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—General issues (Agenda Paper 21A)

Background

This paper set out the staff analysis and recommendations relating to some of the proposals in the ED for entities that invest in the course of main business activities in assets that generate a return individually and largely independently of other resources held by the entity (referred to as ‘entities that invest in the course of main business activities’) or provide financing to customers as a main business activity. This paper was the first in a series of papers on entities that invest in the course of main business activities or provide financing to customers as a main business activity (referred to combined as ‘entities with specified main business activities’). It considered the feedback on the key concept of ‘main business activities’ that is related to both the investing category and the financing category.

Staff recommendations

The staff recommended that the IASB provide additional guidance on ‘main business activities’ by clarifying that:

• The role of main business activities in the requirements of the IFRS Accounting Standard is limited
• When an entity has a reportable segment that constitutes a single business activity it indicates that the business activity of the reportable segment is a main business activity of the entity
• When an entity has an operating segment that constitutes a single business activity, but it does not meet the requirements to be a reportable segment, that operating segment is not precluded from being a main business activity when the operating performance of the operating segment is an important indicator of operating performance of the entity
• The assessment of main business activities is not only a matter of judgement, but should also be observable through the operating performance communicated to users in public communications
• The specified subtotals similar to gross profit in paragraph B78 of the ED are examples of important indicators of operating performance for entities that invest in the course of main business activities or provide financing to customers as a main business activity

In addition, the staff asked the IASB to clarify that the assessment of whether an entity invests in the course of main business activities or provides financing to customers as a main business activity is performed at the reporting entity level and to clarify that when there is a change in the assessment of whether an entity invests in the course of main business activities or provides financing to customers as a main business activity, the change is made prospectively and thus restatement of comparatives is not required. Lastly, the staff recommended the IASB to require that when there has been a change in the assessment of whether an entity invests in the course of main business activities or provides financing to customers as a main business activity, the entity shall disclose that fact.

IASB discussion

Many IASB members agreed with the staff’s recommendation to provide guidance on meaning of ‘main business activities’. However, some IASB members preferred not to state that main business activities should be observable through the operating performance communicated to users in public communications. Proponents of this view believe this is an indicator of the main business activity of an entity but should not be a requirement. Some IASB members preferred not to require an entity to apply the requirements of IFRS 8 to determine the entity’s main business activity if it does not need to comply with IFRS 8. This is because IFRS 8 requires a micro view of an entity’s reporting segments whereas an entity’s main business activity considers a macro view of the entity. Instead, the entity should apply judgement supported by evidence and it is a matter of fact as to what is the entity’s main business activity. The staff clarified that the objective of the additional guidance is not for entities which are not in the scope of IFRS 8 to apply segment reporting but rather, the purpose is to use it to provide a starting point for entities to identify whether an activity is a main business activity. Some IASB members believed that because the proposed guidance provides entities with qualitative factors to consider when considering an entity’s main business activity, it would be useful to provide the preparers with an indication of when factors would be a material indicator of the entity’s main business activity.

Most IASB members agreed to assess whether an entity invests in the course of main business activities or provides financing to customers as a main business activity at a reporting entity level because it is consistent with the principle of understandability. However, some IASB members questioned whether a group with subsidiaries which invests in the course of main business activities or provides financing to customers as a main business activity could retain investing or financing activities as a main business activity at the consolidated financial statement level. Some IASB members preferred not to include this as a practical expedient and believed the assessment be performed at the reporting entity (i.e. group) level because they would not want the accounting policies of the group to be a summation of the accounting policies of its subsidiaries. The IASB members believed that if the activities of those subsidiaries were material, then it would be considered to be a main business activity of the group as the reporting entity. The IASB members suggested this be clarified in the Basis for Conclusion (BC).

