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Primary financial statements

Date recorded:

EBITDA (Earnings before interest, tax, depreciation and amortisation) (Agenda Paper 21A)

Background

This paper discussed whether an EBITDA measure should be required by IFRS Standards, how the Board’s tentative decisions on management performance measures (MPMs) should be applied to EBITDA-type measures, and when the term EBITDA can be used to describe measures in the financial statements.

Staff analysis

A. Should the Board require presentation or disclosure of EBITDA?

The staff recommended the Board decide against the presentation and disclosure of EBTIDA because:

  • This project is for all entities and the EBITDA-type measures would not fit in the existing structure of the statement(s) of financial performance
  • Requiring EBITDA to be presented in the statement(s) of financial performance may give undue prominence to this measure

B. How should the Board’s tentative decisions on management performance measures (“MPM”) apply to EBITDA-type measures?

The application of the Board’s tentative decisions on MPMs to such EBITDA-type measures would mean that entities are:

  • required to disclose EBITDA-type measures in the notes to the financial statements
  • required to present a set of “MPM disclosures”

To avoid the disclosure of tax and non-controlling interest for depreciation and amortisation, the staff have developed two approaches:

  • The Board could describe EBITDA and add it to the list of measures which are not considered to be MPMs—e.g. gross profit
  • The Board could specify a list of MPM adjustments for which the disclosure of tax and non-controlling interest is not required

C. When can the term EBITDA be used to describe measures in financial statements?

In line with the previous discussion of when the term EBIT can be used to describe performance measures in financial statements, the staff think it is appropriate that the term EBITDA can only be used to describe a measure within financial statements when it is a “true” EBITDA.

Therefore, the staff recommended to clarify that the EBITDA label can only be used to describe a measure when it faithfully represents the content of that measure, i.e. the EBITDA label can be used to describe a measure that has been calculated as “profit or loss minus all interest income and plus all interest expense, income tax, and depreciation and amortisation.”

Staff recommendations

In summary, the staff recommended that the Board:

  • a. does not require the presentation of EBITDA in the statement(s) of financial performance or disclosure of EBITDA in the notes
  • b. does not add EBITDA to the list of measures that are not considered to be MPMs
  • c. does not exempt specific MPM adjustments from the requirements to disclose the effects of tax and non-controlling interest
  • d. specifies that an EBITDA label can only be used to describe a measure when the label faithfully represents the content of that measure

Board discussion

The Board members agreed with the staff’s recommendation that EBITDA should not be a required disclosure despite the fact that research has indicated that it is a widely used subtotal. This is because the use of EBTIDA is not in line with the existing structure of statement(s) of financial performance. 

Two main proposals were put forward by Board members. The first proposal (‘Proposal 1’) is to define EBTIDA as “operating profit before depreciation and amortisation” as this reflect the needs of the investors, regulators and institutions such as the Chartered Financial Analyst (CFA) institute and research has shown that 72 out of 85 companies present EBITDA in their statement(s) of financial performance. Under this proposal, EBITDA should be considered as a name rather than the literal translation of the acronym and it should be a defined but not required sub-total, similar to gross profit. The other proposal (‘Proposal 2’) is to provide some guidance on the range of acceptable meanings for each of the letter in the acronym EBITDA in Appendix B (authoritative material in the Standard) rather than defining the term and if used, a reconciliation to each of the acceptable meanings of EBITDA should be presented.

The Board deliberated both proposals and believed that the Proposal 1 has the following benefits:

  • By defining the term EBITDA, all users will understand the meaning of the term and will therefore enhance comparability.
  • There would be no requirement to present reconciliations such as tax and NCI which is of no use to the users of the financial statement as this would not be defined as an MPM.
  • As EBITDA is widely used as a proxy for operating cash flow, by defining EBITDA as “operating profit before depreciation and amortisation” would be the closest reflection of the use of the term in practice.
  • By owning the name EBITDA, any deviations from the defined term should be named “adjusted EBITDA” and a reconciliation should be presented which would be useful to the users of the financial statements.

