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Primary financial statements

Date recorded:

Amendments to IAS 34 Interim Financial Reporting (Agenda Paper 21A)

Background

This paper considers the possible amendments to IAS 34 to reflect the Board’s tentative decisions in the Primary Financial Statements (PFS) project.

Staff analysis

The staff think that Management Performance Measures (MPMs) presented in the interim financial statements will provide users with transparent information on a timely basis. Some preparers have said that it could be costly to provide the information about the income tax and non-controlling interest (NCI) effects. However, the staff believe that interim financial statements should include a full set of MPM disclosures because tax and NCI effects are useful information and the Board has already provided some relief for determining the effect of tax of MPM adjustments. The staff think that applying the new requirements of the PFS project in preparing interim financial statements could result in transition issues because the annual financial statements of the entity in the year before the new requirement may not contain any subtotals in the statement(s) of financial performance or may contain additional subtotals which may be defined differently from the new proposed subtotals.

Staff recommendations

The staff recommend that the Board amend IAS 34 to require entities, in their condensed interim financial statements, to provide the set of financial information about MPMs that will be provided in their annual financial statements and to apply subtotals in their condensed interim financial statements during the first year of application of the new requirements.

Board discussion

Board members agreed with the staff’s proposal to require entities to include information about MPMs in their condensed interim financial statements because if MPMs were only presented on an annual basis, the timing of information provided may be too far apart. As MPMs have to be consistent with what the entity communicates externally, the Board asked the staff to clarify which set of external communication that requirement refers to when presenting MPMs in the interim financial statements. The question is whether this should be the latest set of external communication of MPMs made by the entity or whether this would be the set of external communication of MPMs made in the last available annual financial statements.

Some Board members would prefer not to have different treatments for the presentation of MPMs and the presentation of subtotals for the interim financial statements. However, the staff said that the entity has the option of applying the requirements of the new Standard immediately in their interim financial statements or prepare a set of condensed interim financial statements in accordance with IAS 34 that does not contain the subtotals. This is because IAS 34 requires to include the same subtotals as in the most recent annual financial statements, which is unlikely to have the newly defined subtotals. The Board agreed that this should be made clear in the drafting of the Standard.

Board decision

10 of 14 Board members agreed to require entities to provide, in their condensed interim financial statements, the set of financial information about MPMs that will be provided in their annual financial statements. 8 of 14 Board members agreed to require entities to apply subtotals in their condensed interim financial statements during the first year of application.

Management performance measures and subtotals similar to gross profit (Agenda Paper 21B)

Background

This paper discusses whether subtotals similar to gross profits (e.g. net interest income or net rent income) that meet the definition of MPMs should be exempt from the disclosure requirements for MPMs.

Staff analysis

The Board have tentatively decided that MPMs are subject to disclosure requirements which include a reconciliation between an MPM and the most directly comparable subtotal or total defined by IFRS Standards, disclosure of the income tax and NCI effect and narrative disclosures. The staff considered that the MPM disclosures may not be useful because for all subtotals, the line items in the statement(s) of financial performance provide a reconciliation to a subtotal or total defined by IFRS Standards. Similarly, for some subtotals, there is no comparable subtotal or total defined by IFRS Standards to reconcile to and for some subtotals, the purpose of the subtotal is clear and therefore narrative disclosure may not be useful information. Therefore, the staff considered three approaches: state that subtotals presented in the statement(s) of financial performance in accordance with IAS 1: 85 are not MPMs; or add specific subtotals to the list of subtotals that are not MPMs; or add “subtotals similar to gross profits” to the list of subtotals that are not MPMs. The staff proposed the last approach as this is principle-based and the risk of unintended consequences is likely to be lower.

Staff recommendations

The staff recommend that the Board add “subtotals similar to gross profit” to the list of subtotals that are not MPMs; describe such subtotals as “typically representing the difference between (a type of) revenue and directly related expenses incurred in generating that revenue” and provide a non-exhaustive list of examples of subtotals “similar to gross profits” and for subtotals that are not considered “similar to gross profits.”

Board discussion

Some Board members expressed preference for the first approach, which is to state that subtotals presented in the statement(s) of financial performance in accordance with IAS 1:85 are not MPMs. However, the staff have said that the intention was not to define these subtotals but to describe the types of subtotals that are already in use, which would be subject to this exemption. The Board suggested that this thought process should be made clear in the basis for conclusions (BC).

Board decision

13 of the 14 Board members agreed with the staff’s proposal to add “subtotals similar to gross profit” to the list of subtotals that are not MPMs.  

