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Primary financial statements

Date recorded:

Additional proposals on minimum line items (Agenda Paper 21A)

Background

This paper discusses whether to require the presentation of additional minimum line items in the primary financial statements.

Staff analysis

The staff say that, generally, users have expressed a preference for a principle-based guidance rather than rules based approach when presenting minimum line items in the primary financial statements. The main concern raised by the users is that requiring additional line items could lead to too many lines in the statements(s) of financial performance, which they think would reduce usefulness. Some users preferred that further disaggregation be included in the notes.

The staff believe that although goodwill shares some characteristics with intangible assets, it is sufficiently different, both in identifiability and in measurement to warrant separate presentation. The staff also believe it would be useful to disclose equity income from “integral” associates and joint ventures separately from “non-integral” associates and joint ventures because separate disclosure would allow investors to better evaluate the return on these related assets.

The staff suggested that requiring amortisation and depreciation to be presented in the statement(s) of financial performance would increase comparability and provide the users with an easily accessible view of the entity’s performance. However, depreciation and amortisation are both natural, rather than functional expenses. Therefore, the staff believe that the increase in prominence would be outweighed by the disadvantage of requiring entities that present expenses by function to present these natural items. Similarly, the staff suggested that requiring research and development expenditure to be presented in the statement(s) of financial performance would highlight the importance of this line item to the users. However, the activity of research and development is functional, rather than natural and that the increase in prominence would be outweighed by the disadvantage of requiring entities that present expenses by nature to include this functional item in the statement(s) of financial performance. Overall, the staff recommended that the Board include the presentation of depreciation, amortisation, and research and development expenditure in the illustrative examples that the Board has tentatively decided to develop, to encourage best practice.

Staff recommendations

The staff recommend that the Board require presentation of goodwill and investment in “integral” and “non-integral” associates and joint ventures accounted for using the equity method in the statement of financial position. The staff also recommend that the Board do not require presentation of amortisation, depreciation and research and development expenditure in the statement(s) of financial performance.

Board discussions

The main concerns raised by the Board were the presentation of investments in “non-integral” associates and joint ventures, which includes the following:

  • Whether the presentation of investments in “non-integral” associates and joint ventures should be required or if it could be aggregated with other line items on the statement of financial position.
  • Whether a separate presentation of investments in “non-integral” associates and joint ventures with a significant goodwill component would be required, given the requirement to present goodwill separately in the statement of financial position.

The staff confirmed that, in both instances above, the preparers would need to apply the disaggregation and aggregation principle and in making their decision, which would include considering whether the line item is material. 

The Board questioned how the requirement to present goodwill as a minimum line item would interact with the current project on IFRS 3 Business Combinations. The staff clarified that the project will not be dependent on the outcome of this decision and vice versa.  The staff have confirmed that intangibles would be renamed to “intangibles other than goodwill” or similar, which is a more faithful representation, depending on the Board’s decision.

The Board suggested that they should allow the preparer to present amortisation, depreciation and research and development expenditure in the statement(s) of financial performance if information is suitable to the entity’s method of analysing expenses in those statements. However, the staff said they had not recommended this because the Board have not previously prescribed minimum line items for the presentation of expenditure.

Board decisions

13 Board members voted in favour for the required separate presentation of goodwill and investments in “integral” and “non-integral” associates and joint ventures accounted for using the equity method in the statement of financial position.

12 Board members agreed that they do not require presentation of amortisation, depreciation and research and development expenditure in the statement(s) of financial performance.

Unusual items (Agenda Paper 21B)

Background

This paper seeks the Board’s view on a proposed definition of unusual items and guidance that accompany the definition. This paper also discusses disclosure requirements relating to unusual items.

Staff analysis

The definition as proposed by the staff includes items unusual in amount, frequency and nature and means that income or expense can only be classified as unusual if they have limited predictive value and that similar items will not arise for several future annual reporting periods. The staff have not included reference to unusual transactions or other events in the definition of unusual items. They say this is because some unusual transactions or events (e.g. large earthquake) can lead to some financial consequences that should be classified as unusual and some that should be classified as usual.

In determining the period over which an entity should assess whether a similar item will arise, the staff believe that, without indicating a timeframe, it could be interpreted as meaning that an entity should consider all possible future periods. Likewise, specifying a timeframe over which an entity should consider whether a similar item will arise would be arbitrary. They recommend using the term “several future annual accounting periods.”

