This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

Primary financial statements

Date recorded:

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

Background

This paper set out the staff analysis of the feedback, and recommendations on the scope of ‘public communications’ used in the definition of management performance measures (MPMs) proposed in the Exposure Draft ED/2019/7 General Presentation and Disclosures. The papers 21A-21C should be read in conjunction with each other.

Staff recommendations

The staff recommended that the Board clarify in the application guidance that when used as part of the definition of MPMs, ‘public communications’ refers only to forms of written communication regularly provided in the periodic reporting process. In addition, the Board should clarify in the application guidance that MPMs relate to the same reporting period as the financial statements with the implications that a performance measure that relates to interim financial statements but not the annual financial statements could only be an MPM in the interim financial statements. An entity would therefore only be required to review the public communications related to the reporting period to identify MPMs. Lastly, the staff asked the Board to clarify that an MPM could only reflect transactions that have occurred in the reporting period to which they relate and therefore measures that include transactions that have not occurred in the period could not be an MPM.

Board discussion

Board members believed the term ‘public communications’ can be interpreted widely and questioned whether the term only includes information which is accessible on the company’s website or if it means that the information is reported externally. In addition, the Board questioned whether written public communication also includes digital forms of communication or transcripts from oral communications. Some Board members said that public communications should not be limited to only written form of communication because IFRS 15 includes written or orally agreed contracts, or contracts arising from customary business practices. The Board asked the staff to clarify whether ‘written communication regularly provided in the periodic reporting process’ refers to the frequency of communication or usage of the MPM and whether this refers to an entity’s external or internal reporting process. The staff clarified that ‘regularly provided’ refers to the frequency of the communication and not to how frequent the MPM itself is used. The Board then asked the staff to consider how this would be applied to an entity which is presenting MPMs for the first time and would not have communicated MPMs previously. The staff clarified that an entity is not required to review historical communications related to previous financial statements to identify MPMs. Some Board members believed that the objective of this recommendation is to create borders and not barriers and if indeed management genuinely considers a metric to be an MPM then it should be included as such. However, some Board members stressed the importance of transparency and discipline around the use of MPMs and would prefer the application guidance to be clearer so that the requirements can be enforced.

The Board members were concerned by the staff’s recommendation to clarify in the application guidance that MPMs relate to the same reporting period as the financial statements, because if information is included in the interim financial statements and not in the annual financial statements, this might create gaps in the information. However, the staff clarified that the intention of this recommendation is to avoid duplication of effort and not to require an entity to repeat disclosures provided in the interim financial statements in the annual financial statements. This was aimed at addressing some of the concerns raised by the stakeholders. The Board asked the staff to clarify whether the information to be included in an MPM is consistent with the requirements of IAS 10 and if the MPM also includes transactions which occur due to passage of time. Some Board members recommended that the staff clarify that an MPM could only reflect transactions that relate to the same reporting period rather than transactions that have occurred in the same financial reporting period. Generally, Board members had reservations about including more application guidance that MPMs should include transactions that relate to the same reporting period as the financial statements.

The Board agreed with the staff that if an entity is applying IFRS Standards, then all requirements, including requirements for MPMs, should apply regardless if the entity is public or private.  The Board was not asked to make any decisions.

Management performance measures—other aspects of definition (Agenda Paper 21B)

Background

This paper set out the staff analysis and recommendations which respond to stakeholder comments relating to the definition of MPMs in the ED. This includes the requirement that MPMs complement totals or subtotals specified by IFRS Standards and the requirement that MPMs communicate to users of financial statements management’s view of an aspect of an entity’s performance.

Staff recommendations

The staff recommended that the Board remove ‘complements’ from the definition of MPMs in order to avoid the implication that it should be used as a criterion to identify such measures. The staff further recommended that the Board add application guidance to the definition of MPMs clarifying that management’s view of an aspect of performance is applied solely using management’s judgement because requiring additional disclosures for all measures that meet the definition of an MPM could result in excessive disclosure. Lastly, the staff recommended that the Board retain the label ‘management performance measures’ in order to distinguish MPMs from other measured defined or specified IFRS Standards.

