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.

Management performance measures – disclosure of tax and NCI (Agenda Paper 21A)

Background

This paper set out the staff analysis and recommendations relating to the proposed requirement in the ED for an entity to disclose the tax effect and the effect on non-controlling interests (NCI) for each item disclosed in the reconciliation between a management performance measure (MPM) and the most directly comparable subtotal specified by IFRS Accounting Standards.

Staff recommendation

The staff recommended the IASB confirm the proposed requirements in the ED to disclose the income tax effect and the effect on NCI for each item disclosed in the reconciliation between an MPM and the most directly comparable subtotal or total specified by IFRS Accounting Standards. In addition, the staff recommended the IASB revise the requirement specifying how to calculate the income tax effect to allow an entity to either:

• Calculate the tax effects of the underlying transaction(s) at the statutory tax rate(s) applicable to the transaction(s) in the relevant jurisdictions(s); or
• Calculate the tax effects described above and allocate any other income tax effects related to the underlying transaction(s) based on a reasonable pro rata allocation of the current and deferred tax of the entity in the jurisdictions concerned, or other method that achieves a more appropriate allocation

The staff recommended the IASB remove the proposed requirement in the ED to disclose how the entity determined the income tax required by the ED and add a requirement for an entity to disclose that it has chosen to calculate the tax effects of the underlying transaction(s) at the statutory tax rate(s) applicable to the transaction(s) in the relevant jurisdictions(s) when that is the case.

IASB discussion

Most IASB members believed that it would be useful for preparers to disclose the income tax and NCI effect for each item disclosed in the reconciliation between an MPM and the most directly comparable IFRS subtotal or total. Many IASB members believed it would not be onerous for entities to do this as the information should already be available and based on the feedback from the outreach, preparers would be able to provide this information across jurisdictions, tax systems and industries. However, some IASB members disagreed with this and stated that the requirement will result in undue cost or effort for preparers, especially conglomerates operating in multiple tax jurisdictions and this may deter preparers from providing useful MPMs. Some IASB members believed this requirement is inconsistent with the overall principle of MPMs as the tax or NCI effect is not what management considers to be part of the performance measure. In addition, some IASB members believed that the tax and NCI effect is not the main purpose of the MPMs and any attempt to provide these figures may be arbitrary given the complexities in calculating the amounts. Furthermore, some IASB members highlighted that for some jurisdictions, the tax effect is calculated based on local GAAP. The staff clarified that the purpose of this requirement is to provide discipline and transparency on MPMs provided by management. Other IASB members believed that the tax and NCI effect on MPMs is one of the most useful pieces of information for the stakeholders and absent this requirement, the users of the financial statements will have to determine the tax and NCI effect by themselves. Some IASB members asked the staff to clarify whether this requirement is also applicable to the interim financial statements. Some IASB members believed that the IASB should not specify which approach management should adopt in calculating the tax effect provided the approach has been disclosed by management.

IASB decision

7 of the 10 IASB members agreed to confirm the proposed requirements in the ED to disclose the income tax effect and the effect on NCI for each item disclosed in the reconciliation between an MPM and the most directly comparable subtotal or total specified by IFRS Accounting Standards.

8 of the 10 IASB members agreed to revise the requirement specifying how to calculate the income tax effect to allow an entity to calculate the tax effects of the underlying transaction(s) at the statutory tax rate(s) applicable to the transaction(s) in the relevant jurisdictions(s) as a minimum but not prescribe any formats in how an entity satisfies the requirement. IASB members asked the staff to provide a further analysis of the alternatives on how an entity can calculate the tax effects of the underlying transaction(s).

IASB members did not decide on whether to remove the proposed requirement in the ED to disclose how the entity determined the income tax effect for each MPM reconciling item nor did IASB members make a decision to add a requirement for an entity to disclose that it has chosen to calculate the tax effects of the underlying transaction(s) at the statutory tax rate(s) applicable to the transaction(s) in the relevant jurisdictions.

Unusual income and expenses (income and expenses with limited recurrence) (Agenda Paper 21B)

Background

This paper continued the IASB’s redeliberations on the proposals set out in the ED relating to unusual income and expenses. The paper asked the IASB to make decisions on how to proceed with a definition for such income and expenses and how to disclose information about them.