The staff recommend that the Board clarify information provided about unusual items should be neutral. The staff cite research they say shows that entities tend to report expenses as unusual items but not incomes.  Furthermore, the staff also believe that considering the past occurrence of similar items may help entities assess whether it is reasonable to expect that similar items will arise in the future and therefore would not classify those items as unusual. Finally, the staff recommended that the Board clarify that gains or losses arising from the remeasurement of items required to be measured at current value should not, in general, be classified as unusual just because it varies from period to period and is perceived to lacks predictive value.   

The staff believe that the users may want information about how unusual expenses affect the natural expense categories and have therefore suggested that the Board require all entities to attribute unusual expenses to natural expenses. Furthermore, the staff believe entities should provide narratives about the transaction or other event which gave rise to unusual items as this provides the users with the context in which the unusual items arose and allows the users to form a judgement of the classification and adjust their analysis accordingly. The staff contemplated requiring entities to present information about income and expenses related to the unusual items. They decided against it because it may be costly and difficult for the preparer to identify which income and expenses are related to the unusual items. In addition, it may lead to inconsistent application of the requirement and consequentially, making the information less useful to the users.

Staff recommendations

The staff recommend that the Board define unusual items as: “Unusual items are income or expenses with limited predictive value because it is reasonable to expect that similar items will not arise for several future annual reporting periods. Similar items are income or expenses that are similar in type and amount.” The staff also recommend that the Board clarify that information provided about unusual items should be neutral, considerations of past occurrence of similar items may help entities assess whether similar items would arise in the future and gains or losses on remeasurement of items required to be measured at current value, should not, in general, be classified as unusual items. The staff further recommend that the Board should require all entities to attribute unusual expenses to natural expenses, provide a narrative description of the transaction, and not require entities to disclose income or expenses related to unusual items (unless those income or expense themselves meet the definition of unusual items).

Board discussions

The Board questioned whether the definition of unusual item aims to provide users with confirmatory value or predictive value. The staff agreed and said that the objective of unusual items could be clarified in the basis for conclusion.

The Board contemplated whether “limited predictive value” should be included in the definition of unusual items. This is because some transactions that have been recurring can provide the users with helpful information about the trend of the item. These items could be classified as unusual if it is no longer expected to occur in the next financial reporting period. The staff believe that the wording is consistent with existing wording used in IAS 1 Presentation of Financial Statements but agree that this could be clarified. The Board was concerned that the use of “several future annual reporting periods” may be too broad and guidance should be provided on what is a reasonable timeframe.  Furthermore, the Board believe that unusual items should be described as a concept rather than a rule. The Board also believe that the staff needs to clarify that classifying an item as unusual does not change where it is presented nor how it is measured. 

The Board do not recommend that the guidance emphasise neutrality, as this could imply that in the application of other standards, the preparer could be biased. The Board have also expressed concern on the staff’s recommendation to require all entities to attribute unusual expenses to natural expense categories, regardless of their method of analysis of expenses in the statement(s) of financial performance because this seems to be a rule.  However, the staff believe this will curb any diversity in practice. The Board further required that the staff clarify that gains and losses arising from the remeasurement of items required to be measured at current values are volatile in nature but that does not make it unusual.

The Board questioned whether in a scenario where income is classified as unusual, the related expense should also be classified as unusual because this could distort the margins if the expense does not follow the related income. The staff clarified that the expense may not meet the definition of unusual and by requiring the expense to follow the related income could result in the allocation of expenses on an arbitrary basis.  However, the staff said that the preparer can include additional information describing the scenario.

Board decisions

13 Board members agreed with the definition of unusual items.

6 Board members agreed that information provided about unusual items should be neutral and guidance for unusual items should consider past occurrence of similar items. 11 Board members agree that gains or losses arising from the remeasurement of items required to be measured at current value should not, in general, be classified as unusual items.

13 Board members agreed with the staff’s recommendation to require all entities to attribute unusual expenses to natural expenses, provide a narrative description of the transaction, and not require entities to disclose the specific income or expenses related to unusual items (unless those income or expense themselves meet the definition of unusual items).

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