Primary financial statements
Primary Financial Statements – Cover note – Agenda paper 21
Background
The IASB continued its discussion on the Primary Financial Statements (PFS) project. The topics for this meeting were as follows:
- Clarifying requirements for management performance measures (MPMs) (AP 21A)
- Management-defined adjusted earnings per share measures (AP 21B)
- Presentation of the cash flows of ‘integral’ and ‘non-integral’ associates and joint ventures (AP 21C)
The Staff plan to discuss the following topics at future Board meetings: (a) further development of the proposed structure of the statement of financial performance to cater for more complex scenarios; (b) principles of aggregation and disaggregation, including considering thresholds and the need for additional minimum line items; (c) ways to address the feedback received on the ‘use of performance measures’ section of the Principles of Disclosure DP; and (d) developing illustrative examples/templates for the PFS for a few industries.
Clarifying requirements for management performance measures (MPMs) – Agenda paper 21A
Background
In the January 2018 meeting, the Board asked to Staff to clarify what is meant by a ‘key performance measure’ and a measure that is ‘specified or defined in IFRS Standards’. In this paper, the Staff attempted to clarify these concepts.
Staff analysis and recommendation
The Staff recommended replacing the reference to:
- ‘key performance measures’ with ‘key financial measures of profit or comprehensive income’.
This is intended to clarify that non-financial measures, as well as measures that relate to an entity’s financial position and cash flows are excluded from the MPM disclosure requirements. The reference to ‘profit or comprehensive income’ is also intended to exclude ratios, growth rates and measures of individual income or expense line items (e.g. adjusted revenue) from the MPM requirements.
As most entities and users focus on profit/loss measures, the Staff believed that limiting MPMs to this subset of key performance measures would capture many non-GAAP measures currently used by entities without introducing excessive disclosure. - ‘a measure specified or defined in IFRS Standards’ with ‘subtotal or total that is required in IFRS Standards for the statement(s) of financial performance’.
IAS 1.85A draws a distinction between additional subtotals and those that are required in IFRS Standards. Under the revised wording, the Staff believe that additional subtotals allowed to be presented by IAS 1 would be regarded as an MPM.
Discussion
The Board did not vote on this paper. It was a 1.5-hour discussion fraught with confusion.
The Board essentially re-debated whether an MPM should be presented on the face of the statement of financial performance and how the Staff’s proposals interact with the requirement of IAS 1.85. There was significant confusion as to whether subtotals presented in accordance with IAS 1.85 would be regarded as an IFRS-required number or an MPM.
IAS 1.85 states that an entity shall present additional line items and subtotals when they are relevant to an understanding of an entity’s financial performance. As it stands, many Board members believed that management would have to prove to the auditors that an additional subtotal provides relevant information in order to present it on the face of the statement of financial performance. However, based on the Staff’s proposal, as long as an MPM is identified as a key performance measure, it will have to be presented on the face if it fits within the structure of the statement. In other words, by simply asserting that a non-IFRS number is a key performance measure, e.g. ‘profit before expected credit loss provisions’ for a bank, the number will be ‘guaranteed’ a spot on the face without management having to prove that such a measure is relevant. This undermines the status of IAS 1.85 and it is not what the Board intended. There was concern from the Board that people do not really understand how to apply IAS 1.85 and 85A in practice.
A few Board members believed that most MPMs would not fit into the structure of the statement of financial performance. Coupled with the constraints imposed by IAS 1.85A on the disclosure of additional subtotals on the face of the statement of financial performance, these Board members thought that the risk noted above is minimal, if not non-existent.
Various suggestions on how to overcome this were made although no conclusion was reached. Nevertheless, the Board generally agreed that an entity should reconcile whatever MPM is disclosed in the financial statements to the closest IFRS-number.
The Staff will reconsider their position and bring back further analysis. They will also research into how IAS 1.85 and 85A are being applied in practice.
Management-defined adjusted earnings per share measures – Agenda paper 21B
Background
In this paper, the Staff presented their thoughts on whether an entity should be allowed to disclose a management-defined adjusted earnings per share number (adjusted EPS) in the financial statements.
An adjusted EPS is a basic or diluted EPS figure whose numerator has been adjusted to exclude certain income or expenses. The denominator remains unchanged.
Staff analysis and recommendation
The Staff recommended that the Board:
- require all entities to disclose an adjusted EPS that is calculated consistently with an MPM together with supporting disclosures about:
- differences between the items excluded from the MPM and those excluded from adjusted EPS; and
- the effect of tax and NCI for any adjustments.
The Staff intend to seek feedback from members of the Capital Markets Advisory Committee and the Global Preparers Forum about the cost/benefits of these disclosures.
The Staff regards an adjusted EPS to be calculated consistently with an MPM if the items excluded from these measures are identical. This means that the numerator of the adjusted EPS must:- (a) be an MPM; or
- (b) differ from an MPM solely because it is a measure of profit presented at a different level of the statement of financial performance.
There was not much substantive discussion about this topic in the Staff paper. - permit an entity to disclose an adjusted EPS on the face of the statement of financial performance if the MPM to which it relates is also included on the face of the statement. In all other cases, the adjusted EPS should be disclosed in the notes.
This is consistent with the Board’s tentative decision to require disclosure of an MPM on the face of the statement of financial performance if it fits within the structure of the statement. - Prohibit entities from disclosing adjusted EPS measures that are not consistently calculated with an MPM.
Discussion
The Board did not discuss this paper given the issues raised in AP 21A.
Presentation of the cash flows of ‘integral’ and ‘non-integral’ associates and joint ventures – Agenda paper 21C
Background
In this paper, the Staff considered where cash flows arising from integral and non-integral associates and joint ventures should be presented in the statement of cash flows.
Staff analysis and recommendation
The discussion focused on dividends received from, cash paid on acquisitions of, and loans made to associates and joint ventures. It did not consider other non-investing types of cash flows arising between an entity and these investees (e.g. sales between these entities).
The Staff considered whether the cash flows described above should be classified as operating activities or in another category between the operating and investing categories. They rejected these alternatives because they would either contradict the proposed revised definition of investment activities (which includes dividends and interests received from associates and joint ventures irrespective of whether they are integral to the entity) or make the statement of cash flows more confusing.
Consequently, the Staff believed that all such cash flows should be included in the investing category but that a distinction be made between those arising from integral and non-integral associates and joint ventures.
Discussion
The Board approved the Staff recommendations.
A few Board members asked the Staff to clarify in the next consultative document that the cash flows from integral joint ventures and associates would not be allowed to be classified as operating cash flows because they are investing cash flows by nature. This obvious misalignment with how the related share of profits will be presented in the statement of financial performance (above the investing category) is due to the fact that the Board had made a deliberate decision not to align the definition of investing activities in the statement of cash flows with the definition of ‘income/ expenses from investments’ in the statement of financial performance.
Although a few members were attracted to the creation of another category between the operating and investing categories, they conceded that this would require much greater consideration than what the Board had intended for the statement of cash flows in this project.
