Subtotals in the statement of profit or loss—operating profit (Agenda Paper 21A)

Background

This paper initiates the Board’s redeliberations on subtotals and categories in the statement of profit or loss.

Staff analysis

The staff recommend the Board proceed with the proposal to require all entities to present an operating profit subtotal because operating profit provides relevant information to the users and the Board defining and requiring operating profit could enhance comparability between the entities. The staff further recommend the Board confirm the types of income and expenses (e.g. investing, financing, income tax and discontinued operations) which shall not be classified in the operating category. Lastly, the staff recommend the Board confirm that the operating category comprises all income and expenses arising from an entity’s operations, including volatile and unusual income and expenses arising from an entity’s operations and includes, but is not limited to income and expenses from an entity’s main business activities. The staff believe that further discussions on the proposals should not prevent the Board from confirming the requirements of subtotals to be presented in the statement of profit or loss.

Board discussion

The Board is generally supportive of the staff’s recommendation to require all entities to present an operating profit subtotal. A Board member asked whether the staff is going to allow income and expenses from equity-accounted associates and joint ventures to be classified as operating activities in future discussions. The staff confirmed they will be considering whether this would be allowed for a narrower set of business activities such as insurance companies. The Board member then asked the staff to clarify that this would not undermine previous discussions on excluding income and expenses from equity-accounted associates and joint ventures from operating activities. The Board agreed that the approach taken in this project is to view operating profit as an all-inclusive residual and this will be different to some the perception some have of operating profit being a core or recurring figure. The Board agreed further that operating profit will inherently include volatile and unusual income and expenses because this is the nature of the entity’s operations. Therefore, the Board asked the staff to state this explicitly to avoid ambiguity. The Board believes there are other tools such as disaggregation of information, MPMs and using the definition of unusual items which could address the concerns raised by respondents opposed to defining operating profit as a residual. A Board member said that some jurisdictions require an entity to include income and expenses in operating activity even if the income and expense is not part of the entity’s main business activity. Therefore, the Board member recommended the staff provide additional explanation for income and expense from an entity’s main business activities. The Board asked the staff to elaborate on the distinction between investing activity and income and expenses from a subsidiary conducting ancillary activities that are not yet a main business activity of the group. The Board also suggested the staff consider the proposals in light of digital financial reporting and how this proposal could affect preparers and users. Some Board members asked the staff to clarify the role of main business activities before considering whether main business activities should be considered as part of the definition.

Board conclusion

All Board members agreed with the staff’s proposal to require all entities to present an operating profit subtotal and agreed with the staff’s proposal to confirm the types of income and expenses (e.g. investing, financing, income tax and discontinued operations) which shall not be classified in the operating category. All Board members also agreed with the staff’s proposal to confirm that the operating category comprises all income and expenses arising from an entity’s operations, including volatile and unusual income and expenses arising from an entity’s operations and includes, but is not limited to income and expenses from an entity’s main business activities.

Scope of management performance measures (Agenda Paper 21B)

Background

This paper initiates the Board’s redeliberations on management performance measures (MPMs).

Staff analysis

Based on the support received for this project, the staff recommend the Board proceed with the proposal in Exposure Draft ED/2019/7 General Presentation and Disclosures to include information about measures meeting the definition of MPMs in the financial statements. Furthermore, the staff asks the Board to explore possible approaches to expanding the scope of MPM requirements to include measures other than subtotals of income and expenses because there is potential to provide information that is useful to users and the staff is able to balance the benefits and additional time required. In particular, the staff asks the Board for feedback on the possible approaches for increasing the scope of MPM and propose the following factors for evaluating them:

• The prevalence of the measure in practice
• The usefulness of the disclosure requirements for the measure and the complexity of necessary changes to those requirements
• The contribution that including the measure in the MPM proposals would make to achieving the project objective
• The complexity involved in developing a new definition of MPMs

Board discussion

The Board was pleased with the positive feedback received from the respondents. In particular, the feedback from International Auditing and Assurance Standards Board (IAASB) that MPMs can be audited. However, some Board members expressed concerns that users may take the fact that MPMs have been audited to mean that represents a good metric. Therefore, the Board asked the staff to clarify how faithful representation applies to MPMs in future deliberations. Many Board members expressed concerns that by extending the scope of the project, it could result in diminishing benefits from the project and unnecessary delays. Some Board members opposed the staff’s proposal to expand the scope of the project because this was not the focus of the project and it will result in further delays. A Board member recommended the staff to consider scope expansions as a separate sub-project. However, a majority of the Board members agreed that scope expansion should be considered given the overwhelming feedback received from the stakeholders. Therefore, the Board asked the staff to focus on expanding the scope of MPM as it relates to performance only. A Board member recommended that staff expand the scope by looking at the line items in the statement(s) of financial performance and ratios as two separate items rather than considering how the line items would interact with the ratios. Another Board member suggested the staff to consider whether the denominator for the ratio should also include reconciliations to the most directly comparable subtotal.

Board decision

All Board members agreed with the staff’s recommendation to include information about measures meeting the definition of MPMs in the financial statements. 10 out of 13 Board members agreed with the staff’s proposal to explore possible approaches to expanding the scope of MPM requirements to include measures other than subtotals of income and expenses.

Statement of cash flows (Agenda Paper 21C)

Background

This paper sets out the staff analysis and recommendations on the amendments to IAS 7 proposed in the ED.

Staff analysis

The staff recommend the Board make no additions to the scope of the work relating to the statement of cash flows in this project due to concerns over timeliness of this project. The staff suggest the Board proceed with the proposal to require an entity to use the operating profit or loss subtotal as the starting point for the indirect method of reporting cash flows from operating activities because the balance of the feedback from respondents did not indicate a need to change the proposal. Lastly, the staff recommend the Board proceed with the proposals in the ED relating to the classification of interest paid and dividend cash flows for entities other than those with specified business activities (i.e. interest and dividend paid are classified as cash flows arising from financing activities and dividend received are classified as cash flows from investing activities).

Board discussion

A Board member asked the staff to consider whether mandating disaggregation in the investing category of the statement of cash flows between items reported in the profit or loss and items that are not reported in the profit or loss would resolve compatibility issues between the statement of comprehensive income and the statement of cash flows. This is based on a similar requirement to distinguish, within other comprehensive income, items that would be recycled to profit or loss and items that would not be recycled to profit or loss. A Board member raised the concerns that the cost analysis performed on using operating profit as a starting point for the indirect method seem to consider only costs for preparers and not cost for investors. The staff clarified that the stakeholder’s preference for a common starting point outweighs the cost. A Board member struggled with the staff’s recommendation because it would be difficult to achieve alignment between statement of comprehensive income and statement of cash flows but also suggested that full alignment is not a priority for stakeholders.

Board decision

All Board members agreed with the staff’s recommendation that no additions be made to the scope of the work on the statement of cash flows in this project. All Board members agreed to require an entity to use the operating profit or loss subtotal as the starting point for the indirect method of reporting cash flows from operating activities. Lastly, all Board members agreed to proceed with the proposals in the ED relating to the classification of interest paid and dividend cash flows for entities other than those with specified business activities (i.e. interest and dividend paid are classified as cash flows arising from financing activities and dividend received are classified as cash flows from investing activities).