Management performance measures—disclosures—usefulness and reconciliations (Agenda Paper 21A)

Background

This paper set out the staff analysis and recommendations which respond to stakeholder comments relating to two of the proposed disclosure requirements for management performance measures (‘MPMs’) in ED/2019/7 General Presentation and Disclosures. These proposed disclosures include a description of why the MPM communicates management’s view of performance, including an explanation of how the MPM is calculated and how the measure provides useful information about the entity’s performance. The proposed disclosure requirements also include provision of reconciliation between an MPM and the most directly comparable subtotal or total specified by IFRS Standards.

Staff recommendations

The staff recommended the IASB confirm the requirement for an entity to disclose a description of why an MPM communicates management’s view of performance, including an explanation of how the MPM is calculated and how the measure provides useful information about the entity’s performance. In addition, the staff believe the IASB should provide additional application guidance to support the requirement described and the guidance would clarify that, when necessary for a user of financial statements to understand why an MPM communicates management’s view of performance, the explanations required would refer to the individual items reconciling an MPM to the most directly comparable subtotal or total specified in the Standards. The staff recommended the IASB to confirm the requirement for an entity to disclose a reconciliation between an MPM and the most directly comparable subtotal or total specified in the Standards. Furthermore, the staff recommended the IASB add a requirement for an entity to disclose, for each item reconciling an MPM to the most directly comparable subtotal or total specified by IFRS Standards, the amount(s) related to each line item(s) in the statement(s) of financial performance. Lastly, the staff recommended the IASB specify that one way to meet this requirement is to use a side-by-side columnar format for the reconciliation.

IASB discussion

IASB members agreed with the staff’s recommendations to confirm the requirement for an entity to disclose a description of how an MPM communicates management’s view of performance and to provide application guidance. In addition, IASB members agreed with the requirement to provide reconciliations of individual line items of MPMs to the most directly comparable subtotal or total specified in the IFRS Standards based on the feedback received during outreach. Some IASB members expressed concerns that the requirements may be too granular by requiring the reconciliation to be performed for each individual line item of MPM. However, most IASB members agreed that reconciliation for each line item is the most appropriate level because based on field research, this is the level at which the disclosures are provided in practice and this level of detail would allow users of the financial statements to understand what total or subtotal has been included in the MPM. Most IASB members agreed that the reconciliation of an MPM and the most directly comparable subtotal or total specified by IFRS Standards should be presented side by side but do not believe the requirements should be as prescriptive as imposing a columnar presentation. The staff clarified that columnar presentation is one but not the only way to meet the requirements and highlighted that a columnar approach would be more compatible with digital reporting. IASB members suggested that the staff clarify in the drafting that a columnar approach is not a requirement but only one of the approaches to meet the reconciliation requirement. In addition, IASB members recommended the staff provide illustrative examples of how the reconciliation requirements can be met with presentation of information in columnar format as a strong steer for preparers. However, other IASB members highlighted that the illustrative examples are not translated in some jurisdictions.

IASB decision

All IASB members agreed with the staff’s recommendation to confirm the requirement for an entity to disclose a description of why an MPM communicates management’s view of performance, including an explanation of how the MPM is calculated and how the measure provides useful information about the entity’s performance.

All IASB members agreed with the staff’s recommendation to provide additional application guidance to support the requirement described and the guidance would clarify that, when necessary for a user of financial statements to understand why an MPM communicates management’s view of performance, the explanations required would refer to the individual items reconciling an MPM to the most directly comparable subtotal or total specified in the Standards.

All IASB members agreed with the staff’s recommendation to confirm the requirement for an entity to disclose a reconciliation between an MPM and the most directly comparable subtotal or total specified in the Standards.

11 of the 12 IASB members agreed with the staff’s recommendation to add a requirement for an entity to disclose, for each item reconciling an MPM to the most directly comparable subtotal or total specified by IFRS Standards, the amount(s) related to each line item(s) in the statement(s) of financial performance.

Lastly, 5 IASB members agreed with the staff’s recommendation to specify in the main body of the Standard that one way to meet this requirement is to use a side-by-side columnar format for the reconciliation.

However, 7 IASB members voted in favour to instead provide an illustrative example of side-by-side columnar format for the reconciliation that accompanies the Standard.

Management performance measures—disclosure of tax and non-controlling interests (Agenda Paper 21B)

Background

This paper set out the staff analysis and recommendations which respond to stakeholder comments relating to two of the proposed disclosure requirements for an entity to disclose the tax effect and the effect on non-controlling interests (NCI) for each item disclosed in the reconciliation between an MPM and the most directly comparable subtotal specified by IFRS Standards.

Staff recommendations

The staff recommended the IASB retain the proposed requirements to disclose the income tax effects and the effect on NCI for each item disclosed in a reconciliation between an MPM and the most directly comparable IFRS specified subtotal or total and how the entity determined the income tax effect. The staff recommended the IASB revise the wording for how to calculate the income tax effect to be: “An entity shall determine the income tax effect required by paragraph 106(c) [of the ED] on the basis of a reasonable allocation of the current and deferred tax of the entity”. In addition, the staff recommended the IASB add application guidance on a reasonable allocation and in assessing what is a reasonable allocation, an entity shall consider the tax jurisdiction(s) and the individual treatment of the reconciling item in those jurisdictions but clarify a reasonable allocation need not involve complex calculation relating to tax effects that arise at an aggregated level. Lastly, the staff recommended the IASB include examples to illustrate the application guidance. 

IASB discussion

Some IASB members did not agree with the staff’s recommendation to require disclosure of the income tax effects and the effect on NCI for each item disclosed in a reconciliation between an MPM and the most directly comparable IFRS specified subtotal or total because this contradicts the principles of consolidation and presentation of NCI. In addition, it would be challenging for some multinational companies operating in various tax jurisdictions with multiple subsidiaries to provide the tax effect and NCI effect of MPMs. This could lead to additional costs for the preparer and introduce complexities in auditing these balances. However, some IASB members believe that there are clear benefits of providing the tax and NCI effect for each MPM and many companies can provide this information. Other IASB members highlighted that there should be consistency between the requirements proposed in agenda papers 21A and 21B and it should be clear that the tax and NCI effect should be provided for each individual line item. However, some IASB members expressed concerns that IAS 12 does not require the disclosure of the tax effect for each line item disclosed in the financial statements and it would therefore be unreasonable to impose this requirement. Some IASB members expressed concerns on what would be a reasonable allocation of the current and deferred tax of the entity. Specifically, when it might be appropriate for an entity to deviate from using the average tax rate. These IASB members suggested whether it would be possible for the staff to specify some indicators of when an entity should perform more complex calculations. The staff agreed that a reasonable approximation of the tax and NCI effects is the objective, and the requirement is not intended for preparers to calculate precise effects. Many IASB members expressed concerns that not all companies are in the position to provide the information to estimate tax and NCI effects, and this may deter management from presenting useful MPMs because it would be too onerous to meet these requirements. IASB members asked the staff to perform additional research on whether it would be possible for most companies to reasonably meet this requirement without being too onerous. The staff agreed to discuss with companies that are already providing this disclosure to understand how management have considered and navigated the complexities of tax and NCI effects on their MPMs.

Board decision

The IASB members decided not to vote on this paper before further research has been conducted by the staff.