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Analysis of Expenses by Nature or Function

The Board discussed whether the performance statement should analyse expenses by nature (for instance, staff costs, raw materials, and income taxes) or by function (for instance, cost of sales, administrative expenses, and selling expenses). The Board considered the following approaches:

• Require one of the two methods.
• Allow both methods.
• Require one of the methods with supplemental dislosure of information on the other basis (a 'mixed presentation').

Board members noted that analysis by nature is not as straightforward as it might appear becausee some companies do not produce information in that format for internal management purposes. Moreover, most Board members felt that reporting by function is more meaningful and it is used in managing the business.

An issue in analysis by function is allocating expenses to categories. For example, should freight costs be part of cost of sales or part of selling expenses? Some Board members felt that the IFRS should provide guidance on allocation; otherwise there is likely to be a lack of comparability between entities. On the other hand, a few Board members were concerned that adopting analysis by function may lead to a prescriptive approach.

During discussion, a majority of the Board indicated they would not support a requirement to produce two performance statements, one by function and one by nature.

No votes were taken, but the Board consensus seemed to support a functional analysis on the face of the performance statement, unless such as analysis is impossible or unmeaningful, and not to allow a mixture of function and nature. However, certain analysis by nature should be required in the notes, particularly labour, material, deprecation, and amortisation expenses. Moreover, disaggregation of the functional categories by nature should not be prohuibited (for example, cost of sales could be disaggregated into labour, materials, etc.).

The Board also decided that it should not prescribe which functional headings to be presented, since the appropriate headings would differ between industries or entities. The Board asked its staff to investigate whether presentation by function is likely to be inappropriate in particular industry sectors.

Discontinuing Operations

There was a brief discussion about reviewing the definition of discontinuing operations. It was noted that the IAS 35 definition is preferable to the UK ASB definition in FRS 3. The Board supported requiring a separate category in the performance statement. If the results of discontinuing items are shown as a single net figure on the face, the constituent line items must be shown separately within the notes.

Extraordinary, Exceptional, and Unusual Items

The Board agreed that these items should not be defined in the IFRS on performance reporting. Further, there would be no individual line for such items; instead, they should be included within the relevant line item -- either disaggregated on the face of the performance statement within the relevant item or disclosed separately in the notes.

Provisions - Revision to Estimates

Under the two-column approach being considered for the performance statement, gains and losses that arise on the remeasurement of assets and liabilities should be separately presented in column two. The Board discussed the distinction between the two columns. The Board felt that defining column one as 'events of the current period' is too simplistic because the facts that change an estimate are also an event of the current period. The general feeling was that initial recognition would be shown in column one and that remeasurement would appear in column two.

A vote was taken on the following three possible methods of showing revisions to estimates of provisions:

1. All revisions to estimates of provisions shown in column one. 2. All provisions and revisions to them relating to working capital items should be shown in column one. For non-working capital items, initial recognition should be in column one and revisions to estimates should be in column two. For example, revisions to estimates for warranties would be shown in column one, but revisions to environmental contamination provisions would be shown in column two. 3. For all items, initial recognition should be shown in column one and revision to estimates should be in column two.

Two Board members voted for method one, four voted for method two, and six favoured the third approach (two Board members were absent). It was noted that the third option would result in movements in bad debt provisions, write-offs of uncollectible accounts, and inventory write-downs presented in column two.

Other Items

The allocation of the unwinding of the discount on provisions was discussed. Some Board members felt this should go to column one. However, others believed that, if the operating-financing split is to be defined by reference to a net debt notion, it would need to go to column two. This issue was unresolved and will be discussed at a later meeting.

Another item discussed was the allocation on the performance statement of the difference between selling price and amount received on sales in foreign currency. While a formal vote was not taken, the Board seemed to conclude that this is s column two item to be shown in the same category as the bad debt expense (normally in administrative expenses).