Primary financial statements

Date recorded:

Cover note and summary of feedback and redeliberations (Agenda Paper 21)

In December 2019, the IASB published Exposure Draft ED/2019/7 General Presentation and Disclosures. The comment period ended on 30 September 2020. In this meeting, the IASB continued its redeliberations of the proposals in the ED.

Entities with specified main business activities—Issues specific to the investing category (Agenda Paper 21A)

Background

This paper set out the staff analysis and recommendations relating to some of the proposals in the ED for entities with specified main business activities that are specific to the investing category. It should be read in conjunction with Agenda Paper 21B which discusses the proposals for entities with specified main business activities specific to the financing category.

Staff recommendation

The staff recommended:

  • The IASB amend the proposal in the ED to require an entity to classify income and expenses from investments that generate a return individually and largely independently of other resources held by an entity in the operating category when the entity invests in those investments as a main business activity (Recommendation 1).
  • The IASB add application guidance permitting an entity to perform the assessment of whether investments are made as a main business activity for a group of assets with shared characteristics. Groups of financial assets with shared characteristics used in this assessment should be consistent with the way an entity groups financial assets into classes for the purposes of disclosures about financial instruments in accordance with IFRS 7 (Recommendation 2).
  • The IASB add application guidance clarifying that income and expenses from financial assets recognised from providing financing to customers are classified in the operating category (Recommendation 3).

IASB discussion

IASB members generally agreed with Recommendation 1 as it is consistent with previous tentative decisions and the terminology in the ED cause confusion. One IASB member highlighted that it is important to distinguish between “a” main business activity and “the” main business activity. It is also to distinguish “main business activity” from “supporting a main business activity”. The staff was asked to select drafting that is solid enough so that translating it into other languages would not change the meaning.

On Recommendation 3, one IASB member highlighted an example of an entity that has one significant contract as part of which they provide financing but otherwise they do not provide financing. He asked whether the entity would meet the ‘main business activity’ requirement. The staff replied that these ad hoc cases would not meet the requirement. The IASB member asked whether this issue could be resolved by a disclosure requirement to which the staff replied that feedback from outreach has not indicated significant pushback on this, while IASB members replied that IFRS 15 already has a disclosure requirement for these cases and the example would be captured by that. However, one IASB member did not think that relying on a disclosure in IFRS 15 was helpful in meeting the objective of the project which is to make the P&L more understandable.

IASB decision

All IASB members supported Recommendation 1 and 2.

9 of 10 IASB members supported Recommendation 3 with the addition that the recommendation may be amended by adding a disclosure requirement at a later stage.

Entities with specified main business activities—Issues specific to the financing category (Agenda Paper 21B)

Background

This paper set out the staff analysis and recommendations relating to some of the proposals in the ED for entities with specified main business activities that are specific to the financing category. It should be read in conjunction with Agenda Paper 21A which discusses the proposals for entities with specified main business activities specific to the investing category.

Staff recommendation

The staff recommend the IASB confirm the accounting policy choice for financing transactions proposed in paragraph 51 of the ED (Recommendation 1) and confirm that the accounting policy choice proposed in paragraph 51 of the ED is not applied to specified income and expenses from other liabilities (Recommendation 2).

The staff also recommended the IASB confirm the proposed requirement for entities that invest in financial assets in the course of main business activities to classify income and expenses from cash and cash equivalents in the operating category (Recommendation 3) and explore removing the accounting policy choice for income and expenses from cash and cash equivalents proposed in paragraph 51 of the ED (Recommendation 4).

IASB discussion

IASB members generally agreed with Recommendation 1 although some said that they generally dislike these choices. One IASB member reminded them that accounting policy choices have to be applied consistently and given there was no clear alternative, it should be supported.

At the same time, IASB members agreed with Recommendation 2 to keep the requirements as simple as possible.

IASB members also supported Recommendaton 4, with one IASB member saying that when keeping the accounting policy choice, it should be clear that the default category for these is investing. One IASB member said that removing the accounting policy choice might affect a significant proportion of lenders who sell loans immediately after originating them. An alternative to the accounting policy choice would be to include a practical expedient for those entities.

IASB decision

All recommendations were supported unanimously.

Disclosure of operating expenses by nature in the notes (Agenda Paper 21C)

Background

This paper set out staff analysis and recommendations relating to the proposal in paragraph 72 of the ED. That paragraph requires an entity that presents an analysis of operating expenses by function in the statement of profit or loss to disclose, in a single note, an analysis of its total operating expenses by nature.

