Primary financial statements

Date recorded:

Unusual income and expenses (Agenda Paper 21A)

Background

This paper initiated the Board’s redeliberations on the proposal set out in the ED relating to unusual income and expense. This paper sets out the staff analysis and recommendations on the definition of unusual income and expenses.

Staff recommendations

The staff recommended the Board explores how to proceed with a definition for unusual items. In particular, the staff recommended the Board remove the reference to ‘limited predictive value’ from the definition of unusual items, whilst retaining an explanation of how that idea supports the definition in the Basis for Conclusions (BC). In addition, the staff recommended the Board develop application guidance which clarifies that the definition captures income or expenses that are dissimilar in type or amount from income or expenses expected in the future and helps entities to assess whether similar income or expenses will arise in the future, to be developed based on guidance on the assessment of future transactions and other events in other Standards. Lastly, the staff recommended the Board explains that in considering whether income or expenses are similar, an entity would consider characteristics of the income and expenses, including the underlying event or transaction that gives rise to income or expenses.

Board discussion

Most Board members were supportive of the staff’s recommendation to explore how to proceed with a definition of unusual items because this received strong support from feedback conducted during the outreach and the term ‘unusual’ is widely used in practice. The Board members believe by having a definition for unusual items, this would prevent preparers from using unusual to describe negative results. Some Board members suggested that at a minimum, there should be certain items which are disclosed as unusual. However, other Board members were concerned that this would result in an entity disclosing many of its expenses as unusual when it does not meet that definition. The Board asked the staff to be precise on the direction of the project and whether its objective is to ensure that entities identify all items that are unusual (i.e. completeness) or whether it is to ensure that entities do not describe expenses as unusual when they do not meet that definition. The Board members also asked the staff to confirm whether the definition of unusual is considered by reference to consistency within the entity’s financial reporting or by reference to the industry. The Board members believed that limited predictive value is one, but not the only, factor to consider when deciding whether an item is unusual. This is because all unusual items have limited predictive value but not all items with limited predictive value are an unusual item. Some Board members expressed concerns that the definition of unusual items should not be limited to types or amounts that are expected in the future but also should include items which have occurred in the past because trends are informative. The staff clarified the requirement for items to occur in the future will not be the sole test on whether this item meets the definition of unusual and that guidance will be drafted using the assessment of future transactions and other events in other Standards. Board members also asked the staff to consider what the unit of account would be when considering whether an expense is recurring (i.e. would an entity consider the nature of the expense).

Board decision

All Board members agreed to explore how to proceed with a definition for unusual items. 11 of the 12 Board members agreed with the staff recommendation to remove the reference to ‘limited predictive value’ from the definition of unusual items, whilst retaining an explanation of how that idea supports the definition in the BC. 11 Board members also agreed to develop application guidance which clarifies that the definition captures income or expenses that are dissimilar in type or amount from income or expenses expected in the future and helps entities to assess whether similar income or expenses will arise in the future, to be developed based on guidance on the assessment of future transactions and other events in other Standards. 11 Board members agreed to explain that in considering whether income or expenses are similar, an entity would consider characteristics of the income and expenses, including the underlying event or transaction that gives rise to income or expenses.

Income and expenses classified in the investing category (Agenda Paper 21B)

Background

This paper redeliberated the Board’s proposals in the ED relating to income and expenses classified in the investing category. This paper discusses the proposals for entities other than those with specified main business activities of investing and provision of financing to customers.  

Staff recommendations

The staff recommended the Board retain the proposal to classify in the investing category income and expenses from assets that generate returns individually and largely independently of other resources held by an entity and add further application guidance to help entities determine when income and expenses arise from assets that generate returns individually and largely independently. In particular, the staff recommended to add further application guidance stating that:

  • Income and expenses on individual assets classified as held for sale would be generated individually and largely independently of other resources held by an entity, and income and expenses from disposal groups classified as held for sale would not
  • Income and expenses arising from business combinations would not be generated individually and largely independently of other resources held by an entity
  • Negative returns, such as those arising from unfavourable exchange rates or negative interest rates are classified in the same category as positive returns arising from the asset or liability

In addition, the staff recommended classifying income and expenses from associates and joint ventures in the investing category and to revise the objective of the investing category to be to communicate information about returns on investment which the users of financial statement generally analyse separately from operating profit and remove the discussion of the objective from the requirements of the Standard and instead, including this in the BC. Lastly, the staff recommended the Board retain the label ‘investing category’ and do not continue with the proposal to define ‘income and expense from investments’.

