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Primary financial statements

Date recorded:

Primary Financial Statements – Agenda Paper 21


The Board is exploring potential changes to the structure and content of the primary financial statements, with a focus on the statement(s) of financial performance. A Discussion Paper (DP) or Exposure Draft (ED) is expected in 2019.

At this meeting the Board will discuss improvements to the level of aggregation and disaggregation of line items in the financial statements, criteria to help entities determine whether to analyse expenses by function or by nature and outstanding issues in relation to management performance measures (MPMs) and earnings per share (adjusted EPS) from the April 2018 Board meeting.

The Board will also be provided with an overview of the results of the outreach to national standard-setters (NSS) in relation to work on aggregation and disaggregation. This outreach helped form the basis of staff recommendations.

Additional proposals on aggregation and disaggregation - AP21A

Staff analysis

Three issues are addressed in this paper:

  1. What could be the characteristics for aggregating (or disaggregating) items in the financial statements and should any characteristic be prioritised?
  2. Should the Board consider introducing quantitative thresholds to promote more disaggregation of groups of items?
  3. Should the Board develop a principle for determining the location of financial information in the financial statements?

Staff analysed existing guidance in IAS 1 Presentation of Financial Statements, guidance in other IFRS Standards and guidance from other standard-setters to develop a non-exhaustive list of characteristics for aggregation or disaggregation (see staff recommendations below). A consolidated list was thought useful as it promotes a better understanding of what makes items similar or dissimilar from one another, providing better guidance for preparers in making judgements about aggregation and disaggregation. Previously the Board (March 2017) has agreed to use nature and function as characteristics for aggregation/disaggregation and these should take priority. No further characteristics should be prioritised as it would be inflexible and the relative importance of each characteristic may depend on facts and circumstances.

There were concerns raised by ASAF and users around the introduction of quantitative thresholds for disaggregation.  Concerns included that thresholds may override materiality judgements and developing thresholds relevant to all entities would be challenging. Alternatively, a rebuttable presumption for disaggregation could be used in order to allow entities to continue to apply materiality (i.e. no disaggregation when the resulting information would not be material). As another alternative, examples could be developed of when it is not acceptable to disclose large residual balances.

The staff also considered whether there should be a principle to help entities decide what information should be presented on the face of the primary financial statements and what information should be disclosed in the notes. The staff think that the location of information should depend on the different roles of the primary financial statements and the notes.

Staff recommendations

The staff recommend the Board:

  1. Includes in IAS 1 the following non-exhaustive list of characteristics that could be used as a basis for disaggregating or aggregating financial information:
    • Nature
    • Function (ie how an item is used)
    • Measurement basis
    • Size
    • Liquidity (including current, non-current)
    • Duration and timing
    • Persistence (i.e. frequency, recurring or non-recurring nature)
    • Uncertainty, subjectivity or risks associated with an item;
    • Type (for example, of product, service, production process, financial instrument, funding arrangements, customer or supplier for products and services or of methods used to distribute products or provide services)
    • Geographical location or regulatory environment
    • Held for disposal or held for sale
  2. Prioritises the characteristics of function and nature only allowing preparers to select other characteristics to use on the basis of the entity’s own facts and circumstances
  3. Does not introduce thresholds or rebuttable presumptions for aggregation or disaggregation but instead develops examples of disaggregation of groups of items that could be used to illustrate when it is not acceptable to disclose large residual or ‘other’ balances
  4. Includes a principle for determining the location of financial information in the primary financial statements or the notes that is based on the role of the primary financial statements and the role of the notes suggested in the Discussion Paper Disclosure Initiative: Principles of Disclosure.

Board discussion

Characteristics for aggregation/disaggregation

One Board member agreed with the concept of a complete list but asked for the characteristics to be grouped systematically. For example size and persistence are part of nature and should be grouped as such.

Several Board members did not agree with adding a list of characteristics. There were concerns that including a list in IAS 1 Presentation of Financial Statements may result in confusion for preparers and mislead them to think that the specific characteristics in each Standard may be overridden. Additionally it was noted that there should not be discretion around which characteristics are relevant in all scenarios.  

