This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

Primary financial statements

Date recorded:

Scope of proposals for subtotals in the statement of profit or loss (Agenda Paper 21A)

Background

At its June 2018 meeting, the IASB discussed how its tentative decisions could be applied to financial entities. It did not make any decisions but asked the staff to analyse whether the proposals needed to be adjusted for financial entities, starting with proposals for subtotals in the statement(s) of financial performance.

Profit before finance income/expenses and income tax (EBIT)

The Board has tentatively decided to require non-financial entities to present an EBIT subtotal based on the understanding that it provides useful and comparable information for the users of financial statements. The staff’s research has indicated this is not the case and consequently, they are proposing exemptions for some entities and alternative presentation requirements.

The staff have three approaches for exempting entities from the requirement to present an EBIT subtotal:

  1. Allow entities to make their own assessment of whether the subtotal provides useful information, with possible accompanying disclosure requirements
  2. Define entities that are not required to present the subtotal
  3. Describe entities that are not required to present the subtotal

Alternative requirement for entities not required to present EBIT

The staff believe that all entities, regardless of whether they present an EBIT subtotal or not, should be required to present other finance income and other finance expense as separate line items outside the business profit category. The exception would be insurance finance expense arising from insurance contract liabilities, which the staff recommends should be presented within business profit. 

Income and expenses from investments

The IASB has tentatively decided to require entities to present a category for income/expenses from investments. However, for some entities, presenting income and expenses from investments below business profit is unlikely to provide useful information. The staff are recommending that entities whose main business is to earn returns from investments not be required to present this sub-total.

Alternative requirement for entities that are not required to present a subtotal of profit before investing, financing and income tax

The staff propose that entities that are not required to present a subtotal of profit before investing, financing and income tax, could present income/expenses from investments either:

  • in the entity’s main business activities in business profit from consolidated entities (and all income/expenses outside the entity’s main business activities outside the business profit category)
  • in business profit from consolidated entities

Investing and financing entities

The staff propose that entities whose main business activities include both investing and financing activities, such as banks and bank-insurers, not be required to present both a subtotal from profit before finance income/expenses and income tax and a subtotal of profit before investing, financing and income tax.

This type of entity could be subject to requirements that are consistent with their main activity. Therefore, specific exemptions would apply if the entity’s main activity is weighted towards financing or investing. If the entity’s main activity is neither investing nor financing, then the staff propose that they present all subtotals and apply the Board’s tentative decisions for non-financial entities. The staff also propose an alternative approach that is reflective of the entity’s different main business activities. Under this approach, all proposed subtotals are still required but individual line items are moved to the business profit subtotal in specific circumstances.

Implications of proposals for presentation of share of profit/loss from investments in associates and joint ventures

The staff have proposed the following changes to the tentative decisions made at the January 2018 meeting:

  1. the share of profit or loss from integral and non-integral associates and joint ventures be presented after business profit from consolidated entities; and
  2. entities that are required to present a profit before investing, financing and income tax subtotal should present their share of profit/loss of integral associates or joint venture as a line item above this subtotal. For non-integral associates or joint ventures, the entity’s share of profit/loss should be presented a as line item below the profit before investing, financing and income tax subtotal.

Staff recommendations

In summary, the staff have made the following recommendations:

  1. Entities not be required to present a subtotal of profit before finance income/expenses and income tax if their only main business activity is providing financing to customers and they present financing income separately
  2. Entities that incur insurance finance expense should include this in the business profit subtotal
  3. If an entity invests in assets that generate a return individually or independently of other resources held by the entity, the entity is not required to present a subtotal of profit before income/expenses from investments, finance income/expenses and income tax
  4. Entities that have more than one main business activity (including both investment and financing activities) are not required to present a subtotal of profit before finance income/expenses and income tax. These entities are not exempt from the requirement to present subtotals and are permitted to move some income and/or expense to business profit from consolidated entities (with specific parameters)
  5. Entities that have more than one main business activity and those activities include financing or investing activities are not exempt from the requirement to present subtotals. These entities would be permitted to move some income and/or expenses to business profit from consolidated entities
  6. All entities are required to separately present the share of profit or loss from integral and non-integral associates and joint ventures, after business profit from consolidated entities