Board discussion

Some Board members believed that the use ‘complement’ in the definition of MPMs was not necessary because the key aspect of the definition is that totals and subtotals specified by IFRS Standards are not MPMs and that including ‘complement’ in the definition may be imposing this as an additional criterion. Therefore, some Board members agree that ‘complement’ should be removed from the definition of MPMs and refrain from using this term in the Basis for Conclusion (BC) because the Board do not want preparers to claim that the MPM did not complement the totals or subtotals and therefore would not have to disclose it. Some Board members were concerned that if ‘complement’ was removed from the definition of MPMs the scope of what is an MPM may be expanded and may result in significant audit costs.

Some Board members were comfortable with the staff’s recommendation to clarify that the management’s view of an aspect of performance is applied solely using management’s judgement. Proponents of this view believe that this is closer to the overall objective of the project. They did not want management to have to provide reasons for why a chosen MPM is management’s view of performance. However, some Board members supported the alternative view that if an entity uses a measure in public communication when there is no externally imposed requirement to, then that measure is presumed to be management’s view of an aspect of performance. Supporters of this view believe that it is usual that not all MPMs would reflect management’s view of performance because the MPM may have been requested by market participants, regulators or is disclosed as part of wider industry practice. In addition, if management’s view is determined solely by management’s judgement that it will be difficult to enforce in practice and management would have too much scope for including/excluding certain MPMs. However, some Board members believe there is a close relationship between metrics required by stakeholders and how management considers performance. The risk of capturing a metric that management do not believe is indicative of their performance is outweighed by the benefit of including the MPM.

Board decision

All Board members agreed with the staff’s recommendation to remove ‘complements’ from the definition of MPMs.

The Board did not reach any conclusions on the proposed requirement for a MPM to communicate management’s view of an aspect of performance.

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

Background

This paper 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

Due to time constraints, the Board decided to discuss Agenda Paper 21C during a future meeting. 

Principles of aggregation and disaggregation and their application in the primary financial statements and the notes (Agenda Paper 21D)

Background

This paper sets out the staff analysis and recommendations on the principles of aggregation and disaggregation and the roles of the primary financial statements and notes.

Staff recommendations

The staff recommended that the Board set out the relationship between the general presentation and disclosure requirements and the principles of aggregation and disaggregation by:

  • Separating the general disclosure requirement from any reference to presentation in the primary financial statements
  • Linking the requirement with the objective of financial statements
  • Removing the reference to ‘material’ in the requirement
  • Defining a class of assets, liabilities, income, expenses, items of equity or cash flows to be “an aggregation of items (that is assets, liabilities, income, expenses, items of equity or cash flows) based on shared characteristics”
  • Explain that on one hand, the purpose of aggregation into such classes is to make information understandable. On the other hand, the requirement to disclose such classes applies to all material classes. Hence any class of aggregated items should be disaggregated if the resulting disaggregated classes provide material information. Material classes might arise because items have a single dissimilar characteristic

The staff recommended that the Board require, as part of the disclosure of material classes, an entity to provide an explanation of which line items in the primary financial statements the class is included. The staff asked the Board to include in the standard application guidance summarising characteristics that if shared might form the basis of aggregation of items that form a class that enhances the understandability of information provided in the financial statements or if not shared might form the basis of disaggregation of a single class of items into separate classes that provide material information. In addition, the staff recommended that the Board include in the Standard application guidance that states that, in general, the more diverse the items in a class, that is the more the items have dissimilar characteristics in addition to the shared characteristic(s) that form the basis for the class, the more likely disaggregation based on some of those dissimilar characteristics would result in material information. In addition, the larger the class of items, the more likely it is to include items with dissimilar characteristics for which disaggregation would result in material information. Lastly, the staff asked the Board to require the disclosure of information about material classes of assets, liabilities, equity, income, expenses or cash flows to apply only to the extent the information is available from the entity’s internal reporting systems.