Staff recommendation

The staff recommended that the IASB develop an approach of establishing a broad definition for income and expenses to be included in a single note about limited recurrence and requiring the note that provides information about income and expenses that meet the definition to be divided, so income and expenses with different recurrence characteristics can be identified easily (recommendation included in Agenda Paper 21C). In addition, the staff recommended the IASB establish the broad definition by continuing to include in the definition income and expenses that have occurred in the past, as proposed in the ED, relabelling income and expenses meeting the definition as ‘income and expenses with limited recurrence’ rather than ‘unusual income and expenses’ and amending the definition proposed in the ED to include income and expenses that are expected to arise for a few annual periods. The staff recommended the IASB reduce the subjectivity associated with a broad definition by requiring approved budgets and forecasts to form the basis of the assessments about future income and expenses required by the definition. The assessments are as to whether similar income and expenses are expected to arise for only a few annual periods and whether they are not expected to arise thereafter for several future annual periods. As a result, the definition would refer only to ‘the period of approved budgets and forecasts’ and not to ‘a few annual periods’ and ‘several future annual periods’. Lastly, the staff recommended that the IASB adds application guidance on how the definition should apply when expectations about future income and expenses are subject to high levels of uncertainty. The application guidance would state that an item of income or expense would fall within the definition of income and expenses with limited recurrence if an entity cannot conclude whether, within the period of approved budgets and forecasts, it is reasonable to expect that similar income or expenses will continue or will cease and then not recur.

IASB discussion

All IASB members agreed on including income and expenses that have occurred in the past. Many IASB members agreed to relabel income and expenses meeting the definition as ‘income and expenses with limited recurrence’ rather than ‘unusual income and expenses’. This is because this is a more concise description of the item. However, other IASB members preferred not to relabel the definition because ‘unusual income and expenses’ is a widely understood term and it was the term used in the ED. By changing the label, stakeholders may understand this to be changing the scope. In addition, it would be easier to translate ‘unusual income and expenses’. The IASB members asked the staff to clarify that the term ‘unusual’ is in the context of financial statements. Some IASB members asked the staff to consider whether the definition captures any discontinued activities. In addition, some IASB members raised concerns on the use of ‘few’ and ‘several’ annual periods as the interpretation of this would differ for each individual. Some IASB members believed the staff’s recommendation that an item of income or expense would fall within the definition of income and expenses with limited recurrence if an entity cannot conclude whether, within the period of approved budgets and forecasts, it is reasonable to expect that similar income or expenses will continue or will cease and then not recur could be problematic to apply in practice. This is because some entities may have forecasts for more than one reporting period but would only have approved budgets for the one reporting period. The staff clarified that if an entity has a 3-5 year budget, then this is a good starting point in determining whether income and expenses is expected to continue or cease. However, it is not expected that the entity should prepare a 3-5 year forecast if they do not already prepare this. Some IASB members were concerned that the staff have inadvertently established a hurdle by asking preparers to consider approved budgets and forecast. The IASB members asked the staff to clarify that the period(s) used in the budgets and forecasts is a good indicator of the assessment period(s) that management should consider in determining whether income or expenses is expected to continue or cease. The IASB asked the staff to amend the definition to state “Income and expenses have limited recurrence when it is reasonable to expect that income or expenses that are similar in type and amount will cease, and once ceased will not arise again, before the end of the period of approved budgets and forecasts the assessment period.” IASB members considered an assessment period of 2-4 years a reasonable starting point. IASB members asked the staff to consider whether this assessment period is a period which would aid comparability within the entity and whether this is practical for preparers.

IASB decision

All IASB members agreed with the staff’s recommendation to establish the broad definition by continuing to include in the definition income and expenses that have occurred in the past, as proposed in the ED.

6 of the 10 IASB members agreed with the staff’s recommendation to relabel income and expenses meeting the definition as ‘income and expenses with limited recurrence’ rather than ‘unusual income and expenses’.

All of the IASB members agreed with the staff’s recommendation to amend the definition proposed in the ED as suggested above. IASB members consider an assessment period of 2-4 years a reasonable starting point and asked the staff to provide a further analysis on whether the assessment period can be applied in practice. 

9 of the 10 IASB members agreed with the staff’s recommendation to add application guidance on how the definition should apply when expectations about future income and expenses are subject to high levels of uncertainty. The application guidance would state that an item of income or expense would fall within the definition of income and expenses with limited recurrence if an entity cannot conclude whether, within the period of approved budgets and forecasts, it is reasonable to expect that similar income or expenses will continue or will cease and then not recur.

Income and expenses with limited recurrence—disclosure (Agenda Paper 21C)

Background

This paper accompanied Agenda Paper 21B. The paper considered how to structure the note on income and expenses with limited recurrence. It also considers what disclosures should be required for income and expenses that meet the definition of income and expenses with limited recurrence because of their amount, and as part of that discussion whether income and expenses that are lower than those expected in the future should be included in the definition.