Discussion

Question 1—Requirement to not present a subtotal of profit before finance income/expenses and income tax (where financing is the main activity)

Several Board members expressed support for the staff recommendation that an entity would not be required to present a subtotal of profit before finance income/expenses and income tax if their main and only business activity is providing financing to customers and if they separately present financing income in the statement of financial performance. However, concerns were expressed that the term “only and main business activity” was too restrictive. The other main comments were:

  • Refining the principles to be more precise and written in a more understandable manner
  • Clarifying the definition of ‘business activity’ (by looking to the Conceptual Framework)
  • One Board member distinguished between “ordinary activities” which is used within IFRS 15 Revenue from Contracts with Customers “main or only activities” as proposed by the staff
  • Streamlining the different concepts under the approaches adopted for EBIT, alternatives, income and expenses from investments and investing and financing activities
  • Several Board members indicated that the approach adopted within Question 6 (see below) could be laid out initially before Question 1. In particular, one member indicated that the model could be simplified to potentially cover all three key areas (EBIT, finance income and expenses and investing and financing entities) which would avoid the requirement for defining subgroups
  • One Board member indicated that a company might change its business very quickly and therefore the focus should be on types of activities rather than types of entities
  • Templates should not be included but rather examples (as laid out in Agenda Paper 21B)
  • One Board member indicated that financial liabilities should be factored in to determine the business activity

There were differing views in respect of the implication of the staff recommendation for banks, insurers and conglomerates, in particular:

  • Whilst concurring with the staff outcome, one Board member believed that insurance companies should be included within the recommendation
  • One Board member believes the approach should be simpler to exclude banks, insurance companies and conglomerates rather than have differentiation principles—in particular, it was discussed that the EBIT subtotal will only be relevant for entities that separate out their treasury functions which may not be relevant for banks and insurers
  • One Board member indicated that some entities may view EBIT as material even if they are not a bank, conglomerate, insurance company
  • One Board member indicated that focus should be on whether to have a binary outcome or a graduated approach

The Board discussed concerns on whether the company would not be required to present EBIT if an entity separately presented finance income. The staff clarified that within their proposals, they have stipulated that if an entity does separately present finance income and their main business activity is to provide financing to customers, then these types of entities would fall within their proposed requirements. 

Question 2—Inclusion of specific items within subtotal of business profit if the entity does not present subtotal of EBIT

One Board member questioned whether all mandatory line items have been identified and believes the approach under Question 4 and Question 2a (as laid out in the Agenda Paper) should be mirrored. The staff responded that there is no demand for analysing items in this way and there is potentially cost vs. benefits. Another Board member supported having a principles-based approach but thinks there should be better explanations when there are alternative subtotals.

Two Board members agreed with the outcomes proposed but indicated that a better expression of the outcomes is required in particular with regard to the labels attached to “other finance income and other finance expenses”. One Board member requested the staff share investor feedback for having an EBIT subtotal in insurance.

Question 3—Exemption from presenting a subtotal of profit before investing, financing and income tax (main activity is investing)

Three Board members agreed with the recommendations. Other comments included:

  • A proposal to not include an investment property company within the definition and indicate that the investments should be clearly definitive
  • If the entity has investment property activities, they would need to move both rental income and expenses
  • All concerns made in Question 1 would also be applied within Question 3

One Board member disagreed with the staff proposal on the basis that they did not agree with the approach of the exemption for entities that have investing activities.

Question 4—Presentation of income/expenses from investments in business profit

One Board member indicated that the approach in Question 4 is a business model approach and prefers the approach adopted per Question 2 (as set out in the Agenda Paper). Another Board member indicated where the entities are exempt, they should be prohibited from drawing any other subtotal between business profit and profit after tax.

Question 5—Entities whose main business activities include financing and investing

There was no significant discussion with regard to this question.