The Vice-Chair did not object to the recommendation but asked for the criteria to be put in to context so it was clear when each should be used to avoid the risk of preparers using them in the wrong situations. Another Board member thought that the table in Appendix B provided useful context for the criteria.

One Board member expressed concern that it was not clear what problem they were trying to solve.  Staff clarified that preparers are not disaggregating beyond nature or function despite balances within a line item having different risks or characteristics. The Board member suggested that the proposal should be more direct in achieving this aim.

The Board were split on this recommendation but it was suggested that staff amend the proposal to clarify that it will not override other standards and to add context in order to support application of the list. It was noted that examples may help to encourage application but will not be required for each criteria.

Prioritisation of Characteristics

This recommendation was not discussed as the Board voted against recommendation a.

Thresholds to promote disaggregation

The Vice-Chair opened the discussions by stating that she would support a quantitative threshold. This would help preparers to understand the level of aggregation expected and would not necessarily undermine the application of judgement. It was noted that qualitative requirements only may not be sufficient to facilitate behavioural change and a threshold could be indicative in the basis of conclusions.

Another Board member suggested that a threshold could be restricted to a category representing ‘Other’ which would not always have items with the same characteristics or risk. A threshold could encourage preparers to think again if, after they have disaggregated the balances, there was a material ‘other’ balance remaining. Another Board member suggested that thresholds could apply to any line items with non-descriptive labels.

Some Board members agreed with the recommendations as thresholds will require less judgement from senior management of entities as it will be seen as a calculation exercise rather than a materiality judgement. It was suggested that examples could be used to illustrate disaggregation rather than thresholds. Additionally, the Disclosure Initiative project is aiming to help preparers to understand the concept of materiality better and to change behavior. A threshold could send the wrong message that materiality is only quantitative and not also qualitative.

The Vice-Chair noted that if there was less input from senior management there would still be more disaggregation as a threshold would be a catalyst for change.

One Board member agreed with the recommendation. They asserted that it would be impractical for a large consolidated entity to obtain sufficient disaggregated information from subsidiaries for all balances that may potentially be above the threshold. Were a balance to exceed the threshold in a particular year it would not be possible to revert back to all subsidiaries to provide further reporting for disclosure purposes.  

One Board member said that without the requirement for thresholds there can be significant diversification in practice as some regulators will require thresholds and some will not. When they are required by local GAAP, but not IFRS, information can be lost when preparing IFRS accounts. 

Principle for location

The Chair suggested that the phrase ‘sufficiently material’ used in the paper be corrected to “material”.  No other substantial comments were made.

Board decisions

7 Board members voted in favour of recommendation a with the Chair voting against. Hence the recommendation was rejected.

7 Board members voted in favour of recommendation c. with the Chair voting in favour. Hence the recommendation was supported, i.e. no thresholds

4 Board members voted in favour of recommendation c. - examples

The Board agreed unanimously that staff should explore creating authoritative guidance to encourage entities to disaggregate.

14 Board members voted in favour of recommendation d.

Staff proposals on analysis of expenses by function or by nature – AP21B

Staff analysis

The main objective of using a particular methodology for an analysis of expenses (ie the ‘function of expense’ method or the ‘nature of expense’ method) is to produce useful information about an entity’s financial performance. The focus for deriving criteria was on identifying factors that could help an entity decide which methodology provides the most useful information for users, partly based on feedback from the Discussion Paper Preliminary Views on Financial Statement Presentation.

The factors proposed are:

  • Which method provides the best information about the key components or drivers of profitability
  • Which method most closely matches how management report internally to the board or key decision makers and the way the business is run
  • Peer industry practice
  • Whether the allocation of expenses to functions would be arbitrary. If this is the case, then a ‘by nature’ method should be favoured.