Board discussion

Board members questioned the use of ‘class’ throughout this paper because a class is part of a line item and therefore can be aggregated on the face of the financial statements and disaggregated by class in the notes. Therefore, ‘class’ should be used in the context of asset, liability, income or expense per the Conceptual Framework and ‘class’ should not be conflated with ‘aggregation’. The Board asked the staff to consider whether they may want to permit or preclude preparers from disaggregating line items disclosed on the face of the financial statements and reaggregating the line items in the notes (i.e. disaggregating expenses presented by function from the statement of financial performance and reaggregating into expenses presented by nature within the notes). In addition, the Board asked staff to clarify how the principles of aggregation should be applied to assets and liabilities that have been offset.

Board members did not believe that it is necessary to explicitly state that the requirement to provide an explanation of how the classes are included in the line items in the primary financial statements is only applicable to disclosure of material classes. The staff clarified that materiality is a deciding factor for which information is provided, and understandability and comparability are the criteria for what is presented as a line item. Therefore, there will be material information that is not presented on the face of the primary financial statements but rather disclosed in the notes.

Some Board members were concerned with the staff’s recommendation to state that the larger the class of items, the more likely the entity is to include items with dissimilar characteristics for which disaggregation would result in a more understandable view. This might be perceived as an additional requirement. The staff clarified that this was intended to be a reminder for preparers to consider whether further disaggregation of the item would be useful. Board members asked the staff to clarify whether ‘larger’ line items refers to the quantum of the item of whether it refers to multiple components included within the line item.

Many Board members expressed concerns with the staff’s proposal to require an entity to disclose information about material classes of assets, etc. only to the extent the information is available from the entity’s internal reporting systems because this might compromise the general principle of disclosing useful information. The staff clarified that this proposal was intended to provide a cost relief and that if management did not have the information available then they do not have to provide it. However, the Board members were not convinced and believed that the requirements in financial statements have previously driven a change in what information is available to management and do not believe there should be consideration of cost relief. Therefore, most Board members prefer to use the term undue cost or effort.

Board members believed that the preparer should first consider whether disaggregation of separate line item is important to understandability. If not, the preparer should subsequently consider whether disaggregation in the notes would provide material information. Therefore, most Board members believed that, rather than including this as a requirement, it would be more helpful to include guidance in the Practice Statement on materiality that the more diverse items are in a class, the more likely disaggregation (based on some of those dissimilar characteristics) would result in a more understandable overview.

Board decision

Subject to considering whether ‘class’ is the best term to use, all Board members agreed with the staff’s recommendation to set out the relationship between the general presentation and disclosure requirements and the principles of aggregation and disaggregation by:

  • Separating the general requirement to provide information about classes of assets, liabilities, equity, income, expenses and cash flows from the general requirements on presentation in the primary financial statements
  • Linking the general requirement to provide information about classes with the objective of financial statements
  • Removing the reference to ‘material’ in the requirement
  • Defining a class of assets, liabilities, income, expenses, items of equity or cash flows as ‘an aggregation of items (such as assets) based on shared characteristics’
  • Explaining that:
    • The purpose of aggregation into such classes is to make information understandable
    • The requirement to disclose such classes applies to all material classes. Hence any class of aggregated items should be disaggregated if the resulting disaggregated classes provide material information. Material classes might arise because items have a single dissimilar characteristic

9 of 12 Board members agreed with the staff’s recommendation to require an entity to explain how a disclosed class of items is included in line items in the primary financial statements.