Question 6—Entities with more than one business activity

Overall the Board members agreed with the outcome and the framework proposed by the staff, however they had a number of key comments which are laid out below:

  • A number of Board members indicated if an entity has main activities from which it earns returns, it should be required rather than permitted to include these income/expenses from investments in the business profit. Likewise, when an entity’s main business activity is to provide financing to customers, it should be required rather than permitted to include interest income, other income from financing activities and expenses from financing activities within the business profit line.
  • It would be helpful to change the order of the questions so that the principle laid out in Question 6 is set first and lay out the interaction between this question and other questions.
  • Action points are for the staff to prepare a flow diagram, include the advantages and disadvantages of the different approaches and re-consider the language used.

Question 7—Redrafting of the requirements relating to the presentation of the share of profit or loss of integral and non-integral joint ventures and associates

There was no significant discussion with regard to this question.

Decisions

  • The Board supported all of the staff recommendations, except that no vote was taken for Questions 6 and 7:
  • Q1: 11 in favour
  • Q2a1: 11 in favour Q2b: 12 in favour
  • Q3: 13 in favour
  • Q4: 12 in favour
  • Q5: 13 in favour
  • Q6 and Q7: no vote was taken

Scope of proposals for subtotals in the statement of profit or loss—Illustrations of possible effects of staff proposals on some types of entities (Agenda Paper 21B)

Background

This paper presents illustrations of possible effects of staff proposals on different types of entities. The following table summarises whether the staff think different types of entity are likely to have activities in the identified categories.

Type of entity

Business profit from consolidated entities

Profit before investing, financing and tax

Profit before financing and tax (EBIT)

Profit before tax

Investment property companies

Insurers

Traditional banks with no material investing activities

Entities with more than one main business activity including both investing and financing (i.e. a bank with investing and customer facing activities and a bank-insurer)

Entities with more than one main business activity including investing and financial (i.e.: a manufacturer providing financing to customers)

Staff recommendations

The paper does not contain any staff recommendations.

Unusual or infrequent items (Agenda Paper 21C)

Background

The IASB sought feedback on the use of the terms ‘unusual’ and infrequently occurring’ income and expenditure in the statement(s) of financial performance. Feedback from the Capital Markets Advisory Committee (CMAC) and the Global Preparers Forum (GPF) included that the IASB should develop principle-based guidance on what items are expected to be disclosed separately and/or allow entities to develop their own definitions for ‘unusual’ or ‘infrequent’. This paper sets out the staff proposals for these requirements.

Staff analysis

Development of specific requirements of unusual or infrequent items

The staff consider possible approaches for providing information about unusual or infrequent items:

  • One approach would be to require entities that choose to disclose an MPM to categorise the item(s) in the MPM reconciliation into unusual or infrequent income and expenses and other items of income and expenses.
  • Another approach would be to require entities to present separate information about unusual or infrequent items. An entity would provide a ‘cross-reference’ between unusual or infrequent items included in the MPM reconciliation with separate information about these items. This is the approach the staff are recommending.

Separating information about unusual or infrequent items

The staff have analysed whether entities should have to:

  1. present information about unusual or infrequent items within each proposed category in the statement(s) of financial performance;
  2. present information about unusual or infrequent items in a separate column; or
  3. present information in a separate note accompanying the statement(s) of financial performance.

Describing unusual or infrequent items

The staff concluded that it would be difficult to develop and apply a definition of unusual or infrequent items. The feedback from the Discussion Paper suggested that the IASB could either allow management flexibility in identifying unusual or infrequent items or the IASB could develop guidance to help entities identify items that are unusual or infrequent. The objective of this guidance would be to get more consistency in identifying unusual or infrequent items and to give users a better understanding how of these items are identified.

The paper includes supporting analysis:

  • Appendix A contains a summary of feedback around whether the Board should develop definitions and requirements for the presentation of unusual or infrequent items as laid out in the Discussion
  • Appendix B illustrates the different proposed approaches for providing information about unusual or infrequent items within the statement(s) of financial performance.
  • Appendix C presents research on different descriptions of unusual, infrequent, recurring and non-recurring items and characteristics associated to those descriptions.

