Primary financial statements

Date recorded:

Cover note – Agenda paper 21


The IASB continued its discussion on the Primary Financial Statements (PFS) project. The topics for this meeting were as follows:

  • Presentation of an investing category in the statement(s) of financial performance (AP 21A)
  • Definition of finance income/expenses (AP 21B)
  • Better ways to communicate other comprehensive income (OCI) (AP 21C)

The Staff plan to discuss the following topics at future Board meetings: (a) application of the proposals to other types of entities, e.g. banks; (b) developing guidance on the use of management performance measures and alternative EPS measures; (c) principles of aggregation and disaggregation, including the need for additional minimum line items; (d) developing illustrative examples/templates for the PFS for a few industries; and (e) targeted improvements in the statement of cash flows.

Presentation of an investing category in the statement(s) of financial performance – Agenda paper 21A


In this paper, the Staff refined certain aspects of the investing category to address some of the concerns raised by the Board members in the September 2017 meeting.

Staff analysis and recommendations

1. Refining the definition of investing income and expenses

The Staff originally defined investing income and expenses as those arising from assets and liabilities that do not result in significant synergies. Some Board members asked the Staff to clarify what they meant by ‘synergies’.

The Staff believed that for investing activities, each individual investment can generate a return to the entity on its own. In contrast, for operating activities, income is generated from a combination of different resources and inputs, and no single item within that combination is capable of generating the return shown in profit or loss.

Accordingly, the Staff proposed a revised definition: ‘investing income and expenses are income/expenses from assets that generate a return for the entity individually and largely independently from other resources held by the entity.’

2. Providing a list of items that would be included or excluded from the investing category

The Staff continued to recommend that the Board adopt a principles-based approach to defining investing income and expenses. However, at the suggestion of a few Board members at the September meeting, the Staff tentatively recommended providing a list of items that would typically be included or excluded from the investing category.

Examples of inclusions:

  • interest income and other income on financial assets that is not finance income (i.e. not covered by the ‘I’ of EBIT – see AP 21B);
  • share of profit or loss of associates and joint ventures (see point 3 below);
  • fair value changes and rental income on investment properties if they do not form a significant part of an entity’s operations;
  • income/expenses from speculative investments.

Examples of exclusions:

  • income from excess cash. This would be included as part of finance income/expense (i.e. it would form part of the ‘I’ of EBIT – see AP 21B).

3. Including the share of profit or loss of all associates and joint ventures in the investing category

The Board had questioned at previous meetings whether a distinction should be drawn between associates and joint ventures that are integral to an entity’s operations from those that are not. Some Board members asked the Staff to analyse whether it would be plausible to distinguish between these two types of investments and to present profit or loss from associates and joint ventures that are integral to an entity’s business outside the investing category, potentially with other income and expenses from operations.

On balance, the Staff believed that it would be more appropriate to present the share of profit or loss of all associates and joint ventures in the investing category. Not only would this enhance comparability and consistency in presentation, the Staff also believe that the simplicity of this approach outweighs the advantages of separating integral from non-integral investments. If the Board were to require such a distinction, it would need to create a list of factors that entities would consider to identify integral associates and joint ventures. However, it would be challenging to ensure the list is complete or that it would be applied consistently by all entities in practice.

4. Renaming the investing category as ‘income from investments’

This recommendation was made in response to some Board members’ suggestion that a different term should be used to avoid confusion with the well-established notion of investing activities in IAS 7, especially because the term envisaged for the income statement incorporates more items than that under IAS 7.

5. Labelling the subtotal above the ‘income from investments’ section as ‘operating profit’

In light of the proposed revised structure of the income statement, the Staff believed that the subtotal above investing and financing income/expenses effectively represent the operating profit of an entity, and recommended labelling it as such without defining the term specifically (considering all the past failed attempts at doing so).


The Board tentatively approved recommendations 1, 2 and 4 (subject to broadening the description of ‘income from investments’ to include negative amounts e.g. impairments and losses from investments). The Board was split seven-seven on issue 3 and only four members tentatively supported recommendation 5.

