Financial Statement Presentation
Definition of Discontinued Operations
The Board was asked which of the following criteria should be included in the definition of Discontinued Operations:
- Separate major line of business
- Operating Segment
- Continuing involvement
- Capital appreciation
The Board discussion concentrated on the first two criteria. At the beginning of the discussion it appeared that a majority of Board members supported a level 'one level below Operating Segments'. Those in favour of this noted that an Operating Segment criterion would exclude significant business line within a segment from being presented as Discontinued Operations.
The FASB staff in formed the Board that the FASB had agreed on the Operating Segment criterion. The FASB considered it to be sufficient to only show and restate Operating Segments since disclosures for all other components are to be provided in the notes.
One Board member pointed out that because of the restatement issue there should be no GAAP difference.
Finally Board members voted 8 to 6 in favour of the Operating Segments criterion. No final decision was made on the scope of disclosures for the other components classified as held for sale.
It appeared from the discussion that the last two criteria should not be considered. However, no vote was taken on this.
FASB staff informed the Board that the FASB intends to revise FAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets. The Board acknowledged that it might be necessary to launch a similar project for IFRS 5. However, it was decided to await the outcome of the FASB project first.
Disaggregation on the Statement of Comprehensive Income
The staff presented the following alternatives:
Alternative A: Pure Management Approach
Under Alternative A, an entity would be required to present the following:
- Information based on the primary activities (functions) in which the entity engages
- For each of those functions, information about the significant related costs (by their nature) that would provide information useful in predicting future cash flows.
The standard would include examples of functional activities and related costs that an entity might present separately. Those examples would include:
a. Functional activities:
- 1. Sales of product
- 2. Sales of services
- 3. Cost of product sales
- 4. Cost of services sales
- 5. Marketing
- 6. General and administrative
- 7. Research and development
- 1. Salaries and wages
- 2. Pension and other benefits
- 3. Materials
- 4. Depreciation
- 5. Amortization
- 6. Rent
- 7. Energy
- 8. Lease
- 9. Maintenance
- 10. Technology
- 11. Royalty fees
- 12. Licensing fees.
Alternative B: Modified Management Approach
Alternative B would be the same as Alternative A except that the first seven costs listed in Alternative A under related costs by their nature would be required to be presented separately unless the cost is deemed to be insignificant. As with Alternative A, an entity also would be required to break out any other cost that is important in understanding its operating results that may not be or relate to a functional line item because it does not relate to what the entity does on a regular basis (not a primary activity). Examples would be a gain or loss on the disposal of an asset or impairment of goodwill.
Alternative C: Permit Nature Only (as exception to Modified Management Approach)
Alternative C would add an exception to Alternative B that would permit an entity to present information only based on the nature of expenses (materials, labour, depreciation, and so forth) if classifying costs (expenses) into functional activities provides information that is not relevant.
No formal decision was made. The majority of Board members supported Alternative A for disaggregation by function and were in favour of having Alternative C in certain situations (e.g. holding companies).
Hybrid Entity considerations
Some Board members noted that issues associated with applying the working format to the financial statements of hybrid entities are of high importance. Hybrid entities were considered to be the 'rule rather than the exception' (e.g. manufacturers providing significant finance services).
The Board decided to further explore this issue prior to the issuance of the initial discussion document and asked the staff to prepare a paper for discussion at the March meeting.
Statement of changes in equity and other equity-related issues
The Board discussed the following five issues.
1. Whether the statement of comprehensive income should be expanded to include all changes in net assets including investments by and distributions to owners
The Board decided not to expand the statement of comprehensive income to become a statement of changes in net assets. The statement of changes in equity should be viewed together with the statement of comprehensive income, thereby making the set of financial statements cohesive and complete.
2. What format the statement of changes in equity should take
The staff provided a schedule including details of the change in the beginning and ending balance of each of the following components of equity:
- Common Stock
- Retained Earnings
- Accumulated OCI
The Board agreed to the format but pointed out that within the caption Common Stock an entity should be allowed to show the par value and the additional paid-in capital separately.
3. Whether the working format should be modified such that the equity category would be presented as a separate section distinct from the financing section
The Board agreed to have a separate equity section.
An illustrative example is provided on page 11 of Agenda Paper 13D of the Observer notes available from the IASB website.
4. Whether the Board should be pursuing another statement that would provide information about how capital is allocated
The Board decided not to have this additional statement on grounds that the information can be extracted from the existing statements.
5. Whether Board members are interested in pursuing a schedule that would present equity items (and possibly financing liabilities) at fair value
The Board decided not to have this additional statement as outlined in the Observer Notes.
In this connection the Board discussed and approved a suggestion submitted by one Board member dealing with the presentation of equity components at fair value. However, no details were made available to observers.