Primary financial statements

Date recorded:

Primary Financial Statements – Cover note – Agenda paper 21


The IASB continued its discussion on the Primary Financial Statements (PFS) project. The topics for this meeting were as follows:

  • Earnings before interest and taxes (EBIT) (AP 21A)
  • Management operating performance measure (Management OPM) (AP 21B)
  • General guidance on classification, aggregation and disaggregation (AP 21C)

APs 21A and 21B complement each other and discuss whether additional subtotals should be introduced in the Statement of Financial Performance (SOCI). The Staff recommended that the Board require the presentation of EBIT (to be defined by the Board) and permit the presentation of a Management OPM (to be defined by management) as subtotals in the SOCI in order to balance users’ needs for having a subtotal that allows for comparison across entities and one that allows management the flexibility to tell their own story.

The Staff plans to discuss the following topics at future Board meetings: (a) adjusted basic earnings per share; (b) better ways to communicate information about OCI; (c) targeted improvements in the statement of cash flows; and (d) development of illustrative examples for the PFS.

Primary Financial Statements – Earnings before interest and tax (EBIT) – Agenda paper 21A


In this paper, the Staff analysed how the Board could define EBIT so that it could be calculated in a consistent manner across entities in order to satisfy users’ need for a subtotal in the SOCI that provides a comparable starting point for valuation and ratio analysis across entities.

Staff analysis

The Staff assessed the pros and cons of EBIT against other subtotals as follows:

Operating profit – There is no consensus among users as to what this subtotal constitutes. There have also been various failed attempts in the past to define operating activities and operating profit.

EBITDA – There is concern that this is often used as a measure of cash generation (for which it is a poor proxy) and the Staff thought that the Board may not want to encourage its use. Furthermore, as discussed in the Principles of Disclosures DP, the presentation of EBITDA would be incompatible with the classification of expenses by function in the SOCI. In addition, if a standardised EBIT subtotal is introduced, users can simply add back depreciation and amortisation to arrive at EBITDA.

EBIT – This is already widely used in practice and there is reasonable consensus on what this subtotal comprises – earnings before finance income/expense and tax. Nevertheless, there is diversity in practice as to what constitutes finance income/expense. As EBIT inherently removes the financial effects of differences in capital structure, the Staff believes that finance income/expense should be described as income/expenses relating to an entity’s capital structure, which includes cash and short-term investments. This is because how an entity manages its cash and short-term investments is interrelated with an entity’s decisions on debt and equity financing. This treatment would also be consistent with current practice. As to whether something constitutes short-term or long-term investments, and whether long-term investments form part of the entity’s capital structure, it is a matter of management judgement.

Staff recommendations

The Staff recommends that the Board:

  • (a) require EBIT to be presented as a subtotal in the SOCI;
  • (b) define EBIT as profit before finance income/expenses and tax;
  • (c) describe finance income/expenses as income/expenses related to the entity’s capital structure (which includes cash held and short-term investments); and
  • (d) provide guidance on whether certain items are finance income/expenses, e.g. net interest on the net defined benefit liability and income/expenses from long-term investments.

Next steps

The Staff plans to discuss the following issues in relation to EBIT at future Board meetings:

  • (a) whether an EBIT subtotal is relevant for entities whose ordinary activities are primarily financing activities (e.g. financial institutions);
  • (b) how to classify finance income/expense arising from an entity’s ordinary activities; and
  • (c) how the share of results of associates and joint ventures affects the EBIT calculation.


The Board generally supported including an EBIT subtotal and acknowledged that the biggest challenge would be to define what constitutes the capital structure. The Board also asked the Staff to consider and develop the following points further:

  • EBIT seemed to have been selected by the Staff because it is commonly used. The Staff should explore further whether there are any conceptual reasons for choosing EBIT as the comparability anchor and what is the purpose of the subtotal (e.g. how will it assist with ratio analysis?), which may in turn provide the Board with a framework to define ‘capital structure’.
  • Where does one draw the line between short-term and long-term investments? Are long-term investments anything that exceeds one year? How does that notion interact with investments accounted for under IFRS 9? This also touches on what is meant by an entity’s cash management activities. The Board also noted that they have eschewed defining long-term investments as it is a difficult category to define, and cautioned the Staff that the discussions in this project should be consistent with the Board’s past decisions.
  • What is net debt? The Board had several failed attempts at defining this term and cautioned the Staff from re-treading the same path.
  • How would the following affect the EBIT calculation:
    • (a) IAS 37 accretion expense,
    • (b) interest arising from an IFRS 15 contract asset/liability,
    • (c) finance income and expenses of insurers, banks, conglomerates,
    • (d) net interest expense on defined benefit plans – some Board members disagreed with the Staff’s view that this should be treated as a finance expense. This is because the net defined benefit obligation and its related expense are presented on the statement of financial position and in profit or loss as a single amount, and that many entities view this as operating staff expense (i.e. not split between operating and financing),
    • (e) fair value changes of investment properties, returns on equity securities, share of results of associates (the question is are these assets part of an entity’s long-term investments?)

The Staff pointed out that the eventual guidance will lay out the principles but it will also have some rules, as this is the most pragmatic way to establish a comparable subtotal.