Most of the time was spent discussing issue 3. Those who supported the single location approach believed that it would achieve consistency and comparability between companies, which is the main objective of the EBIT subtotal. One member noted that the Board had set a precedent in promoting consistency and comparability over whether or not a joint venture is integral to an entity’s operations when it removed proportionate consolidation as an option to account for joint ventures when it finalised IFRS 11. Given that the equity method is fundamentally different from consolidation, the share of profits/losses from equity accounted investments is by nature different from operating income and expenses, regardless of whether an associate or a joint venture is integral to an entity’s operation.

A few Board members also observed that most users prefer excluding profits/losses from equity accounted investments from EBIT so as not to distort any margin analysis. In addition, they believed that the reluctance to show equity accounted profits/losses as investment income could have stemmed from a widely held perception that investment income is ‘incidental’ income and that it may not be sustainable. A way to help dispel what in their view is a misconception would be proper investor education about the interaction between operating and investing profits.

In contrast, those Board members who supported distinguishing between integral and non-integral associates and joint ventures believed that these investments are economically very different. Combining their results into one line item would not reflect the underlying business structures of different entities, thereby undermining the usefulness and comparability of the EBIT subtotal across entities. Furthermore, these Board members believed that as long as an entity clearly discloses where it has included the share of equity accounted profits/losses, users would be able to make whatever adjustments they need. A couple of Board members were also concerned that the single location approach would push entities into using more non-GAAP measures.

In light of the mixed views, the Chairman believed that a thorough analysis of the pros and cons of both approaches should be exposed in the discussion paper to solicit stakeholder comments.

On issue 5, the Board generally believed that they should avoid the emotive term ‘operating profit’. A few members also commented that it is premature to agree on a name for the subtotal before the Board has agreed on the more fundamental issues of what should be included in the investing category and in the ‘I’ of EBIT.

Definition of finance income/expenses – Agenda paper 21B


In this paper, the Staff refined the composition of finance income/expense, i.e. the composition of ‘I’ in EBIT, in response to comments received from Board members in previous meetings. The Staff also followed up on the revised definition of ‘financing activities’ which was proposed in AP 21B to the June 2017 Board meeting but not discussed by the Board then.

Staff analysis and recommendations

1. Refining the composition of finance income/expense (the ‘I’ of EBIT)

The Staff now recommended the following simplified composition of finance income/expense:

  • a) interest income from cash and cash equivalents calculated using the effective interest method;
  • b) other income from cash, cash equivalents and financing activities;
  • c) expenses from financing activities;
  • d) other finance income; and
  • e) other finance expenses.

This simplified composition avoids the use of the term ‘capital structure’ and other ambiguities inherent in the previous version of the definition. The distinction between (a) and (b) is needed because of the consequential amendment to IAS 1.82(a) by IFRS 9 which requires separate presentation of interest revenue calculated using the effective rate.

2. Using cash and cash equivalents as a proxy for excess cash

The Staff confirmed their previous recommendation of using cash and cash equivalents as a proxy for cash and temporary investments of excess cash (collectively ‘excess cash’) in the definition of finance income/expense for the following reasons:

  • a) there is no single solution that could fit all entities, given the diverse ways and reasons in which entities hold and manage cash.
  • b) most preparers and users view cash and temporary investments as financing in nature.
  • c) having a broader definition of excess cash, e.g. including liquid investments and financial assets, is problematic. This is because ‘liquid investments’ is not defined. Whilst ‘financial assets’ is defined, many of these assets are not temporary investments that are held to service debt, i.e. the investing or operating sections of the income statement may be a better fit for these items.
  • d) ‘cash and cash equivalents’ is defined in IAS 7 and the term seems to be relatively consistently applied in practice.
  • e) using this term would help achieve alignment with IAS 7 because cash and cash equivalents are outside the investing category in the statement of cash flows.

3. Clarifying what constitutes financing activities

This analysis is extracted from the June 2017 Board paper AP 21B.