Board discussion

The Board asked the staff to clarify why income and expenses from assets would need to generate returns individual and largely independent of other resources. The staff clarified that some assets can give rise to individual returns but not largely independent from other resources and therefore it would be important to meet both criteria. Most Board members agreed that the focus of the proposal of income and expenses from assets that generate a return individually and largely independently of other resources is the nature of assets and how those assets are used in the business. The focus is not on the type of income or expenses the assets are generating. Many Board members expressed concerns that there is lack of definition and overall objective of investing category. The staff clarified that the purpose is to affirm the approach to investing categories rather than providing a definition.

Most Board members expressed concerns that income and expense on individual assets classified as held for sale would be considered to be generating returns individually and largely independent of other resources held by the entity but income and expense from disposal groups classified as held for sale would not. The Board members believed this to be a complicated approach that would introduce inconsistencies with the principles of IFRS 5 as there is no difference in accounting treatment for individual assets or disposal groups classified as held for sale. Therefore, there should not be a different accounting treatment for income and expenses generated from individual assets and or disposal groups classified as held for sale. In addition, Board members raised concerns that the proposal is a rule-based approach and that there is no clear principle on when income and expense from individual assets or disposal groups classified as held for sale would move into investing category. Other Board members also indicated that many entities would continue to use or rent out individual assets which have been classified as held for sale of which the returns on these would be more akin to income generated from operations rather than income from investing activities. Most of the Board members agreed with the staff’s recommendation to provide application guidance stating that income and expenses arising from business combinations would not be generated individually and largely independently of other resources held by an entity. This is because income and expenses arising from business combinations relate to the transaction itself and not to the operations of the entity.

Some Board members objected to the staff’s recommendation to classify income and expenses from associates and joint ventures in the same category as income and expenses from assets that generate returns individually and largely independent of other resources in the investing category. Proponents of this view believe that income and expenses from associates and joint ventures is sufficiently unique that it should have its own category. Furthermore, these Board members did not believe that associates and joint ventures generate returns individually and for some investment companies, income and expenses from associates and joint ventures comprise a large proportion of its operations and therefore would be more appropriate to classify this in operating category. The staff acknowledge that income and expenses from associates and joint ventures do not fit neatly into any category and confirmed that the purpose is to simplify the classification. In addition, the staff clarified that the categories are used as a construct used to assist with the explanations during drafting and the financial statements would not include labels of the various categories. Some Board members agreed with the staff’s recommendation because the fundamental issue is that income and expenses from associates and joint ventures should not be classified in operating activities based on the feedback received from outreach. In addition, these Board members believe that having a separate category for income and expenses from associates and joint ventures would require the category to be defined and the Board would need to mandate where the category is presented which should be a management decision.

Most Board members believed that the objective of the investing category is to communicate information about returns from investments that are generated individually and largely independently of other resources held by the entity and income and expenses arising from associates and joint ventures. Therefore, these Board members would prefer to remove this as an objective but rather provide an explanation of why certain items are included in the investing category in the BC. The Board highlighted that the definition of investing category could be circular if it is defined with reference to operating categories. This is because the operating category is a residual category by definition.

Board decision

11 Board members agreed to retain the proposal to classify in the investing category income and expenses from assets that generate returns individually and largely independently of other resources held by an entity.

None of the Board members agreed with the staff’s recommendation to provide further application guidance stating that income and expenses on individual assets classified as held for sale would be generated individually and largely independently of other resources held by an entity, and income and expenses from disposal groups classified as held for sale would not. Instead, 10 Board members (1 absent) agreed to be explicit in stating that income and expenses on individual assets classified as held for sale and income and expenses from disposal groups classified as held for sale would not be in the investing category. 8 Board members (1 absent) agreed with the staff’s recommendation to provide application guidance which state that income and expenses arising from business combinations would not be generated individually and largely independently of other resources held by an entity. In addition, 11 Board members (1 absent) agreed to provide application guidance which states that negative returns, such as those arising from unfavourable exchange rates or negative interest rates are classified in the same category as positive returns arising from the asset or liability.

9 Board members agreed with the staff’s recommendation to classify income and expenses from associates and joint ventures in the same category as income and expenses from assets that generate returns individually and largely independently of other resources held by an entity.

10 Board members agreed not to define the objective of the investing category but to explain it to be a category which communicates information about returns on investment which the users of financial statement generally analyse separately from operating profit. 8 Board members agreed with the staff’s recommendation to retain the label ‘investing category’ and 10 Board members agreed not to continue with the proposal to define ‘income and expense from investments’.

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