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

In September 2022, the IASB completed redeliberations on key aspects of the proposals in the Exposure Draft ED/2019/7 General Presentation and Disclosures. In this session, the IASB discussed the feedback from targeted outreach conducted between September and December 2022 and continued discussing the proposals in the ED.

Associates and joint ventures accounted for using the equity method (Agenda Paper 21A)

Background

This paper discussed the proposal related to associates and joint ventures accounted for using the equity method in the ED. This paper included a summary of the IASB’s discussions, proposals in the ED and tentative decisions to date on the classification of income and expenses from investments in associates and joint ventures accounted for using the equity method. This paper also included a summary of the feedback received in targeted outreach on the IASB’s tentative decisions and the fair value measurement and transition requirements as well as the proposals in the ED related to cash flows from investments in associates and joint ventures.

Staff recommendation

The staff recommended that the IASB confirm the tentative decision to require all entities to classify income and expenses from associates and joint ventures accounted for using the equity method in the investing category. Furthermore, the staff recommended that the IASB provide a transition relief which permits an entity to apply the election in paragraph 18 of IAS 28 to measure an investment in an associate or joint venture at fair value through profit or loss in accordance with IFRS 9 when such an investment is held by, or is held indirectly through, an entity that is a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, when it first applies the new Standard. Lastly, the staff recommended that the IASB withdraw the proposed new paragraph 38A of IAS 7 in the ED. As a result, all entities would be required to classify dividends received from interests in associates and joint ventures accounted for using the equity method in a single category applying the same guidance as applicable to the entity for all other dividends received.

IASB discussion

The staff clarified a typo on paragraph 86 of the agenda paper which should refer to investments in associates and joint ventures accounted for using fair value through profit or loss rather than equity method. Many IASB members expressed great sympathy towards concerns raised by the insurance industry of the mismatches between investment income and insurance finance expense if income and expenses from associates and joint ventures accounted for using the equity method were excluded from operating profit. However, many IASB members do not believe there should be an exception for insurers because one of the primary objectives of the Primary Financial Statements project is to improve consistency and comparability of the primary financial statements across all industries. In addition, based on research conducted, investors analyse income and expenses from associates and joint ventures accounted for using the equity method separately from other types of investment because these figures are post financing and post tax, have no impact on revenue and are not included in the consolidated results. Therefore, it would be important to have income and expenses from associates and joint ventures accounted for using the equity method disclosed in a single location. Furthermore, many IASB members said that the concerns raised by insurers can be resolved through the use of management performance measures and transition provisions permitting an entity to apply the election in paragraph 18 of IAS 28 to measure an investment in an associate or joint venture at fair value through profit or loss when it first applies the new Standard. One IASB member disagreed with the staff recommendation to confirm the tentative decision to require all entities to classify income and expenses from associates and joint ventures accounted for using the equity method in the investing category based on the outreach performed.

Many IASB members agreed that all entities should classify dividends received from interests in associates and joint ventures accounted for using the equity method in a single category because based on the feedback received, the users of the financial statements would want dividends received to be disclosed in a single location. However, one IASB member disagreed with the proposal because of the misalignment between the classification of income and expenses from associates and joint ventures accounted for using the equity method in the statement of profit or loss (which is required to be presented in the investing category) and the classification of dividends received from associates and joint ventures accounted for using the equity method in the statement of cash flows (which is an accounting policy choice).

IASB decision

13 of the 14 IASB members agreed with the staff recommendation to confirm the tentative decision to require all entities to classify income and expenses from associates and joint ventures accounted for using the equity method in the investing category.

All of the IASB members agreed with the staff recommendation to provide a transition relief which permits an entity to apply the election in paragraph 18 of IAS 28 to measure an investment in an associate or joint venture at fair value through profit or loss in accordance with IFRS 9 when such an investment is held by, or is held indirectly through, an entity that is a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, when it first applies the new Standard.

13 of the 14 IASB members agreed with the staff recommendation to withdraw the new paragraph 38A of IAS 7 proposed in the ED. As a result, all entities would be required to classify dividends received from interests in associates and joint ventures accounted for using the equity method in a single category applying the same guidance as applicable to the entity for all other dividends received.

Issues related to Management Performance Measures (MPMs) and IFRS 8 Operating Segments (Agenda Paper 21B)

Background

This paper set out staff analysis and recommendations for issues related to MPMs in the ED and consequential amendments to IFRS 8. This paper discussed whether individual segment measures would be MPMs, whether to confirm the proposal in paragraph B83 of the ED and whether to provide further clarification on the interaction between reconciliations required by IFRS 8 and the ED proposal for MPMs.

Staff recommendation

The staff recommended that the IASB clarify in the application guidance that MPMs reflect management’s view of the performance of the entity as a whole. In addition, the staff recommended that the IASB confirm the proposal in paragraph B83 of the ED that, when one or more of an entity’s MPMs are the same as part of the operating segment information disclosed by the entity in applying IFRS 8, the entity may disclose information about those MPMs in the note that it uses to disclose information about its operating segments provided the entity either includes in that note all of the information required to be disclosed for MPMs or provides a separate note that includes all of the information required for MPMs.

IASB discussion

IASB members agreed it would be useful to clarify that MPMs reflect management’s view of the performance of the entity as a whole rather than the performance of a segment.

Some IASB members agreed that when one or more of an entity’s MPMs are the same as part of the operating segment information disclosed by the entity applying IFRS 8, the entity may disclose the required information about those MPMs in the notes where it discloses information about its operating segments. This is because both MPMs and segment information reflect the view of management. In addition, proponents of this view said that no issues were raised by stakeholders when this proposal was included in the ED. However, some IASB members disagreed with this proposal because of differing requirements for MPMs and segmental reporting and presenting this information in the same place may be confusing to the users of the financial statements. The staff clarified that if MPMs were included in the operating segments note, the preparer would have to choose a note label that faithfully represents the information. Furthermore, the staff confirmed that there will be future guidance around digital reporting and tagging of information if the IASB agrees with the recommendation.

IASB decision

All IASB members agreed with the staff recommendation to clarify in the application guidance that MPMs reflect management’s view of the performance of the entity as a whole.

11 of the 14 IASB members agreed confirm the proposal in paragraph B83 of the ED that, when one or more of an entity’s MPMs are the same as part of the operating segment information disclosed by the entity in applying IFRS 8, the entity may disclose information about those MPMs in the note that it uses to disclose information about its operating segments provided the entity either includes in that note all of the information required to be disclosed for MPMs or provides a separate note that includes all of the information required for MPMs.