This issue was considered by the IFRS Interpretations Committee (IC) in March 2013 but no conclusion was reached because the IC thought the issue was too big for it to address. The Staff’s recommendation to the IC then was to clarify that the nature of a financing activity involves:

  • a) the receipt or use of a resource from a provider of finance (or provision of credit);
  • b) the expectation that the resource will be returned to the provider of finance; and
  • c) the expectation that the provider of finance will be appropriately compensated through a finance charge.

The Staff recommended the same clarification to the Board now.

Based on the above, the Staff believed that the more contentious liabilities e.g. net defined benefit liabilities, decommissioning liabilities, and other long-term provisions such as warranty provisions, would not be considered as financing activities. This is because they do not involve the receipt of a resource from a provider of finance that will be subsequently returned to the finance provider. Accordingly, expenses on these liabilities would not constitute expenses from financing activities (see point 1(c) above). However, they would be included in ‘other finance expenses’ (point 1(e) above) and so would still be considered as part of finance income/expense, and thus be reflected below EBIT.


The Board approved all of the Staff recommendations.

With regard to issue 1, the Board asked the Staff to use more meaningful descriptions for each of the line items comprising finance income/expense and to provide guidance on the types of income/expense that each line item would include.

On issue 2, one Board member believed that the notion of excess cash should incorporate more than just cash and cash equivalents. Another member believed that entities should be given the flexibility to define what is excess cash based on facts and circumstances. He cited the example of an entity holding cash in excess of the amount that will be needed to settle financing liabilities. In such cases, the interest earned on the excess cash would lead to a negative ‘I’ for EBIT, which is counter-intuitive.

On issue 3, some Board members suggested some fine-tuning to the proposed clarification of what constitutes financing activities.

Better ways to communicate other comprehensive income – Agenda paper 21C


At the December 2016 Board meeting, the Board tentatively decided to focus on improving the presentation of items in OCI, and not to reconsider the distinction between OCI and profit or loss or when reclassification of OCI items to profit or loss should be required.

In this paper, the Staff considered minor labelling changes to the two categories of OCI.

Staff analysis and recommendations

The Staff proposed to rename OCI items that:

  • will not be reclassified subsequently to profit or loss as ‘remeasurements reported outside profit or loss’; and
  • will be reclassified subsequently to profit or loss as ‘income and expenses to be included in profit or loss in the future’.

They further recommendd inserting a subtotal called ‘income after remeasurements reported outside profit or loss’ between the two categories.

Although there is no significant demand by stakeholders for such changes (what stakeholders want is a more fundamental and conceptual reconsideration of what OCI is, why items are recognised in OCI and the reclassification requirements), the Staff believed that this will help clean up the OCI section and promote user understanding.

In addition, the Staff recommended that the Board develop investor education material to enhance awareness of the importance of OCI and how it could affect their analysis of an entity’s financial performance. This is because the Staff have observed that currently most investors ignore OCI when performing financial analysis.


The Board narrowly agreed with renaming the two categories of OCI but rejected inserting a subtotal after items of OCI that will not be subsequently reclassified to profit or loss. No Board member supported developing investor education material on how to use OCI.

The Staff clarified that the renaming of the two categories of OCI would involve abandoning the use of the term ‘other comprehensive income’. The Chairman’s reactions indicated that this was by no means clear from the Staff paper. A couple of Board members were also concerned about how this would interact with the forthcoming Conceptual Framework as that document refers to OCI on many occasions. The Staff have yet to consider what the combination of the two renamed categories will be called and also what the title of the statement of profit or loss and other comprehensive income will be after the renaming exercise. Some Board members were not convinced that the renaming would make anything difference practically on users’ perception of OCI. Also, ‘income and expenses to be included in profit or loss in the future’ is misleading as the amounts are subject to change and the full amount may not end up being recycled to profit or loss (e.g. gains on cash flow hedges being reduced with losses in the future).

The Board did not agree with adding a subtotal as that might provoke old discussions about what should be included in OCI and whether or not the items should be recycled to profit or loss, which is not the purpose of this project.

With regard to the proposed development of investor education materials, the Board observed that this is not their role and that they should seek out partners whose task is to educate investors on these matters.

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