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Primary financial statements

Date recorded:

Presenting management performance measures using columns (Agenda Paper 21A)

Background

At its December 2017 meeting, the Board tentatively decided that an entity should be permitted to present a management performance measure (MPM) in the statement(s) of financial performance if it fits in the Board’s proposed structure for the statement(s) and satisfies the requirements in IAS 1 Presentation of Financial Statements. In its January 2018 meeting, the Board further tentatively decided that if the MPM identified by management is not a subtotal or total specified by IAS 1, a separate reconciliation should be disclosed in the notes between the MPM and the most directly comparable subtotal or total specified by IAS 1.

The Board’s tentative decisions left it open whether an entity can use columns to present MPMs on the face of its primary financial statements. The paper discusses whether there should be restrictions on the use of such columns and what those restrictions should be.

Staff analysis

In some jurisdictions, like the UK, the regulators allow the use of columns for MPMs and therefore, the presentation of those columns is quite common in those jurisdictions. However, outside of those jurisdictions, such columns are not very widespread. Some stakeholders are concerned that presenting information about MPMs on the face of the income statement may give too much prominence to those MPMs.

The staff agree with this view and propose that the Board should consider placing restrictions on the use of columns to present information about MPMs in the income statement. The staff set out two different approaches to the restrictions:

Approach A: Provide guidance on when columns could be used in the statement(s) of financial performance to present information about MPMs. For example, that guidance could state that a column could be used only if amounts included in the column are recognised and measured in accordance with IFRS Standards and the label used for the column is descriptive and unambiguous.

Approach B: Prohibit the use of columns to present information about MPMs in the statement(s) of financial performance.

Staff recommendation

As the staff have identified many issues with Approach A, such as difficulties for the Board to develop the guidance and difficulties for regulators to enforce the guidance, the staff recommend Approach B.

Board discussion

The Board members broadly agreed with the staff recommendation. The Chairman reminded the Board that it had already been decided by the Board that MPMs should be reconciled in the notes. Some Board members expressed concerns that this would discourage preparers from using any columns in the income statement, although if they are a mere disaggregation of IFRS figures, they could be quite useful. Another concern was that preparers would find a way to still present MPMs on the face of the income statement, even if columns were prohibited. The objective should be to have all MPMs and their reconciliation to the closest IFRS figure in one place in the notes. One Board member noted that MPMs should be prohibited from neiing presented in the primary financial statements.

Board decision

12 of the 14 Board members voted in favour of the staff recommendation, i.e. to prohibit the use of columns to present information about MPMs in the statement(s) of financial performance.

 

EBITDA (Agenda Paper 21B)

Background

At the November 2018 Board meeting the Board tentatively decided not to require presentation of EBITDA in the statement(s) of financial performance and not to require its disclosure in the notes. However, the Board have asked the staff to perform further analysis on the issue. This paper discusses whether the Board should describe EBITDA, add EBITDA to the list of measures that are not considered to be MPMs and update its decisions on the labelling of EBIT.

Staff analysis

The paper discusses two approaches for the Board to consider:

Approach A: Add ‘operating profit before depreciation and amortisation’ to the list of measures that are not considered to be MPMs.

Approach B: Describe EBITDA and add it to the list of measures that are not considered to be MPMs.

Staff recommendation

The staff recommend Approach B as Approach A is not consistent with the Board’s identified objectives of providing guidance in this area.

In Approach B, the staff recommend to use operating profit as a starting point for EBITDA. The ‘DA’ part in EBITDA should not include impairment expense (i.e. the Board’s description of EBITDA should be after impairment expense). The amount of ‘depreciation and amortisation’ used to calculate EBITDA should be the amount of depreciation and amortisation recognised in profit or loss in the period.

The staff also recommend that the Board update its tentative decision on EBIT, clarifying that using the EBIT label for performance measures included in the financial statements is potentially misleading.

Board discussion

The Board had mixed views on this issue. There was a lengthy discussion on whether EBITDA should be defined and how it should be defined. Many Board members saw merit in using operating profit as a starting point as the Board had already decided to define that term and consistency would therefore be ensured. Some Board members thought that when using operating profit as a starting point, this term should be used instead of earnings.

The discussion also included a debate around whether EBITDA would have to be reconciled in the notes if the Board were to define the term EBITDA, with the majority of Board members stating that defined subtotals in IFRS Standards need not be reconciled. There were mixed views amongst the Board members on whether EBITDA would be an MPM or a subtotal. One Board member in particular thought it was an MPM and was strongly opposed to defining MPMs in IFRS Standards. By introducing the term EBITDA into IFRS Standards, the Board would signal that it considers EBITDA a good operating measure, to which the Board member strongly objects. The Board member stated that it should be the duty of the regulators to ensure consistency, not the duty of the standard-setter. The only standard-setting activity should be to require reconciliation in the notes of every MPM to the closest IFRS figure.

On the other hand, the Board acknowledged that EBITDA is a widespread and important measure and that it is used differently by different entities. This leads to diversity in practice and impairs comparability between entities. Users of financial statements have therefore repeatedly demanded a definition of EBITDA to address this inconsistency.

One Board member suggested to split the question to the Board in two parts:

  • Does the Board want to add a subtotal (EBITDA or similar) to IFRS Standards?
  • What should that subtotal be called?

It was highlighted by some Board members that if the subtotal was not called EBITDA and an entity would use EBITDA nonetheless, EBITDA would have to be reconciled to the subtotal the Board included instead in IFRS Standards as this would be the closest IFRS figure.

The Chairman suggested, as a first instance, to vote on the question as posed in the paper. This vote did not hold a majority (6/14). It was then suggested by the staff that the vote should be taken on Approach A, i.e. to permit, but not require, a subtotal of operating profit before depreciation and amortisation. There was some resistance in the Board with regard to Approach A as it would not solve the issue of a widespread and inconsistent use of EBITDA. EBITDA would still be permitted to be presented and preparers would still define EBITDA on their own terms. However, the Vice-Chair conceded that it would be helpful that EBITDA would have to be reconciled to operating profit before depreciation and amortisation. This reconciliation to a closer figure would reduce diversity and increase understandability.

The Chairman called a vote on the following question:

Should IFRS Standards permit, but not require, to present the subtotal ‘operating profit before depreciation and amortisation’ on the face of the income statement? (This would imply that any other similar measure (like EBITDA) would have to be reconciled to this figure.)

10 of the 14 Board members voted in favour.

The Board struggled with the inconsistency between EBIT and EBITDA, although one Board member hoped that EBIT would be used much less with the Board providing a definition of operating profit. In any case EBIT was the much less interesting figure of the two to users of financial statements.

The Chairman was concerned that prohibiting EBIT would also raise the question of whether EBITDA would be prohibited. Most of the Board members suggested to not put any restrictions on EBIT or EBITDA and stay silent. 12 of the 14 Board members voted in favour of this approach.

Board decision

10 of the 14 Board members voted in favour of permitting, but not requiring, to present the subtotal ‘operating profit before depreciation and amortisation’ on the face of the income statement. A reconciliation of any other similar measure (like EBITDA) to this figure is required.

12 of the 14 Board members voted in favour of not adding any restrictions on EBIT or EBITDA to IFRS Standards.

Correction list for hyphenation

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