Some Board members raised the following concerns under Proposal 1:

  • Research has shown that there is diversity in how EBITDA is calculated in the industry and it may not be appropriate to define it as “operating profit before depreciation and amortisation.” Furthermore, some regulators have defined EBITDA and this may differ from the proposed definition. However, the Board note that if EBITDA were to be defined, “operating profit before depreciation and amortisation” would most likely be the fitting definition.
  • By defining the term EBITDA, this would be defining a non-GAAP measure which is outside the scope of standard-setting.
  • By defining the term EBITDA as “operating profit before depreciation and amortisation”, this effectively implies that the term “earnings” is defined as “operating profit” which may not be appropriate.

Some Board members opposed against Proposal 2 to set out an acceptable range of meanings for EBITDA as they do not believe this will result in useful information being presented in the financial statement and this would not be faithful labelling of the term. 

Most Board members have reservations in making an immediate decision and believe more analysis is required.

Board decisions

14 Board members voted in favour of the staff recommendations that EBITDA should not be a required disclosure.

All Board members agreed that more research is required into whether EBITDA can be defined as “operating profit before depreciation and amortisation” before a decision can be made.

Templates or Examples (Agenda Paper 21B)

Background

This paper discussed staff proposals for developing templates or examples to assist preparers of financial statements, and the status and scope of such templates or examples.

Staff analysis

A. Status of templates or examples

The Board considered whether the templates or examples developed should be made mandatory in terms of IAS 1 Presentation of Financial Statements, which may increase comparability. However, the staff recommended that the Board decide against developing mandatory templates.

B. Advantages and disadvantages of developing non-statutory illustrative examples

The paper presents a list of advantages and disadvantages of developing non-mandatory illustrative examples.

Although some regulators, industries and audit firms developed their own templates or examples, it would still be useful if the Board did develop its own examples or templates. Therefore, the staff recommend that the Board should develop non-mandatory illustrative examples that accompany a revised IAS 1.

C. Scope of the material

C.1 Which primary financial statements and notes should be included?
The staff think that the illustrative disclosures developed by the Board should focus on primary financial statements that are amended by the project and any notes that are introduced/amended by the project.

The staff also believe that the Board should not update the examples for the statement in changes of equity because the statement may be affected by the Board’s Financial Instrument with Characteristics of Equity project.

C.2 Which types of entities should be included in the examples of statement(s) of financial performance?

The staff propose that the illustrative examples could include examples for different types of entities.

Staff recommendations

In summary, the staff recommended that the Board:

  1. develop non-mandatory illustrative examples to accompany a revised IAS 1
  2. include the following in the newly developed illustrative examples:
    • The statement(s) of financial performance of different types of entities
    • The statement of cash flows
    • Any notes that are introduced or amended by the project
  3. include illustrative examples for the statement(s) of financial performance for the different types of entities

Board discussion

One Board member believed it is not beneficial to develop a non-mandatory template as the preparer may not be able to identify the category of templates which should be applied. This may discourage the preparer from applying the faithful presentation principle and considering what is the best presentation for their business. Another Board member expressed concern on how to communicate that the templates are not mandatory or not to be perceived as mandatory. A suggestion is to consider the templates as practice statement and not as an authoritative standard. However, the majority of the Board members supported the staff’s recommendation to provide non-mandatory templates for the following reasons:

  • Templates provide good visualisation and shed some light on the Board’s thinking process when the Standards were developed.
  • Templates enhance the comparability of financial statements across entities.
  • Templates provide useful guidance for the preparers of the financial statements.
  • Templates can be linked to the IFRS Taxonomy.

Some Board members raised the following concerns:

  • The Board will have to decide on the number of templates that should be developed, the scope of these notes disclosure templates and whether a comprehensive example is going to be developed which will cover all industries. The staff confirmed that the scope of the notes is limited to notes affected by the project due to the cost vs. benefit associated.
  • The Board will have to decide whether the templates will cover various industries and whether there would be a balance in developing templates for non-financial institutions and financial institutions. The staff confirmed that it would not be possible to develop a template for all possible industries and a balance should be sought.
  • It requires effort to keep the templates current and up to date.
  • The templates should be considered as selective illustrations rather than comprehensive examples, but users around the world may have different interpretations on whether the illustrative examples and the practice statements are authoritative and this may lead the preparers to perceive these templates as mandatory.

Board decisions

13 Board members supported the staff’s recommendation to develop non-mandatory templates.

13 Board members supported the staff’s recommendations to develop illustrative examples on the statement of financial performance for different types of entities, the statement of cash flows and any notes which are introduced or amended by the project.