All Board members agreed to include application guidance that summarises characteristics that:

  • If shared, might form the basis of aggregation of items that form a class that enhances the understandability of information provided in the financial statements
  • If not shared, might form the basis of disaggregation of a single class of items into separate classes that provide material information

7 of 12 Board members agreed with the staff’s recommendation to include application guidance that states that, in general, the more diverse the items are in a class (i.e. items that have dissimilar characteristics in addition to the shared characteristic(s) that form the basis for the class), the more likely disaggregation based on some of those dissimilar characteristics would result in material information.

4 of 12 Board members agreed with the staff’s recommendation to include application guidance that states that the larger the class of items, the more likely it is to contain items with dissimilar characteristics for which disaggregation would result in material information.

None of the Board members agreed with the staff’s recommendation to state that the general requirement to disclose information about material classes of assets, etc. should apply only to the extent the information is available from the entity’s internal reporting systems.

6 of 12 Board members (including the Chairman) would support this recommendation provided that the proposal refers to undue cost or effort rather than cost relief.

All Board members agreed with the staff’s recommendation not to develop further general aggregation or disaggregation requirements relating to comparability. 

7 of 12 Board members agreed that the Standard should state that, in general, the more diverse the items in a class (i.e. items that have dissimilar characteristics in addition to the shared characteristic(s) that form the basis for the class), the more likely disaggregation based on some of those dissimilar characteristics would result in a more understandable overview.

3 of 12 Board members agreed with the staff’s recommendation that the Standard should state that the larger the class of items, the more likely it is to include items with dissimilar characteristics for which disaggregation would result in a more understandable overview.

Analysis of operating expenses—presentation in the statement of profit or loss (Agenda Paper 21E)

Background

This paper initiates the Board’s redeliberations on the proposals set out in the ED relating to the analysis of expenses classified in the operating category in the statement of profit or loss.

Staff recommendations

The staff recommended that the Board provide application guidance that builds on the description of the function of expense method in the ED to set out:

  • The relationship with expenses of the same nature, that is, typically expenses of the same nature would be allocated to more than one function
  • The attributes of functions, that is, they represent activities that are on-going and distinguishable from other activities of the entity
  • The interaction with the role of the primary financial statements and the principles of aggregation and disaggregation, which can result in aggregating functions but only to the extent such aggregation provides an understandable overview of the entity’s operating expenses.

The staff recommended that the Board does not develop a definition of ‘cost of sales’ as part of this project and, instead, provides application guidance to explain that, as a minimum, cost of sales would include inventory expense (if applicable), calculated in accordance with IAS 2. In addition, the staff also recommended that the Board explore an approach to analysing and presenting operating expenses in the statement of profit or loss that would:

  • Retain the proposal to require operating expenses to be analysed and presented based on their nature or function
  • Not retain the proposed prohibition on a mixed presentation in the statement of profit or loss and instead provide application guidance and disclosure requirements to improve comparability
  • Retain the proposal to provide application guidance on how to determine which presentation method should be used to provide the most useful information to users of the financial statements, with some modifications to the proposed application guidance as a consequence of not retaining the proposed prohibition on a mixed presentation

Board discussion

Due to time constraints, the Board decided to discuss Agenda Paper 21E during a future meeting. 

Associates and joint ventures (Agenda Paper 21F)

Background

This paper initiates the Board’s redeliberations on the proposals set out in the ED relating to integral and non-integral associates and joint ventures.

Staff recommendation

The staff recommended that the Board proceed with the proposal to present income and expenses from equity-accounted associates and joint ventures outside of operating profit. However, the staff recommended that the Board does not proceed with the proposal to require presentation of the subtotal ‘operating profit or loss and income and expenses from integral associates and joint ventures’ and not to proceed with the proposal to require income and expenses from integral associates and joint ventures to be identified and presented separately from non-integral associates and joint ventures. Lastly, the staff recommended that the Board require income and expenses from all equity-accounted associates and joint ventures to be classified in a merged investing, associates and joint ventures category.

Board discussion

Due to time constraints, the Board decided to discuss Agenda Paper 21F during a future meeting. 

Related Topics

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.