Staff recommendations

In summary, the staff have recommended:

  1. Requiring disclosure of information about unusual or infrequent items irrespective of whether an entity chooses to disclose a management performance measure (MPM)
  2. Requiring separate disclosure of unusual or infrequent items in the notes to the financial statements and that those items should be attributed to line items in the statement(s) of financial performance
  3. Developing principle-based guidance to help entities identify items that are ‘unusual’ or ‘infrequent’

Discussion

The feedback from investors about ‘unusual’ and ‘infrequent items’ is that these words are used inconsistently and it was believed that management performance measures should be kept separate from unusual or infrequent items.

Numerous Board members supported obtaining further research around definitions with one Board member supporting an approach to provide additional guidance. One Board member believes that the staff should present guidance before the Board voted on the approach proposed by staff. One Board member supported the proposed disclosures however thought there should be a clarification within IAS 1 Presentation of Financial Statements.

Other Board members expressed concerns about the ability to define unusual or infrequent items and whether this could be done in a consistent manner. One Board member agreed that the project is worth the effort but had reservations about whether infrequent or unusual items should be distinct from MPM disclosure.

One Board member did not agree with the approach to provide separate information about unusual or infrequent items but thought guidance should be provided, in particular looking at characteristics of items that are relevant to users such as frequency and size. Additionally, this Board member discussed also referring to the guidance around aggregation and disaggregation.

Decisions

  • 8 Board members supported the staff recommendation to provide separate information about unusual or infrequent items irrespective of management’s decision to disclose an MPM
  • 10 Board members supported the staff recommendation for separate disclosure of unusual or infrequent items in the notes to the financial statements and that those items should be attributed to line items in the statement(s) of financial performance
  • 10 Board members supported the staff recommendation to develop principle-based guidance to help entities identify items that are ‘unusual’ or ‘infrequent’

Presentation of the results of integral and non-integral associates and joint ventures in the statement(s) of financial performance (Agenda Paper 21D)

Background

There is diversity in practice as to where the results of associates and joint ventures are presented within the statement(s) of financial performance. The IASB has tentatively decided to require separate presentation of the share of profit of loss of ‘integral’ and ‘non-integral’ associates and joint ventures (January 2018). Additionally, the IASB has tentatively decided to require separate presentation of cash flows of 'integral’ and ‘non-integral’ associates and joint ventures in the investing section of the statement of cash flows (February 2018).

Staff analysis

Further research

The staff looked at the financial reports of 85 companies across different industries. Only one entity reported the results of associates and joint ventures separately based on whether they were integral to its operations. The other entities presented the results of associates and joint ventures in a variety of ways.

Staff comments on feedback on tentative decisions

Feedback relevant to the proposal is set out in two appendices to this agenda paper. Appendix A gives the feedback primarily from the CMAC, GPF and other members on the January 2018 tentative decisions. Appendix B gives the feedback received from users and preparers prior to the Board’s tentative decisions. Overall, there is no consensus other than that separating the results of integral and non-integral associates and joint ventures may bring only limited benefits. Indicators of integral status

A list of potential indicators to classify an investee as integral or on-integral was discussed in the January 2018 IASB meeting. The staff have refined the list and are proposing that the list be non-exhaustive without any comparative ranking of indicators. They believe the proposed list will cover most factors of importance across entities and industries.

Reclassification of equity-accounted investments

One issue is whether entities should be able, or required, to reclassify an equity-accounted investment after initial recognition. The staff propose that when there has been a substantive change in relationship between the reporting entity and the equity-accounted investment, reclassification should be required. This change would not be a change in accounting policy as it reflects a change in circumstance.

Disclosure and presentation

The staff view the disclosure requirements of IFRS 12 as extensive and sufficient. They think IFRS 12 requires the entity to discuss the factors that were considered when classifying an equity-accounted investment as integral or non-integral. They are, however, proposing additional disclosures when there has been a reclassification.