Classification of interest and dividends in the statement of cash flows (Agenda Paper 21C)

Background

This paper analyses the suggestion made by the Board at its February 2019 meeting on the classification of interest and dividend in the statement of cash flows and discusses whether the Board should amend its tentative decision made at its December 2017 meeting.

Staff analysis

The Board tentatively decided to require non-financial entities to classify each type of cash flow in a single section of the statement of cash flows that would result in a classification in the statement of cash flows that is generally consistent with the classification of the related income or expense in the statement(s) of financial performance. Furthermore, the Board also tentatively decided to propose an approach for financial entities to determine the classification of interest and dividend cash flows that if the entity presents related income or expense in a single section of the statement(s) of financial performance, the entity presents the related cash flows in that section. If the entity presents related income or expense in more than one section of the statement(s) of financial performance, the entity can make an accounting policy choice regarding the section of the statement of cash flows in which to present the related cash flows. In a previous meeting, one Board member suggested an alternative approach which would require both financial and non-financial entities to classify dividend received, interest paid and interest received in operating cash flows and dividends paid in financing cash flows. The staff considered both pros and cons of the suggested approach but ultimately recommend against it because the amendment would be a fundamental change to IAS 7 which could have unintended consequences.

Staff recommendations

The staff recommend that the Board retain its tentative decision regarding the classification of interest and dividend in the statements of cash flows without amendment.

Board discussion

Board members have said that the focus of the users of the financial statement is less on where dividends and interest are presented in the cash flow statements (i.e. operating, financing or investing activities)  but rather that the presentation of these are clear and done on a systematic basis.

Board decision

11 of 14 Board members agreed with the staff’s proposals to retain its tentative decision regarding the classification of interest and dividend in the statement of cash flows without amendment.

Management performance measures and adjusted earnings per share (AP 21D)

Background

This paper discusses whether to amend IAS 33 to restrict what can be used as the numerator in an adjusted earnings per share (EPS) figure, to amounts based on IFRS-defined subtotals or MPMs.

Staff analysis

IAS 33 requires entities to disclose the basis on which the numerator of an adjusted EPS figure is calculated and, if the numerator is not reported as a line item in the statement(s) of financial performance, a reconciliation between the numerator and a line item in that statement. However, in applying the Board’s tentative decisions, entities may choose to disclose an adjusted EPS figure rather than an MPM because there are fewer disclosure requirements for an adjusted EPS figure. Not all MPMs can be disclosed on a per share basis as MPMs do not have to be calculated in accordance with IFRS Standards per IAS 33:73. The staff considered whether to require same disclosures for adjusted EPS figures as for MPMs or to require a reconciliation between the numerator of the adjusted EPS figure and the entity’s MPM. The staff rejected both approaches and agree that by restricting what can be used as a numerator in an adjusted EPS figure would be the best approach as it allows the users to receive the same information about adjusted EPS figures as for MPMs and clarifies whether all MPMs can be used as a basis for the numerator used in the calculation of an adjusted EPS figure.

Staff recommendations

The staff recommended that the Board amend IAS 33 to restrict what can be used as a numerator in an adjusted EPS figure, to amounts based on IFRS-defined subtotals or MPMs.

Board discussion

The Board said that the staff should bear in mind that there could be some conflicting requirements of this proposal with the requirement with some regulators. For example, in South Africa, the regulators require the entities to calculate EPS using their guidelines.

Board decision

13 of the 14 Board members voted in favour the staff’s proposal to amend IAS 33 to restrict what can be used as a numerator in an adjusted EPS figure, to amounts based on IFRS-defined subtotals or MPMs.

Due process and permission to begin the balloting process (Agenda Paper 21E)

Staff questions

In this part of the session, the staff will ask the Board:

  • to confirm that all of the due process steps have been taken, so that the formal balloting of the ED can start.
  • what comment period it would like to allow. The staff have recommended 180 days.
  • whether any Board members intend to dissent from the proposals in the ED.

Board discussion

Some Board members expressed intention to dissent but on an overall basis agreed with the proposals. A Board member raised concerns on the application of the presentation of share of profit of integral and non-integral associates. This is because there is a risk that positively performing associates could be classified as integral and non-performing associates could be classified as non-integral. Therefore, the Board suggested that the pros and cons be analysed as part of the ED. Another Board member said that MPMs should belong in the management commentary and by bringing MPMs into the financial statements could give them undue prominence and legitimacy. Lastly, a Board member suggested that 180 days as the comment period may be too long for this project.

Board decision

13 of the 14 Board members agreed with the staff’s proposal that the comment period should be 180 days and agreed to give permission to ballot the ED.

Correction list for hyphenation

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