IAS 1:104 requires an entity using the ‘function of expense’ method to disclose additional information on the nature of expenses, including depreciation and amortisation expense and employee benefits expense. IAS 1:105 explains that additional disclosure of the nature of expenses is required when the function of expenses method is used because by-nature information is useful in predicting future cash flows.

Research indicates that IAS 1:104 is not being applied consistently and may be unclear. ASAF members noted that only some by-nature information is provided, in line with IAS 1, and that preparers may be unable to provide by-nature information due to system constraints or difficulty in attributing expenses to a specific category. ASAF members suggested the Board consider giving entities more flexibility in the way they provide additional information by nature.

In September 2017 the Board tentatively decided to retain the requirement to provide additional information by nature in order to avoid potential loss of information when presenting information using a by-function methodology.

Staff identified different approaches for providing additional information by nature:

  • Approach A (‘flexible’ approach): require information by nature to be disaggregated for each functional line presented and allow entities flexibility to decide which natural components should be disclosed separately
  • Approach B (‘standardised’ approach): require information by nature to be disaggregated for each functional line presented. This approach would specify which natural components should be disclosed separately for specific functional lines
  • Approach C (‘mixed basis’ approach): require additional information by nature but do not require this information to be attributed to functional lines

The staff reject Approach C as it does not give the relevant information that the Board is trying to avoid losing. They also reject Approach B as identifying specific functional lines and natural components associated to those lines could be challenging and it is too rigid. Approach A is proposed because it provides useful information, is flexible and is less likely to be challenging to develop.

Staff recommendations

The staff recommend the Board:

  • Add the factors listed at (a)–(d) above to IAS 1 for consideration of whether a by-function or by-nature methodology is most useful
  • Require the ‘flexible’ approach; information by nature to be disaggregated for each functional line presented and flexibility to decide which natural components should be disclosed separately

Board discussion

Addition of Factors

One Board member had concerns over the equality of the four factors as the first factor is around what is the ‘best information’ and so this should take priority. Staff clarified that that the provision of useful information is the top priority and these four factors are indicators to consider. Another concern was that the concept of arbitrary within factor four appears to be black and white and without context. Staff clarified that arbitrary is where the degree of judgement is such that it is not a faithful representation and is too uncertain. This is in line with the use of the concept in current standards.

One Board member supported the recommendations and considered that it would be helpful to articulate in the basis of conclusions that they represent a move from free choice to having to select the most appropriate outcome of the two approaches.

Flexible approach

One Board member thought that option B would be welcomed by analysts but was too onerous for small and medium companies. Option A appeared to be too flexible and some items would have to be mandatory if that option were selected.

One Board member agreed with the recommendation but suggested that option A should be the ‘principles’ approach as it requires entities to apply judgement rather than simply being flexible.  

Some Board members supported option C as it is the simplest way to provide users with information and is more clearly defined than the current requirements. Furthermore, option A requires more information than is required in reporting by nature and it will not always be practical to allocate costs to comply with the requirements. It was felt that option C allows for more comparability and would also allow users to see total costs by nature which would not be visible under option A.

Board decisions

The Board unanimously voted in favour of recommendation (a).

In relation to recommendation (b) 10 Board members voted in favour of approach (c), the mixed basis approach.

Outstanding issues on management performance measures (MPMs) and adjusted EPS – AP21C

Staff analysis

The Board, at the April 2018 meeting, asked staff to bring a recommendation to expand the list of subtotals in IAS 1:81A so that these subtotals were not subject to additional MPM disclosure requirements.

Staff identified commonly used subtotals, rather than developing a principles approach, for which additional disclosure would not be useful for users. These subtotals are profit before tax, profit from continuing operations, gross profit and EBITDA. These subtotals have been identified as they are defined implicitly in IFRS Standards (profit before tax, profit from continuing operations) or could easily be defined (gross profit). EBITDA is not discussed further in this paper. It is noted that these subtotals may be in a separate paragraph as they will not be required by IFRS.