The staff are also recommending that the disclosures in IFRS 12 paragraph 20 be split between integral and non-integral associates and joint ventures. The staff present extracts from IFRS 12 Disclosure of Interests in Other Entities within Appendix E of this agenda paper.  Illustrative disclosures of the separate presentation of the share of profit or loss of integral associates and joint ventures are presented within Appendix C. Appendix D illustrates the separate presentation of cash flows of integral associates or joint ventures.

Staff recommendations

The summary of the staff recommendations are laid out below:

  • Introduce specific indicators as laid out in this Agenda Paper to help preparers decide whether an associate or joint venture is ‘integral’
  • State that a change in classification as integral or non-integral shall only be in circumstances where the relationship between the reporting entity and investee has changed substantively
  • Amend the disclosure requirements of IFRS 12 Disclosure of Interests in Other Entities to reflect the introduction of the integral and non-integral categorisation of associates and joint ventures.

Discussion

Indicators of integral status

A number of Board members expressed concerns around feedback received from users as laid out in the appendices of the Agenda Paper. Numerous Board members supported an approach of testing the proposals and having a greater outreach to target users.  Additionally, the Board made suggestions to the indicators presented by the staff, including:

  • Inclusion of more generic factors such as assessing the economic interdependency between the associate and joint venture and the other activities of the business
  • Contrasting the position of other investors in the joint venture or associate and size should not be an indicator
  • Assessing intellectual property and whether the investor had the ability to appoint board members in the investee

There were differing views amongst Board members around whether determining whether associates and joint ventures were ‘integral’ or ‘non-integral’ would require judgement or not. One Board member believed that it should be in exceptional circumstances that tentative decisions should be revisited.

The staff actions from the discussion was to include the feedback in the list of factors taken into account and have outreach to more targeted users.

Reclassification of equity-accounted investments

The Board members discussed that a reclassification would only be reassessed if there is a change in circumstance.

Disclosure and presentation

One Board member raised a concern about timing and did not believe IFRS 12 should be amended at this point in time.

Decisions

8 voted in favour of the staff recommendation to change the classification as integral or non-integral in circumstances when the relationship between the reporting entity and investee has changed substantively

9 voted in favour of the staff recommendation to change the disclosure requirements of IFRS 12 to reflect the introduction of the integral and non-integral categorisation of associates and joint ventures

Project proposal — moving the project to the standard-setting programme (Agenda Paper 21E)

Background

This paper asks the Board to decide whether the Primary Financial Statements project should be moved from the research programme to the standard-setting programme and whether a consultative group is required. 

Staff analysis

Deficiencies in current reporting and importance to users

This research project came after strong demand from users of financial statements for the IASB to undertake a project on performance reporting. The Board initially looked at the set of primary financial statements but concluded that the statement(s) of financial performance should be given a high priority and decided to focus on targeted improvements to this statement. Appendix A of this agenda paper sets out the scope of the Primary Financial Statements Project.

Types of entities affected and pervasiveness of the problem

The staff’s research has indicated that problems with presentation in the primary statement are pervasive. Furthermore, the project proposals are also likely to be pervasive, even with an initial focus on non-financial entities.

Staff recommendations

Based on an assessment of criteria for adding a project to the standard-setting programme and advice from the Accounting Standards Advisory Forum (ASAF) and IFRS Advisory Council, the staff recommends that the Primary Financial Statements project be added to the standard-setting programme. Appendix C of this agenda paper includes a full summary of the ASAF July 2018 meeting.

The IFRS Foundation Due Process Handbook requires the Board to consider whether it should establish a consultative group for each major project added to the standard-setting programme. The staff conclude that a consultative group is not required on the basis that the project does not require detailed specialist knowledge and the Board’s existing consultative groups have the necessary experience and expertise to advice on this project.

Decision

All Board members supported the staff recommendation that the Primary Financial Statements project be added to the standard-setting programme. All Board members agreed with the staff proposal that a consultative group is not required.

 

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.