Disclosure initiative

Date recorded:

Agenda Paper 11B: Principles of Disclosure – Alternative Performance Measures

The Technical Principal introduced the agenda paper and said that for the purpose of the agenda paper, alternative performance measures (APMs) were described as competing measures of performance to which the entity gave more emphasis than it did to other IFRS measures. The first question in the paper was as to whether further guidance was required with regard to APMs in financial statements. The Technical Principal said that the staff recommended not prohibiting the use of APMs in financial statements. They also recommended that no further guidance was required with regard to presentation of subtotals as this had been addressed by the recent amendments to IAS 1. The staff however proposed to introduce guidance on additional types of disclosures, regardless of whether they were in the primary financial statements or the notes.

One Board member said that users of financial statements expected from a standard-setter to define a performance measure that provided the most useful information. The permission of APMs would detract from those expectations. He expressed concern that management could provide information that was convenient to them in a special period. He proposed to require disclosure as to how those measures reconciled to the most relevant IFRS measure. The Chairman suggested having a more precise definition of what an APM was. Subtotals that were a mere sum of the line items above them (like EBITDA, for example) would not be APMs in his view as they were IFRS measures, albeit not mandated by or defined in the Standards. The term APM should be reserved for non-IFRS measures.

The Vice-Chairman said that if APMs required comparatives, reconciliations and presentation with equal or less prominence than IFRS measures, the raised concerns would be covered in his view.

One Board member asked whether the term ‘APM’ was required if the term ‘non-IFRS information’ was defined. He asked whether EBITDA would be an APM in the light of IAS 1 permitting subtotals. The Technical Principal replied that EBITDA would indeed be seen as APM by some constituents, for example ESMA. The staff would see it as non-IFRS information, although the Technical Principal conceded that the term ‘non-IFRS’ was misleading in this case. The Board member disagreed with the constituents that saw EBITDA as an APM. He said that in some industries there were more relevant performance measures than those defined by IFRS and those industries would therefore give those more prominence. He said that it would be difficult to prohibit this.

Another Board member said that the IASB could only address IFRS issues but could not mandate what preparers wrote in their press releases. The Chairman agreed but doubted that it would be permissible for financial statements to start and end with non-IFRS measures with the IFRS numbers hidden in between. The Board member replied that addressing these matters was not the IASB’s responsibility.

One Board member agreed with not prohibiting APMs but believed the guidance for APMs should be stricter than indicated in the agenda paper.

A fellow Board member said APMs should be prohibited in the income statement and should only be allowed in the notes. The Vice-Chairman replied that with the guidance proposed in the agenda paper he would not prohibit APMs as information about them would have to be disclosed. One Board member replied that not every user of financial statements read the notes. Another Board member agreed and said that the guidance proposed in the agenda paper could not be transferred to an IFRS.  The Chairman asked what his opinion was about the subtotals. The Board member replied that they should also be prohibited until this issue was specifically addressed in IAS 1. The Technical Principal said that to prohibit subtotals, an amendment to IAS 1 would be necessary as subtotals were required if they provided more useful information.

One Board member was in favour of allowing APMs. He said that APMs were commonly used to measure and report performance and prohibiting it would lead to IFRS financial statements being prepared only for compliance reasons whilst the APMs were communicated in another way.

Another Board member suggested distinguishing non-GAAP measures from additional GAAP measures. She said that only non-GAAP measures required further guidance. She said the IASB should state that it did not intend to issue guidance on how subtotals were calculated.

One Board member proposed to explore some common APMs as this was a research project.

The Technical Principal summarised that there were mixed views around the Board table as to whether APMs should be allowed in the financial statements with a perceived majority for allowing them. She said that some of those who were in favour of allowing them were reluctant to allow them ‘on the face’ of the income statement. She also said that there was a demand for more rigour around the definition and the proposed guidance should be more precise.

She continued with the depiction of non-recurring, unusual or infrequently occurring items. She said that the agenda paper presented two views on this issue. Under the first view no guidance would be required as the issue was covered by materiality guidance and the guidance provided in IAS 1 on subtotals. The second view proposed providing additional guidance.

The Chairman called a vote on the views. 11 Board members were in favour of providing additional guidance.

The Technical Principal then asked whether the Board agreed that EBIT and EBITDA could also be included in an income statement that was presented ‘by nature’. The majority of Board members agreed.

Agenda Paper 11C: Principles of Disclosure – Other Non-IFRS information

The Technical Principal said that the paper addressed the question of whether IFRS financial statements should prohibit the disclosure of information that ultimately was outside of the scope of financial statements and, if it was not prohibited, whether guidance should be provided about the presentation of this information.

One Board member was in favour of not prohibiting this information, especially as some of the information could be reconciled to IFRS measures. One benefit of this view was that the quality of this information would be ensured as it would be audited. The Technical Principal asked if his opinion would change if the information was presented in a non-audited part of the financial statements. He replied that he still believed that the quality would be higher within the financial statements.

Another Board member found that the requirement to include the proposed list of the disclosures that an entity had identified as non-IFRS was too burdensome.

The Technical Principal asked whether the IASB agreed with not prohibiting non-IFRS information in financial statements and whether a disclosure Standard should provide guidance on the presentation of those. The Board agreed.

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