Minimum line items (Agenda Paper 21C)

Background

This paper sought the Board’s views on possible amendments to the presentation requirement for line items in the statement(s) of financial performance.

Staff analysis

Issues identified by the Board include:

A. Issue 1: Required line items which may qualify for inclusion in more than one section of the statement(s) of financial performance

Based on the Board’s tentative decision on the content of subtotals, some of the line items required by IAS 1:82, would be included in more than one section of the statement(s) of financial performance.

The staff recommended presenting required line items in more than one section because separate presentation of line items in each section is consistent with the Board’s objective of developing comparable subtotals in the statement(s) of financial performance.

B. Issue 2: Line items presented below ‘profit or loss before financing and income tax’

Some of the line items that the Board has tentatively decided to require to be presented below the subtotal ‘profit or loss before financing and income tax’ may not provide useful information.

The staff do not think a requirement to present “other finance income” and “other finance expenses” would result in useful information and recommended that the Board do not add these line items to the list of items required to be presented in the statement(s) of financial performances. The staff note that their proposal on disaggregation is likely to result in separate presentation of material income or expenses on liabilities which do not arise from financing activities but would expect entities to use descriptions for those items that are more descriptive than “other finance income” and “other finance costs.”

C. Issue 3: Consequences for the existing requirement to present finance costs

Some of the line items that the Board has tentatively decided to require to be presented below the subtotal ‘profit or loss before financing and income tax’ overlap with existing required line items. Therefore, the staff recommended removing the requirement in IAS 1:82(b) to present “finance costs” in the statement(s) of financial performance.

D. Issue 4: Interaction between required line items and the requirement to present an analysis of expenses by function or by nature

The line items required by IAS 1:82 can be described as by-nature line items rather than by-function line items. The staff recommended requiring the presentation of line items regardless of the method of analysis of expenses because the usefulness of separate presentation of required line items in the operating profit section of the statement(s) of financial performance outweighs the disadvantages of possible inconsistency with the method of analysis of operating expenses.

Staff recommendations

In summary, the staff recommended that the Board:

  • a. clarifies that the line items that are required to be presented in the statement(s) of financial performance may need to be presented in more than one section of that statement
  • b. does not add “other finance income” and “other finance expenses” to the list of line items required to be presented in the statement(s) of financial performance
  • c. removes the requirement in IAS 1:82(b) to present “finance costs” in the statement(s) of financial performance
  • d. clarifies that the items required to be presented in the statement(s) of financial performance shall be presented separately regardless of the method of analysis of expenses in the operating profit section

Board discussion

All Board members agreed with the staff’s recommendation that line items are required to be separately presented in each section of the statement(s) of financial performance as this is consistent with the disaggregation principle.

Some Board members did not believe that “other finance income” and “other finance expense” should be required to be presented in the statement of financial performance. This is because, if the item is material, then it should be disaggregated and presented separately. For example, interest expense on pension should be presented separately from interest expense from financing activities.

All Board members agreed with the staff’s recommendation to remove the requirement in IAS 1:82(b) to present “finance costs” in the statement(s) of financial performance.

The Board favoured the staff’s recommendation that items presented in the statement(s) of financial performance shall be presented separately regardless of the method of analysis of expense in the operating profit section. This is because the presentation of operating profit should be driven by the facts and circumstances which will provide the most useful information to the users of the financial statements. Therefore, if the line item is important enough to be presented on the face of the statement(s) of financial performance, then it should be presented regardless of whether the analysis of operating profit is presented by nature or by function. Some Board members expressed concerns that there may be a risk of lack of comparability if the expense line item should be allocated under the statement(s) of financial performance presented by function. For example, it would not be appropriate to allocate impairment loss on trade receivables to a line item of expenses presented by function as there is no indication of how this expense has been allocated and to which line item. 

Board decisions

14 Board members agreed with the staff’s recommendation to present the required line items in more than one section in the statement of financial performance.

11 Board members supported the staff recommendation not to add “other finance income” and “other finance expense” to the list of required line items, subject to applying the disaggregation principle.

14 Board members agreed with staff’s recommendation to remove the requirement in IAS 1:82(b) to present “finance costs” in the statement(s) of financial performance.

12 Board members supported the staff recommendation that the items required to be presented in the statement(s) of financial performance shall be presented separately regardless of the method of analysis of expenses in the operating profit section.

Correction list for hyphenation

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