Primary financial statements

Date recorded:


The purpose of this meeting was to provide the Board with a summary of the research work that the Staff has undertaken in relation to establishing the scope of a research project on the Primary Financial Statements (PFS). The work focused on gathering evidence about perceived problems with the presentation of the PFS (excluding the statement of changes in equity pending finalisation of the Financial Instruments with the Characteristics of Equity project) and to understand stakeholders’ views on the areas of the PFS that need improvement.

The Board was not asked to make any decisions at this meeting.

Summary of research results

The results of the Staff’s research and outreach activities were summarised in the following papers:

  • (a) Agenda Paper 21A Analysis of financial statements presentation. This paper summarises the results of the Staff’s analysis on the presentation of the PFS of 25 entities. The purpose of this analysis is to help identify problems with the structure and content of the PFS.
  • (b) Agenda Paper 21B Use of performance measures. This paper summarises the results of the Staff’s analysis of the performance measures used in communications with shareholders of 25 entities. The purpose of this analysis is to help understand the implications of the use of non-IFRS information in communications with shareholders.
  • (c) Agenda Paper 21C Literature review. This paper summarises the information gathered by the Staff from a review of academic and non-academic studies that are relevant to the PFS project. The purpose of the review is to obtain evidence about existing problems and suggested solutions.
  • (d) Agenda Paper 21D Result of outreach on scope of project. This paper summarises the feedback received during outreach conducted by the Staff to help the Board define the scope of the PFS project.
  • (e) Agenda Paper 21E Ten possible approaches presented during outreach. This paper describes the possible approaches to improve the structure and content of the PFS that were presented during the Staff’s outreach activities.

Next steps

In the December 2016 Board meeting, the Staff intends to ask the Board to decide on the scope of the PFS research project. Furthermore, based on the results of the research performed, the Staff intends to ask the Board questions along the following lines in the next meeting:

Statement(s) of financial performance (SoCI)

(1) Should the Staff explore improvements to the structure of the SoCI? If so, should they explore the following:

  • (a) requiring additional subtotal(s), e.g. earnings before interest and tax (EBIT), operating profit?
  • (b) removing some of the options for presentation of income and expenses in existing Standards?
  • (c) requiring separate presentation of non-recurring, unusual or infrequently occurring items?
  • (d) incorporating commonly used performance measures into Standards?
  • (e) providing additional guidance on the use of performance measures?
  • (f) better ways to communicate information about other comprehensive income?

Statement of cash flows (SoCF)

(2) Should the Staff explore improvements to the SoCF? If so, should they explore the following:

  • (a) eliminating the options currently available in IAS 7 for the classification of some cash flows (i.e. interest and dividend cash flows)?
  • (b) more closely aligning operating cash flows in the SoCF and operating profit in the SoCI?
  • (c) addressing the relevance of the SoCF for financial institutions?

Statement of financial position (SoFP)

(3) Should the Staff explore improvements to the SoFP? If so, should they explore aligning the structure of the SoFP with the other PFS?

Financial statements format

(4) Should the Staff explore creating templates or formats for the presentation of the PFS? If so, should they consider providing formats or templates for some industries (e.g. for non-financial, bank, insurance or real-estate companies)?

Segment reporting

(5) Should the Staff explore requiring more line items in the segment reporting note (e.g. introducing some minimum items or aligning segment reporting with a revised SoCI)?

Discussion of Agenda Paper 21A (Analysis of financial statements presentation)

There was significant discussion on the lack of disaggregation in the financial statements, and also whether the disaggregated information should be presented on the face of the PFS or in the notes. The Board raised the following points:

  • IAS 1 required an entity to present additional line items when such presentation was relevant to an understanding of the entity’s financial performance and position. The Staff should investigate what went amiss in the communication between auditors, preparers and regulators that this explicit requirement in IAS 1 was not complied with.
  • Feedback received indicated that there was a pressing need for the Board to clarify when and how it was going to address the issue of disaggregation in the financial statements. The Staff noted that they would explore this in the PFS project.
  • The Staff should analyse the financial statements of entities prepared using IFRS taxonomy, and see whether their financial statements were more structured and comparable across entities than that shown in the Staff’s existing analyses.
  • The Staff should understand why entities chose to disclose the way they did in considering what improvements were needed. A Board member referred to Entity E in paragraph 15 of the agenda paper and said that there could be a valid reason why that entity presented only two line items in arriving at operating profit.
  • A few Board members cautioned against giving a list of line items that should be presented when addressing the level of disaggregation that was required. This was because different users from different industries wanted different things.
  • A Board member noted that what an entity disclosed was largely influenced by what its peers were doing. This in turn was affected by how the users were reacting to the disclosures made by the peers, which in turn prompted regulators to question any differences in presentation and disclosure between the peers. This peers-users-regulator triangle indicated that the inconsistencies could stem from jurisdictional practices and/or requirements. The Staff confirmed this observation and said that they noted more consistency between entities within each jurisdiction. The Staff noted that jurisdictional-specific practices and guidance played a role in creating these differences. Another Board member said this should not be an excuse for inconsistency when the entities were all applying IFRS. It was suggested that the Staff work with international regulators on what was meant by IFRS compliant in relation to the structure and format of PFS.
  • Somewhat related to disaggregation, some Board members noted that many users wanted consistency in what was included in a subtotal. This was because many users were not sophisticated analysts or investors and did not have the resources (time or expertise) to re-arrange the numbers to suit their needs.
  • The Staff should research into whether it mattered to users whether the disaggregated information was presented on the face of the PFS or in the notes, and the reasons for why it mattered and how much it mattered to them.
  • Segment reporting – as the Board had just finished the post-implementation review (PIR) of IFRS 8, the Staff should consider the feedback there and reassess what should be done in the PFS project. However, a Board member cautioned against doing too much on IFRS 8 in the PFS project unless it was absolutely necessary lest it should be viewed as trumping the decisions approved on the PIR.

