain more disaggregated, detailed information than primary statements, including information about key assumptions, judgements, risks and other material information not presented separately in primary statements.

Yes, entities can label items as 'other' under IFRS 18, but the standard discourages this practice. When an entity cannot find a more informative label, it must describe the aggregated item as precisely as possible (such as 'other operating expenses') and provide disaggregated information in the notes if material. For large 'other' amounts comprising immaterial items, additional explanatory information may be required.

IFRS 18 introduces consistent principles for aggregation and disaggregation that IAS 1 lacked. Whilst IAS 1 allowed entities to group information in their own ways, IFRS 18 provides detailed guidance requiring items to share at least one similar characteristic for aggregation, whilst a single dissimilar characteristic may require disaggregation. The standard also defines distinct roles for primary statements and notes.

Yes, materiality continues to determine whether an entity must present or disclose information in financial statements under IFRS 18. However, for primary financial statements, entities must also consider whether presenting a line item contributes to providing a useful structured summary. Material information not presented in primary statements must be disclosed in the notes.

The IFRS 18 aggregation and disaggregation process involves three steps: (1) Identify assets, liabilities, equity, income, expenses or cash flows from individual transactions or events; (2) Aggregate items based on similar characteristics; (3) Disaggregate items based on dissimilar characteristics. This process ensures material information is not obscured and financial statements fulfil their defined roles.

IFRS 18 requires entities to label and describe items in a way that faithfully represents them and provides users with necessary information to understand the items. Labels should be informative rather than generic. When items comprise both material and immaterial components, describing the material item may provide an informative label. Labels should describe the characteristics considered when grouping items.