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Primary financial statements

Date recorded:

Management performance measures—management’s view of an aspect of performance (Agenda Paper 21A)

Background

This paper set out the staff analysis and recommendations relating to the aspect of the definition of management performance measures (MPMs) that requires they communicate to the users of financial statements management’s view of an aspect of an entity’s performance. This paper continued from the September 2021 Board meeting.

Staff recommendations

The staff recommended that the Board retain ‘providing insight into management’s view of an aspect of performance’ as the objective of the requirements for MPMs and ‘management’s view of an aspect of performance’ in the definition of MPMs. The staff also recommended that the Board establish a rebuttable presumption that a subtotal of income and expenses included in public communications outside financial statements represents management’s view of an aspect of performance, allow an entity to rebut the presumption when there is reasonable and supportable information demonstrating that a subtotal of income and expenses does not represent management’s view of an aspect of performance and provide application guidance on how to assess whether there is reasonable and supportable information to support the rebuttal.

Board discussion

Most Board members agreed with the staff’s recommendation to retain ‘providing insight into management’s view of an aspect of performance’ as the objective of the requirements for MPMs and ‘management’s view of an aspect of performance’ in the definition of MPMs. This is because there is value in understanding that the MPM selected is indeed management’s view of performance. In addition, the proposed objective and definition of MPMs allows users to distinguish between an MPM and other key performance indicators (KPIs) used by the entity. Some Board members disagreed with the staff’s recommendation because the costs may outweigh the benefits and have raised concerns that they would not want preparers to not provide certain MPMs by arguing that the measure is not management’s view of performance. Therefore, these Board members suggest that it would be more useful to provide scope exclusions rather than requiring preparers to demonstrate whether the MPM is or is not management’s view of performance. However, most Board members believe the value of MPMs is understanding what the management’s performance objective is and what is management’s view of performance and without these definitions in the MPM, there would be too many metrics in the scope of MPMs.

All Board members supported the staff’s recommendation to establish a rebuttable presumption that a subtotal of income and expenses included in public communications outside financial statements represents management’s view of an aspect of performance because they believe in jurisdictions where there are more requirements to disclose performance measures, there is more rebuttable presumption that these metrics are not management’s view of performance. Some Board members asked the staff to clarify how to apply ‘an aspect of performance’ because within one MPM, management could include adjustments which management believe to be an aspect of performance but could also include adjustments which are only included to be comparable to industry and in this instance, would the metric meet the definition of MPM. The staff clarified that the application of the definition is to the metric as a whole and not intended to be applied to each adjustment in deriving the metric. The Board suggested for the staff to clarify this in the BC and provide examples to illustrate this point. Some Board members cautioned the staff that MPMs could automatically become GAAP measures in certain jurisdictions and asked whether MPMs disclosed in the financial statements should be consistent with the MPMs used in public communications. The staff clarified that the MPMs used in the financial statements should be consistent with those measures communicated publicly and it is not intended that there would be a third set of performance measures. Some Board members also asked whether there should be a restriction on using the rebuttable presumption if the measure has been communicated publicly and is used internally by management. Board members also asked the staff to clarify that ‘externally imposed requirements’ relate to requirements imposed by regulators or local governance requirements.

Board decision

10 of the 12 Board members agreed with the staff’s recommendation to retain ‘providing insight into management’s view of an aspect of performance’ as the objective of the requirements for MPMs. 11 Board members agreed with the recommendation to retain ‘management’s view of an aspect of performance’ in the definition of MPMs. All Board members agreed to establish a rebuttable presumption that a subtotal of income and expenses included in public communications outside financial statements represents management’s view of an aspect of performance, and allow an entity to rebut the presumption when there is reasonable and supportable information demonstrating that a subtotal of income and expenses does not represent management’s view of an aspect of performance. All Board members agreed with the staff’s recommendation to provide application guidance on how to assess whether there is reasonable and supportable information to support the rebuttal.

Management performance measures and the scope of public communications (Agenda Paper 21B)

Background

This paper set out the staff analysis and recommendations on the scope of ‘public communications’ used in the definition of MPMs, following the Board discussion at the September 2021 Board meeting. This paper dod not address the timing of public communications.

Staff recommendations

The staff recommended that the Board narrow the scope of public communications considered for the purposes of applying the definition of MPMs to exclude oral communications, transcripts, and social media posts.

Board discussion

The majority of Board members agreed with the staff’s recommendation to exclude oral communications, transcripts, and social media posts from the scope of public communication because most companies would have communicated these measures through other means (i.e. press release) before communicating via oral communication or social media posts. Therefore, it would not be necessary to look to social media posts which is a secondary channel of communication to determine if the measure has already been included in public communications. However, a Board member disagreed with the proposal and said that more and more companies are using their social media platform as a formal way to communicate with investors, and it would be useful to include this in the scope of public communications. The staff clarified that this proposal was based on the feedback received that if oral communication, transcripts, and social media posts were included in the scope of public communications, it can be cumbersome to search through all the channels of communication to verify which measures have been communicated publicly. The Board agreed to include in the BC that the intended purpose is to provide a cost relief from performing all the searches.

Board decision

11 Board members agreed with the staff’s recommendation to narrow the scope of public communications considered for the purposes of applying the definition of MPMs to exclude oral communications, transcripts, and social media posts.

Management performance measures—faithful representation (Agenda Paper 21C)

Background

This paper has been carried forward from Agenda Paper 21C of the September 2021 meeting and set out the staff analysis and recommendations relating to the proposal in the ED to require MPMs to faithfully represent aspects of the financial performance of the entity to users of financial statements.

Staff recommendations

The staff recommended that the Board add application guidance clarifying how an entity applies the requirement to describe an MPM in a clear and understandable manner that does not mislead users. An entity would do so by:

  • Explaining the basis for determining the income and expenses the measure includes or excludes
  • Including definitions for terms not defined in IFRS Standards that are needed to understand the aspect of performance being communicated
  • Disclosing whether and how an MPM has been calculated using accounting policies that differ from those selected when applying IFRS Standards

The staff also recommended that the Board remove the specific requirement for MPMs to faithfully represent aspects of the entity’s financial performance to users of financial statements.

Board discussion

Some Board members agreed with the staff’s recommendation but said it would be important to explicitly state in the requirement that preparers would need to provide information and reconciliation to enable users to understand what has been included or excluded from the calculation of the MPM. Therefore, the Board member asked the staff to rephrase the proposal to ‘add application guidance clarifying how an entity applies the requirement to describe an MPM in a clear and understandable manner’. The staff clarified that this can be included when the Board debates reconciliation objectives. Some Board members also suggested that if the MPM is not calculated based on accounting requirements from the Standards, the entity should be required to explain how the MPM was calculated. Another Board member asked if an entity could reference to accepted definitions of the performance measure rather than requiring an entity to explain the definition. The staff clarified that ‘understandability’ was intended to address issues such as naming a measure as ‘non-recurring’ without providing an explanation of what it means, and the staff also clarified that cross referencing is a topic which they will bring in a future paper.  

Board decision

All Board members agreed with the staff’s recommendation to add application guidance clarifying how an entity applies the requirement to describe an MPM in a clear and understandable manner that does not mislead users by:

  • Explaining the basis for determining the income and expenses the measure includes or excludes
  • Including definitions for terms not defined in IFRS Standards that are needed to understand the aspect of performance being communicated
  • Disclosing whether and how an MPM has been calculated using accounting policies that differ from those selected when applying IFRS Standards

All Board members agreed to remove the specific requirement for MPMs to faithfully represent aspects of the entity’s financial performance to users of financial statements.

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