The purpose of this session was to consider the feedback on what guidance on income and expenses and presentation information about financial performance should be included in the revised Conceptual Framework for Financial Reporting.
There are two decision focused papers, on the definitions of income and expenses (10B) and on information about financial performance (10C). There is also a paper summarising the decisions made so far, in relation to feedback on the exposure draft (10A).
The cover paper indicated that at the July Board meeting the Board would discuss:
- Whether and how the Conceptual Framework should acknowledge that asymmetric treatment of gains (or assets) and losses (or liabilities) could be selected;
- The definition of an asset and supporting guidance;
- Recognition; and
- Factors to consider when selecting a measurement basis.
Conceptual Framework- Definitions of income and expenses — Agenda paper 10B
Chapter 4 of the Exposure Draft Conceptual Framework for Financial Reporting sets out proposed definitions of ‘income’ and ‘expenses’.
Definitions of income and expenses
The existing Conceptual Framework identifies income and expenses as the elements of financial performance, and defines those elements in terms of changes in assets and liabilities. The Exposure Draft proposed only minor changes to the definitions, to simplify them and align the terminology with that proposed for the definitions of an asset and a liability.
The majority of respondents did not express concerns about the proposal. Respondents who disagreed with the proposal stated that the proposed definitions (i) imply a primacy of the statement of financial position over the statement(s) of financial performance; (ii) give insufficient weight to the importance of income and expenses; or (iii) raise questions of whether changes in fair value are income. These respondents expressed a preference that the overriding concept for recognising and measuring performance should be based on matching of income and related costs.
The staff are recommending that the Conceptual Framework definitions of income and expenses should be those proposed in the Exposure Draft, but with additional discussion as explained next.
Further discussion of income and expenses
The ED proposed not to carry forward from the Conceptual Framework some existing discussion of specific types of income and expenses—namely gains, losses and revenue.
Some respondents did not support removing the existing discussion of types of income and expenses or, more specifically, the definition of revenue. The staff thinks that it might be useful to discuss, with the definitions of income and expenses, some of the transactions and other events that give rise to income and expenses. This approach might provide a more balanced discussion between the financial position elements (assets and liabilities) and the financial performance elements. It could also help demonstrate that the elements depict real world economic phenomena, and are not just abstract accounting concepts.
Therefore, the staff recommends that the chapter of the revised Conceptual Framework that defines the elements of financial statements should discuss some of the typical types of transactions and other events that may give rise to income and expenses but not the presentation of items of income and expenses.
The Board approved the first part (not to change the definitions of income and expenses from the ED) and no objections or comments were raised.
The Board did not approve the staff recommendations on the further discussions of income and expenses as presented in the paper. The Board decided that instead of providing a list of examples (which raised many concerns from the Board) that it would be more useful to add a reference as to where those concepts were discussed in the Conceptual Framework.
Although there some Board members expressed support for the staff recommendations, the discussion highlighted that: (i) providing a non-exhaustive list was a step too far given that only a minority of respondents asked for this information; (ii) some Board members disagreed with particular items included in the list (i.e. whether enhancement of assets could imply an impact of income or expenses; impairment of “other assets” instead of assets); (iii) whether users would clearly understand that the list was not exhaustive; and (iv) the fact that the section was already simple and it did seem necessary to add more guidance. The Conceptual Framework is not education material and should not require a list of examples.
Given the concerns raised, one Board member suggested that instead of providing a list of examples, that the staff could provide references to the sections in which the concepts are discussed. A majority of the Board members supported this suggestion which was conditional on the staff being able to work out the drafting.
Information about financial performance — Agenda paper 10C
Describing the statement of profit or loss:
The ED did not propose to define profit or loss. Instead, it proposed to describe the statement of profit or loss as the primary source of information about an entity’s financial performance for the period. It also noted that the total or subtotal for profit or loss provides a highly summarised depiction of the entity’s financial performance for the period.
The ED also proposed that the purpose of the statement of profit or loss to both: (a) depict the return that an entity has made on its economic resources during the period; and (b) provide information that is helpful in assessing prospects for future cash flows and in assessing management’s stewardship of the entity’s resources.
Some respondents expressed the view that the proposed description of the statement of profit or loss is not sufficient and asked the Board to better describe or define profit or loss. On the other hand, some respondents broadly agreed with the proposed description of profit or loss. Some of them specifically stated that defining profit or loss is neither necessary nor feasible and that high-level principles of the type proposed in the Exposure Draft are appropriate for the Conceptual Framework.
The staff is recommending that the framework describe the statement of profit or loss as the primary source of information about an entity’s financial performance for the period but should not discuss the purpose of that statement
The use of OCI
The Exposure Draft proposed that, because profit or loss is the primary source of information about an entity’s financial performance for the period, the framework should include a presumption that all income and all expenses will be included in that statement. They would be included in OCI only if they relate to assets or liabilities measured at current values and that excluding those items from profit or loss would enhance the relevance of the information in the statement of profit or loss for the period.
Many respondents thought that the proposed guidance on when income and expenses could be included in OCI is not sufficient or lacks a conceptual basis. Some thought that an entity’s financial performance is multi-faceted and the Board should consider classification and disaggregation of income and expenses comprehensively rather than focus on the binary distinction between the statement of profit or loss and OCI.