The IASB members agreed that additional disclosures are necessary when there has been a change in the assessment of whether an entity invests in the course of main business activities or provides financing to customers as a main business activity because operating profit is a key metric for most users of the financial statements. In addition, most IASB members agreed that an entity would only define what is that entity’s main business activity at a point in time (i.e. discrete) whereas there could be changes to the entity’s main business activities which evolve over time (i.e. gradual) and without clear explanation, the trend analysis of the entity may be distorted. Most IASB members agreed that an entity should disclose the significance of the change and merely indicating that there has been a change in the entity’s main business activities would not be sufficient. The IASB members recommended the staff to provide guidance on how information on trends may change as a result of the change in the assessment of an entity’s main business activity. Most IASB members agreed not to require restatement of comparatives when there has been a change in the assessment of an entity’s main business activity as this would not a faithful representation of the financial information in the previous reporting period.

IASB decision

All IASB members agreed with the staff’s recommendation to provide additional guidance on ‘main business activities’ by clarifying that:

• The role of main business activities in the requirements of the IFRS Accounting Standard is limited
• When an entity has a reportable segment that constitutes a single business activity it indicates that the business activity of the reportable segment is a main business activity of the entity
• When an entity has an operating segment that constitutes a single business activity, but it does not meet the requirements to be a reportable segment, that operating segment is not precluded from being a main business activity when the operating performance of the operating segment is an important indicator of operating performance of the entity
• The assessment of main business activities is not only a matter of judgement, but should also be observable through the operating performance communicated to users in public communications
• The specified subtotals similar to gross profit in paragraph B78 of the ED are examples of important indicators of operating performance for entities that invest in the course of main business activities or provide financing to customers as a main business activity

All IASB members agreed with the staff’s recommendation to clarify that the assessment of whether an entity invests in the course of main business activities or provides financing to customers as a main business activity is performed at the reporting entity level and to clarify that when there is a change in the assessment of whether an entity invests in the course of main business activities or provides financing to customers as a main business activity, the change is made prospectively and thus restatement of comparatives is not required.

All IASB members agreed with the staff’s recommendation to require that when there has been a change in the assessment of whether an entity invests in the course of main business activities or provides financing to customers as a main business activity, the entity shall disclose that fact.

Management performance measures— Location and cross-referencing (Agenda Paper 21B)

Background

This paper set out staff analysis and recommendations relating to stakeholder comments on the location and cross-referencing of the management performance measures (MPMs) disclosures proposed in the ED.

Staff recommendations

The staff recommended the IASB confirm the requirement for an entity to disclose information about MPMs in a single note to the financial statements and not add specific requirements relating to including the MPMs disclosures in the financial statements by reference to another document.

IASB discussion

Most IASB members agreed with the staff’s recommendation to require an entity to disclose information about MPMs in a single note to the financial statements as stakeholders have said they value the information provided by MPMs and having MPMs disclosed throughout the financial statements would seem counterintuitive. Some IASB members asked the staff to explicitly state that presenting MPMs on the face of the primary financial statements similar to earnings per share (EPS) information is not permitted. In addition, some IASB members asked the staff to clarify that even if MPMs are presented in a single note, it should be clearly identified which information is an MPM and which is not, so it is clear to users of the financial statements which measures are subject to the MPM requirements.

Some IASB members agreed with the staff’s recommendation not to add specific requirements relating to including the MPM disclosures in the financial statements by reference to another document because by permitting an entity to cross-reference to other documents, it can result in fragmented information. Other IASB members believed that the staff should be explicit if a preparer is not permitted to cross-refer to documents outside the financial statements. However, many IASB members stated that they would prefer not explicitly prohibit entities from cross-referencing to other locations or documents because the default assumption is that preparers should be presenting the information all in the financial statements and are not permitted to cross-reference to information provided elsewhere and by including an explicit statement, it can have unintended consequences to existing standards where explicit prohibitions have not been made. The staff added that this can be clarified in the BC. Some IASB members questioned the capabilities of digital reporting with respect to cross-referencing and the staff clarified that the limitations are not due to capabilities of digital reporting but to how the tagging function operates. 

IASB decision

All IASB members agreed with the staff’s recommendation to confirm the requirement for an entity to disclose information about MPMs in a single note to the financial statements and not add specific requirements relating to including the MPMs disclosures in the financial statements by reference to another document.