Discussion of Agenda Paper 21B (Use of performance measures)

The Board made the following observations:

  • The Staff should be cautious not to associate the presentation of alternative performance measures (APMs) with a deficiency of IFRS as a whole or that IFRS was lacking in relevance. This was because entities presented APMs as they often depicted a more favourable picture for the entity. Another reason could be a change in users’ appetite and information needs from when IAS 1 was first issued. The Staff was asked to look further into this.
  • Even if the Standards were to prescribe more performance measures, it would not stop entities from presenting other APMs. Since the Board could not stop entities from doing that, a more important point that the Staff should focus on was how to make sure the APMs did not mislead users.
  • A couple of Board members cautioned against specifying how to calculate the APMs citing EPS as an example. IAS 33 provided detailed calculation guidance but entities still presented ‘adjusted’ EPS numbers albeit with a reconciliation on how the adjusted numbers were derived. These Board members believed that entities would make adjustments as they saw fit to the defined elements of any prescribed calculation which would defeat the purpose of providing guidance in the first place. Accordingly, they suggested that the Staff think of a more high-level approach to addressing the proliferation of APMs, e.g. providing guidelines on what should and should not be done, rather than trying to specify too much.

Discussion of Agenda Paper 21C (Literature review)

The session was mainly devoted to a staff member sharing her insights on the literature review. In addition, the Board made the following observations:

  • The literature review indicated that allowing a choice in where to present interest expense and income in the SoCF hindered comparability. This seemed to contradict with why IAS 7 allowed this choice in the first place, which was to cater for the different circumstances of different entities, as requested by users. The Staff responded that the comment was made in the context of entities not providing enough disclosures on where they have included interest expense/income and thus the users could not make the necessary adjustments to suit their needs.
  • In assessing the costs of implementing any proposed changes, the Staff should be careful not to assume automatically that a change in presentation would be expensive. For example, mandating interest expense to be presented as, say, operating activities would impose no additional costs on preparers; in contrast, mandating the direct method of presenting the cash flows from operations might impose significant costs on entities to make potential system changes. The Staff should assess costs/benefits on a case-by-case basis.
  • The Staff should research further into why non-GAAP measures were considered more relevant than GAAP measures. Was it because users needed a performance matrix that was more granular than net profit after tax? Why was this the case?
  • Why did investors no use OCI?

Discussion of Agenda Paper 21D (Result of outreach on scope of project)

The Board shared the feedback received from the outreach meetings they attended and made the following observations:

  • In order to strike a balance between giving preparers the flexibility to ‘tell their own story’ and the desire for comparability across different entities, one Board member suggested exploring the idea of allowing entities to tell their stories on the face of the PFS, and supplementing that with a standardised note disclosing various items prescribed by the Board. Nevertheless, the Chairman warned against giving too much flexibility in the PFS.
  • One Board member suggested that one could bring more of a management view into the PFS by the use of subtotals. This would also improve confidence in, and credibility of, management. However, it was noted that some other constituents were sceptical about including more subtotals. If the Board wanted to go that route, it had to be clear on what should be included and excluded from a each subtotal.
  • Another Board member noted that even though investors had their own methodology of analysing the financial statements already, providing a standardised template might still be helpful.
  • Many respondents did not find OCI useful because they thought it a black box and were not sure of what it represented. It was suggested that the Staff look at revising the name of ‘other comprehensive income’ and what should be recognised in it.
  • Respondents had mixed views regarding the recurring v. non-recurring item distinction on the SoCI. Although it sounded good in theory, they were concerned that management might not have correctly classified whether something was recurring or non-recurring, thus defeating the purpose of the disclosure.
  • One Board member advocated that the PFS project should focus on performance reporting, i.e. whether more, and if so what, line items were needed, disaggregation, and how to integrate APMs into the FS. He disagreed with the seemingly endless increase in scope of the project to discuss items that had been discussed previously and frankly thought that it was a waste of time.

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