Staff recommendation

The staff recommended the IASB require that an entity discloses the amounts included in each line item in the statement of profit or loss for depreciation, amortisation, and employee benefits (Recommendation 1) and explore an approach that would require that an entity discloses, for all operating expenses disclosed in the notes, the amounts included in each line item in the statement of profit or loss (‘a general requirement’) (Recommendation 2).

IASB discussion

IASB members generally agreed with the Recommendation 1 as it provided some granularity of the cost of sales figure which was demanded by users. The required disclosures should be readily available in preparers’ systems and therefore the requirement is not too onerous. However, one IASB member said that entities presenting the P&L by function do not review the figures by nature and do not make decisions based on them. Therefore, the requirement would impose extra cost which should not be underestimated. Nonetheless, he thought that the additional information would be useful.

One IASB member asked why impairment was not included in the list and said that the rationale for this should be explained in the basis for conclusions to the Standard.

On Recommendation 2 most IASB members agreed with exploring a general requirement. However, IASB members asked to ensure that the exploration does not repeal the decision made on Recommendation 1, i.e. the three items from Recommendation 1 would still be required. IASB members said that cost-benefit considerations would be crucial to the exploration. While one IASB member thought that the approach would not be aligned with a principle-based standard, others confirmed that but said that sometimes it is necessary to spell out what is required so that it is widely understood.

There was some discussion about including a cost relief and how to best phrase it. It was mentioned that it should be more than impracticable as that was a very high hurdle. One IASB member said that it should not be a new one but to look in IFRS Accounting Standards where a cost relief was used and apply that. For example, the “undue cost or effort” relief in many Standards.

The Chairman asked how long outreach would take for this issue as he was concerned about excessive use of resource for this topic. The staff replied that they are planning to present outreach results in January 2023. The outreach would be performed as a package with categories, MPMs, unusual items, etc.

IASB decision

All IASB members agreed with Recommendation 1.

9 of 10 IASB members agreed with Recommendation 2.

Unusual income and expenses (Agenda Paper 21E)

Background

This paper continued the IASB’s discussions on unusual income and expenses. It sets out feedback from the discussion of this topic at the joint meeting of the Capital Markets Advisory Committee (CMAC) and Global Preparers Forum (GPF) in June 2022 and provided an analysis of the questions the IASB will need to address to proceed with a definition of unusual income and expenses.

The staff did not make any recommendations or asked the IASB to make any decisions in this paper.

IASB discussion

IASB members acknowledged the challenges of this part of the project and urged the staff not to delay the project because of these challenges. One IASB member highlighted the option to move this issue into a separate project to avoid delays to the PFS project.

Most IASB members spoke in favour of having a definition but had mixed views on the staff suggestion in the paper to consider amending the definition to include items that are expected to arise in a few annual periods and to require a comparison with past income and expenses (to exclude items that have arisen in more than a few annual periods in the past).

One main concern was that it captures too many items of income and expense resulting in a variance analysis. Unusual items should only be those that are fundamentally unusual. The staff responded that the concept of materiality would help to narrow the volume of items included. However, two IASB members disagreed with this view. One of them cited the impact of COVID on the income statements of most companies. While the impact was material, the items themselves were not unusual. The same applies to higher energy costs in 2022 compared to 2021, which lead to changes in the income statement that are material but not unusual.

One IASB member agreed that unusual should be both with regard to type and amount but said it should only be unusually high amounts, no low amounts. Otherwise, the analysis would include everything that is missing (for example missing revenue due to COVID).

On assessments of expected future income and expenses and related disclosures, IASB members signalled agreement that this should be investigated further. However, one IASB member disagreed that forward-looking information should be used as this approach should only be used when measuring items (e.g. value in use) and not when recognising items. It would also bring uncertainty into the determination of what is unusual.

On the question of what ‘a few annual periods’ means, IASB members seemed to agree that it should be a set number, even if that is arbitrary. Two IASB members suggested to add this to the definition of unusual as it would make the definition easier to apply and would facilitate consistent application. On the staff’s suggestion to look back five years and forward three to five years, depending on the period of approved forecasts and budgets, IASB members seemed to generally agree. However, there was some concern that referring to the period of approved forecasts and budgets might be confusing, for example if that period was shorter than three years. The staff confirmed that it would have to be a minimum of three years and that forecasts and budgets can support assessing how long the period should be but should not determine it. The longer the period, the less items would be captured as unusual. One IASB member suggested to add the word “normally” to accommodate other lengths as well.

On the link between unusual income and expenses and unusual events, one IASB member said that it is sensible to focus on the event that caused an item to become unusual as this provided better clarity. However, not considering the amount would eliminate some unusual items that should be reported.  

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.