The staff note that the ED already discusses the use of the statement or profit or loss and OCI as an example of classification. The broader questions about presentation and classification of information in the financial statements will be considered by the Board comprehensively in its research project on Primary Financial Statements.
However, the staff thinks that the discussion about classification of income and expenses in the Conceptual Framework can be improved to help to emphasise that both the statement of profit or loss and OCI provide information about an entity’s financial performance for the period. In particular, the Conceptual Framework could emphasise that financial performance is multi-faceted and that this is reflected in the different types of income and expenses recognised by the entity.
Some respondents stated that a rebuttable presumption about the use of OCI is inappropriate in a framework and should be replaced by a principle.
Some respondents stated that what is meant by ‘enhancing the relevance of the statement of profit or loss’ is not clear. Also, in presenting information about financial performance the Board should also consider faithful representation of information provided in the statement of profit or loss.
Although most respondents did not object to the proposal that changes in current values of assets and liabilities could be included in OCI, some advocated a broader use of OCI whereas others advocated a narrower use of OCI.
On the use of OCI for dual measurement, some supported the use of whereas others did not support using different measurement bases for the statement of financial position and the statement of profit or loss at all.
Some respondents made alternative suggestions about the types of income and expenses that could be included in OCI. However, those suggestions were diverse and no consensus view emerged.
In the light of the feedback received on the proposals, the staff recommend that:
- that the framework discuss that only the Board can make such a decision in setting Standards and that in making such a decision the Board would need to explain why excluding a change in the current value of an asset or a liability from the statement of profit or loss would enhance the relevance or faithful representation of the information provided in that statement.
- the dual measurement example not be included in the presentation chapter. That would also be consistent with the Board’s decision to provide high-level guidance on reporting financial performance in the Conceptual Framework; and
- that the framework set out a principle for classifying income and expenses, rather than a rebuttable presumption.
- the framework explain that in rare circumstances the relevance or faithful representation of the information provided in the statement of profit or loss could be enhanced by excluding a change in the current value of an asset or a liability from that statement and including such a change in other comprehensive income (OCI).
The ED included a presumption that income or expenses included in OCI in one period will be reclassified into the statement of profit or loss in some future period, if doing so will enhance the relevance of the information included in the statement of profit or loss for that future period.
The feedback has consistently been mixed, reflecting diverse views on the use of OCI in general. However, most respondents agree that some or all income and expenses included in OCI should be recycled to the statement of profit or loss in a subsequent period.
The staff continue to think that, in principle, income and expenses included in OCI should be recycled. That is consistent with describing the statement of profit or loss as the primary source of information about an entity’s financial performance for the period. The staff is recommending that:
- the rebuttable presumption on recycling should be replaced by a principle about recycling of income and expenses.
- The framework explain:
- that income and expenses included in OCI are recycled when doing so would enhance the relevance or faithful representation of the information provided in the statement of profit or loss for that period;
- that if there is no clear basis for identifying the period in which recycling should occur, that may indicate that such income or expenses should not be included in OCI; and
- that only the Board can decide in setting Standards whether and when income and expenses included in OCI should be recycled and that in making such a decision the Board would need to explain why recycling would enhance the relevance or faithful representation of the information provided in the statement of profit or loss for that period.
The Board approved the recommendation as presented by the staff (a) the Conceptual Framework should describe the statement of profit or loss as the primary source of information about an entity’s financial performance for the period; and (b) the Conceptual Framework should not discuss the purpose of the statement of profit or loss.
The Board approved the second recommendation related to OCI, but with modified wording, combining items a) and b) to make one statement.
The Board also approved the third recommendation (recycling), but with some modifications to the wording proposed. They will combine items a) and b). Item c) will be reworded to state that items may not be recycled if there is no clear basis for identifying the period and the amount. The Board approved item d), that only the Board can decide when and whether an item should be recycled.
There were no significant comments raised on the first question.
In relation to the second question, the following concerns and suggestions were raised: (i) some Board members said they would prefer a single statement (instead of a separate P&L and OCI) but acknowledged that some compromise was necessary; (ii) some Board members suggested combining items a) and b) in the definitions proposed by the staff; (iii) others suggested specifying that the definition should relate to the period presented; (iv) the long discussion in the Conceptual Framework about OCI seemed to overplay its importance; and (v) the reference to “rare circumstances” (as stated in item b) in the staff proposal) did not seem appropriate. Most companies present items in OCI and it would be better to refer to “exception” rather than rare.
There was general agreement that only the Board can decide when an item can be classify in OCI. One Board member said that this statement need not be included in the main text of the Conceptual Framework because IAS 1 already states that an item can be recognise in OCI only if it is permitted by a Standard. He suggested that this could be noted in the Basis for Conclusions.
In relation to the topic of recycling (question 3), the following comments were raised by the Board: (i) items a) and b) should be combined because both relate to the same principle, (ii) it will be necessary to clarify that a reason for not recycling an item should not only be for not knowing the timing but also for not knowing the amount, (iii) it was not clear what was meant by relevance and faithful presentation. An example discussed given was that recycling the cumulative foreign currency translation of a foreign subsidiary when the subsidiary is sold is not, by itself, because of relevance and faithful presentation; and (iv) a discussion of how presentation can be enhanced with a better structured P&L could reduce the emphasis on the discussion about OCI.