Primary Financial Statements – Management operating performance measure – Agenda paper 21B


In this paper, the Staff analysed whether entities should be permitted to present an OPM – to be defined by management and not by the Board – in the SOCI to supplement the proposed presentation of EBIT in the SOCI (See AP 21A). The Staff further considered what constraints should be imposed on the OPM calculation in order to reduce the risk of their being misleading (e.g. should there be any prohibition on the exclusion of infrequently occurring items and/or of other items such as amortisation and share-based payment expenses?), given the amount of relative freedom that management will have with regard to how they are calculated.

Staff analysis

The Staff believed that it is beneficial for management to define their own OPMs as this would allow them the flexibility to ‘tell their own story’ and it would also save the Board a major challenge (as indicated by past unsuccessful attempts) to try to define what such an OPM should encompass. With regard to what constraints should be imposed, the Staff reasoned that not only will it be difficult to define what items should be allowed to be excluded from the OPM, it may also lead to entities presenting another OPM outside the financial statements if the restrictions do not suit their needs, which undermines the whole purpose of this project. A potential solution is to require transparent disclosures about the OPMs (see recommendations below).

Staff recommendations

The Staff recommended that the Board:

  • (a) allow the presentation of a Management OPM in the SOCI;
  • (b) allow items to be excluded from the Management OPM as long as it meets the requirements for subtotals in IAS 1.85, 85A and 85B; and
  • (c) require additional disclosures on the Management OPM to enhance transparency, including:
    • (i) appropriate labelling of the subtotal;
    • (ii) a requirement to describe and explain the OPM (including an explanation of why any items have been excluded from the OPM, and why management believes it reflects the entity’s performance);
    • (iii) a requirement to disclose whether the entity uses the same OPM outside the financial statements; and
    • (iv) a historical summary of items excluded from the OPM.


The Board asked the Staff to explore further whether they should require or allow the presentation of a Management OPM in the SOCI. They supported not imposing any more constraints on the Management OPM beyond what is required by IAS 1.85-85B. There was hardly any appetite to explore defining ‘operating profit’ which would entail presenting a section relating to investment activities in the SOCI in addition to EBIT and the Management OPM. Lastly, the Board agreed with the Staff’s proposals on additional disclosures regarding Management OPM presented in the SOCI.

Disclosure of a Management OPM in the SOCI

The Board was undecided on this issue (which is separate from the discussion on requiring versus allowing such a disclosure). One Board member did not see how this adds to the existing IAS 1 guidance which allows an entity to disclose additional information in the SOCI if it is relevant to an understanding of the entity’s financial performance. Another Board member asked the Staff to consider the possibility of including the Management OPM in a separate statement that reconciles to the SOCI (he was concerned that including the OPM in the SOCI would destroy the structure of the SOCI), and others suggested presenting it as part of segment information. Some Board members also believed that some parameters should be set on what is meant by operating performance measurement instead of allowing a free choice (because some entities might regard net profit after tax as their Management OPM which is not a measure of operating performance).

Requiring versus allowing

Most Board members preferred requiring the presentation of Management OPM as opposed to merely allowing it. One Board member believed that whatever OPM is disclosed outside the financial statements should be disclosed in the financial statements, because if given a choice, an entity would not disclose it in the financial statements due to all the disclosure requirements. Nevertheless, the Board noted that they do not have the authority to impose such a requirement and asked the Staff to liaise with regulators and find a way to implement this. Another Board member believed that having it as a requirement would elicit more response from the stakeholders than a permission to disclose.

Defining operating profit

One Board member lobbied at length for the inclusion of operating profit as a subtotal in the SOCI. He believed that it is important to distinguish operating profit from income/expenses from investing activities. There were however not much support from the other Board members: some were not clear about what purpose this subtotal will serve, and others believed that it is sufficient to disclose EBIT and/or the Management OPM. Despite this, the Staff will bring back a paper illustrating the Board member’s suggestions and how it interacts with EBIT and the Management OPM for discussion at a future meeting.

Primary Financial Statements – General guidance on classification, aggregation and disaggregation – Agenda paper 21C


In this paper, the Staff drew together relevant guidance in IAS 1 and the Conceptual Framework ED to come up with three basic principles (which are self-explanatory) that could guide the aggregation and disaggregation of information in the financial statements. The Staff also described the notions of ‘classification’, ‘aggregation’ and ‘disaggregation’ and how they interact with one another. Furthermore, the paper includes a brief outline of various possible aggregation characteristics, e.g. by an item’s nature, function, or measurement basis.

Staff recommendations

The Staff recommended that the Board include the following principles in the Standards:

  • (1) Items that share similar characteristics should be classified and aggregated together.
  • (2) Items that are dissimilar should not be combined and should be disaggregated.
  • (3) Aggregation and disaggregation in the financial statements should not obscure relevant information or reduce the understandability of the information presented. They should also contribute to a faithful representation of the items presented.

The Staff also recommended that the Board define the notions of ‘classification’, ‘aggregation’ and ‘disaggregation’, including how they interact with one another, in the Standards.

Furthermore, the Staff asked the Board whether they should explore the possible aggregation characteristics in more detail.


The Board agreed with the Staff’s recommendations. The discussion focused on how to refine these principles.

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