In relation to presentation of multiple EPS disclosures where multiple MPMs are identified staff have considered to approaches, both of which they consider to be appropriate:

  1. Where there are multiple MPMs which have identical adjustments, aside from additional adjustments that might be made because one MPM is further down on the statement of financial performance, e.g. adjusted EBIT and adjusted PBT, EPS disclosures could be provided for adjusted PBT only as this would provide the information required for adjusted EBIT also.
  2. Instead of requiring adjusted EPS for each MPM, disclosure of the effects of tax and NCI separately for each of the differences between the MPM and the most directly comparable subtotal/total in IAS 1:81A could be required. This would provide relief from a full adjusted EPS calculation and avoid the need for entities to disclose adjusted EPS for its MPMs.

Staff support option a. as users would prefer to see adjusted EPS in the financial statements and this is already provided by some preparers. Furthermore, the EPS disclosure would not be an additional burden and if multiple MPMs do not have identical adjustments then multiple EPS figures should be presented. A simple combined reconciliation could be used for approach a. (see Appendix C of the staff paper). 

Staff recommendations

The staff recommend the Board:

  • Add profit before tax, profit before continuing operations and gross profit (defined as revenue less cost of sales) to the list of subtotals for the purpose of MPM disclosure requirements. This would mean if one of these subtotals were identified as an MPM the additional disclosures would not be required or that they can be used as the most directly comparable subtotal for an MPM reconciliation.
  • Permit or require an entity to provide adjusted EPS disclosures for adjusted profit before tax only where multiple MPMs have identical adjustments.

Board discussion

Addition of subtotals to MPM list

One Board member clarified that the subtotals would be added to the list of subtotals that would be permitted, but not required, by IFRS for the purposes of MPM reconciliation. The subtotals will not be added to IAS1:81A as this would mean they are required. Staff agreed that this is the case and will consider this further in drafting to ensure it is not too complex on request of the Chair.

Another Board member supported the recommendation in order to support the effectiveness of reconciling MPMs to the nearest IFRS defined subtotal. Additionally, one Board member suggested that profit before tax and profit from continuing operations should be required IFRS subtotals as these are comparable. Gross profit should not be required but an accounting policy of how it is formulated should be required.

One Board member was in favour of the proposal but concerned that the definition of gross profit as revenue less cost of sales may not be effective for service entities.

One Board member supported the direction of the proposal but suggested that there should be a more generic formulation of when reconciliations are not required if MPMs are made from clear IFRS components rather than a defined list. Furthermore, there was concern that if gross profit were included as an IFRS measure users may be misled as to the comparability of cost of sales. The Chair echoed this concern.

Another Board member suggested that gross profit is ill-defined so should not be included but operating profit could be included instead to simplify a reconciliation.

Adjusted EPS disclosures

The majority of Board members did not support the potential for having multiple adjusted EPS figures in the financial statements.

Some Board members preferred proposal 19(b)—disclosure of the effects of tax and NCI separately for the adjusting items between MPM and the most directly comparable IAS 1 Presentation of Financial Statements subtotal or total. One Board member supported this proposal on the basis that the purpose of providing MPMs is for users to understand how management assess the business and requiring preparers to present EPS figures that they do not use does not align with that objective. Another Board member also agreed on the basis that 19(b) eliminates the need for multiple EPS and provides information for users to compute EPS if they wish to. It would not preclude preparers from providing an adjusted EPS figure if they chose to.

One Board member suggested that in order to provide relief from multiple EPS figures the Board could mandate that only one adjusted EPS figure is permitted and this should be the one that provides most useful information to users.

Some Board members supported the use of the table in Appendix C to present information required for proposal 19(b).

One Board member expressed concern around whether only the numerator of the EPS calculation is adjusted or whether users expect disclosure around denominator adjustments as well which would not be covered by the proposal in 19(b). Staff clarified that IAS 33 Earnings Per Share does not allow adjustments to the denominator.

Board decisions

13 Board members voted in favour of recommendation (a)

13 Board members voted in favour of recommendation 19(b) – disclosure of the effects of tax and NCI separately for the adjusting items between MPM and the most directly comparable IAS 1 Presentation of Financial Statements subtotal or total.


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