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Primary financial statements

Date recorded:

Subtotals and categories—financing category (Agenda Paper 21A)

Background

This paper sets out staff analysis and recommendations relating to the proposals in the Exposure Draft ED/2019/7 General Presentation and Disclosures on the identification of income and expenses to be classified as financing in the statement of profit or loss.

Staff recommendations

The staff recommended that the Board require all income and expenses from liabilities that arise from transactions that involve only the raising of finance and interest income and expenses from other liabilities to be classified in the financing category of profit or loss. The staff also recommended the Board describe the receipt by the entity of cash or a reduction in a financial liability and the return by the entity of cash or an entity's own equity as transactions that involve only the raising of finance. However, the staff recommended the Board do not proceed with the proposed addition to the definition of financing activities in IAS 7 and the Board do not proceed with the proposed definition of liabilities from financing activities in the new IFRS Standard.

Board discussion

A majority of Board members agreed with the staff’s recommendation not to proceed with the proposed addition to the definition of financing activities in IAS 7. This is because what investors deem to be debt is captured by the existing definition and the addition of the proposed definition of liabilities arising from financing activities to the definition in IAS 7 of financing activities may create further inconsistencies and complications. Board members also agreed that adding the proposed definition is going above the scope of this project.

Board members expressed concerns over the staff’s proposal to require all income and expenses from liabilities that arise from transactions that involve only the raising of finance and interest income and expenses from other liabilities to be classified in the financing category of profit or loss. Board members recommended that the staff first clarify an overall objective, which is to allow stakeholders to analyse the performance of an entity independent of how the entity is financed. This is followed by an analysis of line items presented in the profit or loss and whether this may create tension compared to the presentation of these line items in the cash flow statement. The staff agreed that the paper does not provide a clear description of the overall objective but clarified this was because it would be difficult to obtain consensus on the definition of liabilities arising from financing activities. Board members expressed concerns that the paper requires users to distinguish between economically similar items which poses the risk of putting more emphasis on form rather than substance of the transaction. Furthermore, any item which does not meet the definition of financing activities will be included as a residual in operating activities and the staff should consider whether this would result in useful information. Board members also questioned whether financial liabilities measured at fair value through profit or loss would have to be bifurcated into its interest component and present this in financing activities. The staff clarified that was not the intended outcome and that the objective was for users to present only the raising of finance and interest income and expenses from other liabilities in the financing activities and the drafting will reflect this. Board members asked the staff to conduct more research and identify how many line items will meet the proposed definition to be presented in financing activities.

Board decision

12 out of 13 Board members supported the staff’s recommendation not to proceed with the proposed addition to the definition of financing activities in IAS 7.

11 out of 13 Board members agreed for the staff to explore more options and conduct more research and accordingly the Board did not decide on whether to require all income and expenses from liabilities that arise from transactions that involve only the raising of finance and interest income and expenses from other liabilities to be classified in the financing category of profit or loss. The Board also did not decide on whether to proceed with the proposed definition of liabilities from financing activities in the new IFRS Standard.

Subtotals and categories—profit before financing and income tax (Agenda Paper 21B)

Background

This paper set out the staff’s analysis and recommendations on the boundary between the investing and financing categories proposed in the ED.

Staff recommendations

The staff recommended the Board retain the proposal to introduce separate investing and financing categories in the statement of profit or loss and to define the profit before financing and income tax subtotal but make it a specified subtotal, rather than a required subtotal in order to retain comparability and increase understandability. The staff also suggested the Board require a minimum line item for income and expenses from investments to describe the investing and financing categories and require entities to classify income and expenses from cash and cash equivalents in the investing category rather than the financing category.

Board discussion

Board members expressed concerns that the staff’s proposal with regard to the profit before financing and income tax subtotal will not address the issues raised by the respondents. In addition, Board members questioned whether it was sufficient to carrying over the existing requirement from IAS 1 for an entity to present additional line items, headings and subtotals in the statement(s) of financial performance and the statement of financial position or whether this should be a specific requirement. Most Board members disagreed with the staff’s analysis that the investing category is relatively small and a separate investing category and profit before financing and income tax subtotal may clutter the statement of profit or loss. Furthermore, some Board members said that it would be difficult to support the staff’s proposal to require users to include a specified subtotal and to require a minimum line item for income and expenses from investments if feedback from the outreach did not raise this as an issue. Some Board members supported the staff’s recommendation based on a cost benefit analysis. Board members further asked the staff to consider the interaction between the current proposal and digital reporting.

Board members agreed that requiring entities to classify income and expenses from cash and cash equivalents in the investing category rather than the financing category was a good approach to address stakeholder concerns.

Board decision

All Board members agreed to retain the proposal in the ED to introduce separate investing and financing categories in the statement of profit or loss. However only 1 out of 13 Board members agreed to retain the proposal in the ED to define the profit before financing and income tax subtotal but make it a specified subtotal, rather than a required subtotal and to require a minimum line item for income and expenses from investments to describe the investing and financing categories.

All Board members agreed with the staff recommendation to require entities to classify income and expenses from cash and cash equivalents in the investing category rather than the financing category.

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