Staff recommendation

The staff recommended that the IASB require the note on income and expenses with limited recurrence to be divided into sections so income and expenses with different recurrence characteristics can be identified easily. The sections would be:

• Income and expenses that are expected to arise only in the current annual reporting period
• Income and expenses that are expected to arise for a few annual reporting periods
• Other income and expenses with limited recurrence, being income and expenses that meet the definition of income and expenses with limited recurrence and are expected to have occurred for more than the period of approved budgets and forecasts by the time they cease

The staff recommended that the IASB, in determining which items fall into which of these groups, require an entity to use an equivalent period for assessing whether similar income or expenses have arisen in the past to the period it considers in assessing whether similar income or expenses are expected to arise in the future, that is the period of approved budgets and forecasts. In addition, the staff recommend that the IASB continue with the disclosure requirements proposed in the ED reworded to reflect the staff recommendation in Agenda Paper 21B:

• The amount of the item with limited recurrence recognised in the reporting period
• A narrative description of the transaction or other events that gave rise to the item and why income or expenses that are similar in type and amount will cease, and once ceased will not arise again, before the end of the period of approved budgets and forecasts
• The line item(s) in the statement (s) of financial performance in which the item is included

The staff recommended that the IASB add the following disclosure requirements:

• Disclosure of the period covered by approved budgets and forecasts
• For items that that have arisen or are expected to arise for only a few annual periods, disclosure of any past periods in which they have arisen and any future periods in which they are expected to arise
• For items that have arisen for more than a few annual periods in the past, disclosure of any future periods in which they are expected to arise

The staff recommended that the IASB continue to include in the definition income and expenses that are dissimilar to those expected to arise in the future because they are lower in amount and for such items of income and expenses, reconfirm the proposal to require disclosure of the amount recognised in the period and an explanation of why that amount has limited recurrence.

IASB discussion

Some IASB members disagreed with the staff’s recommendation to disclose income and expense with limited recurrence by considering forecasts. This is because this may provide stakeholders with insight into transactions which management may want to enter into the future but is not yet committed. IASB members believed this puts management at risk of disclosing information which may result in constructive obligation. The staff stated that this is going against previous tentative decisions made by the IASB and clarified that the disclosure is only required for income and expenses which the entity has already incurred. However, in determining whether those income or expenses are expected to reoccur, management should consider information included in forecasts. The staff also clarified that these requirements do not consider situations of high uncertainty (e.g. the COVID pandemic) where some could argue that all the income and expenses are unlikely to reoccur. IASB members asked the staff to clarify that if an item of income or expense meets the requirement to be disclosed as income or expense with limited recurrence, this does not override the existing disclosure and presentation requirements in IAS 1. Some IASB members raised the concern that this requirement is straying into management commentary territory because the item that is required to be disclosed is an item that has already occurred but the assessment as to whether that item is disclosed is forward-looking. The staff clarified that the purpose of this is for preparers to disclose non-recurring variances that stakeholders would be interested in. Some IASB members asked the staff to consider whether an entity may satisfy this requirement by referencing to MPMs or providing qualitative disclosures. However, other IASB members disagreed with this proposal as it would not be possible for entities to cross-reference to MPMs in certain jurisdictions. IASB members asked the staff to bring back a separate paper analysing whether using forecasts in management’s assessment of whether an item of income or expense is expected to reoccur would result in unintended signalling to the stakeholders.

IASB decision

8 of the 10 IASB members agreed income or expenses that are lower than those expected to arise in the future should continue to be captured by the definition and disclosure of the amount recognised and an explanation of why that amount has limited recurrence should continue to be required.

Investments accounted for using the equity method (Agenda Paper 21D)

Background

This paper continued the IASB’s discussions on the proposals in the ED for entities with specified main business activities. It is the second in a series of papers on entities with specified main business activities and discusses the feedback on the proposal for entities with specified main business activities to classify income and expenses from associates and joint ventures accounted for using the equity method outside of the operating category and the consequences for entities with specified main business activities of the redeliberations on the classification of income and expenses from associates and joint ventures accounted for using the equity method under the general model.

Staff recommendation

The staff did not make any recommendations or ask the IASB to make any decisions in this paper. The staff will bring back a future paper on the issues discussed in this paper on which the staff will ask the IASB to make decisions. In future papers the staff will also consider other issues related to entities with specified main business activities and whether any transition guidance is required.

IASB discussion

Some IASB members believed a clear distinction should be made for specified main business activities to classify income and expenses from associates and joint ventures accounted for using the equity method outside the operating category. In addition, some IASB members questioned whether this requirement can be easily applied by insurers or whether exemptions should be made for these entities. These IASB members stated that insurers typically have three types of investments in associates and joint ventures being investments linked directly to insurance contract, investments for the purposes of solvency requirements and investments for the purposes of undertaking insurance related activities and it is only the last type of investments in associates and joint ventures which should be presented in the operating category. Other IASB members do not agree with creating exemptions from applying these requirements as these exemptions would have to be very narrowly defined in order to prevent abuse. Some IASB members preferred that income and expenses from associates and joint ventures accounted for using the equity method be presented outside the operating category as this is a post-tax figure. However, IASB members agreed that if this proposal would create conflict between the requirements of IFRS 17 then this would need to be addressed. The staff clarified that different measurement bases of line items (i.e. equity accounting) should not preclude the line item from being presented in the same category as there are items which are measured at fair value being presented in the operating category. However, it is the conflict between transactions that are presented in a single line such as investments and associates and joint ventures accounted for using the equity method and transactions which are typically presented in multiple line items that creates problems for stakeholders.

IASB decision

IASB members were not asked to make any decisions on this paper.