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Primary financial statements

Date recorded:

Feedback summary – Overview (Agenda Paper 21A)

Background

This paper summarised key messages from feedback received and provides an overview of the comment letters received, fieldwork and other outreach undertaken during the comment period for Exposure Draft ED/2019/7 General Presentation and Disclosures.

Staff analysis

Agenda Papers 21B-21J provided a summary of the feedback received from all respondents on topic covered by the ED. Agenda Paper 21K provided a summary of feedback from users of financial statements and Agenda Paper 21L reviews academic and other literature relevant to the proposals. The staff was not asking the Board to make any decisions but rather they asked for feedback and asked that the Board identify areas which would require further research.

Feedback summary – Subtotals and categories – general model (Agenda Paper 21B)

Background

This paper analysed feedback on the proposed “general model” for the structure of statement of profit or loss, set out in the ED.

Staff analysis

Most respondents agree with the proposals to introduce defined subtotals and categories in the statement of profit or loss. However, some respondents asked for additional guidance, including guidance on the definition of the categories and the term ‘main business activities’. Many respondents expressed concerns about the proposed classification of foreign exchange differences and of fair value gains and losses on derivatives and hedging instruments. In addition, many respondents expressed concerns about the proposed labels for the categories in the statement of profit or loss. Some respondents expressed concerns about defining the operating category as a residual category and the proposed classification of income and expenses from cash and cash equivalents and other investments held as part of treasury activities.

Board discussion

Board members noted that the main proposals of the ED were supported, but that it would also be challenging to address all the feedback received.

With regard to the operating category, Board members were concerned about feedback received on whether the area of main business can be a residual. Board members suggested to examine whether the operating category could be defined explicitly.

With regard to separating financing activities from operating, Board members noted that the feedback supported this, but some feedback did not support having a separate investment category. One Board member thought this category would be relatively small and should therefore be reconsidered. The Vice Chair, however, said, that even if small, it provides relevant information and she therefore supports retaining this category. Board members noted that the definition of the financing category is similar to that of ‘solely payments of principal and interest’ in IFRS 9, which may lead to confusion.

Board members were also split on providing more detailed guidance in the new Standard—some saying that it should be a principles-based Standard and guidance will develop in practice with others expressing caution that this could lead to diversity in practice and pass the problem to the Interpretations Committee.

For the cash flow statement, Board members suggested that although alignment with the performance statement is part of this project, the Board should not try to address other issues that have arisen in the past with regard to the statement of cash flows. One Board member thought that the labelling in performance and cash flow statements should be consistent, suggesting that the net debt expense should be reported in the statement of performance.

The Vice Chair said that moving foreign exchange results to the financing category, as suggested by some respondents, might not be conceptually correct and the intention of respondents could be to strip those out of operating.

Feedback summary – Subtotals and categories – entities with particular main business activities (Agenda Paper 21C)

Background

The ED proposes requirements for the structure of the statement of profit or loss. This paper analysed feedback on the ED’s requirement for entities with particular main business activities, such as providing financing to customers and investing.

Staff analysis

Most respondents agree with the proposal to classify in the operating category, income and expenses from investments made in the course of an entity’s main business activities and income and expenses from financing activities and income and expenses from cash and cash equivalents if an entity provides financing to customers as a main business activity. However, many respondents asked for additional guidance, including guidance on the terms ‘main business activities’ and ‘in the course of main business activities’. Many respondents disagreed with the proposed accounting policy choice for entities that provide financing to customers as a main business activity and said that the accounting policy choice should be replaced with a practical expedient. 

Board discussion

Board members discussed the feedback received on the difficulties to apply the concept of ‘main business activity’. Some were surprised at this feedback, as the main business activity should be a matter of fact. It is similar to the IFRS 9 business model and should not change period to period. One member suggested linking the term ‘main business activity’ to other Standards, like IFRS 8 or IFRS 15. The feedback also highlighted that the main business activity of a subsidiary is not necessarily that of the group.

Some Board members thought the accounting policy choice for presenting financing that is part of the main business activity in operating or financing, should be revisited. It was an area of concern to respondents and could lead to a lack of comparability.

Feedback summary – Subtotals and categories – integral and non-integral associates and joint ventures (Agenda Paper 21D)

Background

This paper analysed feedback from comment letters and outreach on the proposals relating to integral and non-integral associates and joint ventures set out in the ED.

Staff analysis

Respondents expressed diverse opinions across various aspects of the proposals in the ED. Many respondents did not express an overall view, commenting instead on specific aspects of the proposals. Most respondents highlighted concerns with the proposals including the proposal to identify separately integral associates and joint ventures; the proposed definitions of integral and non-integral associates and joint ventures; and the separate presentation of amounts relating to these investments in the primary financial statements. Overall, there is not much support among stakeholders for the proposals. However, most users agreed with one aspect of the proposal, the exclusion from operating profit of the share of profit or loss from equity-accounted associates and joint ventures.

Board discussion

Most Board members said that the feedback from investors is clear. They do not want the equity method results in income, because it affects margin analysis. Investors also do not think the disaggregation is helpful. One member said that given a lack of demand from investors and that preparers are saying it would be costly to implement, the Board should not pursue this any further. Other Board members made similar statements, with one saying that he was reluctant to have staff spend time trying to rescue this.

Some Board members said it was not clear whether the problem is the definition or whether it simply is not a helpful disaggregation. One member disagreed with the other members and thought that the feedback from users was mixed. She agreed that users did not want his integral – non-integral split in the primary financial statements but that some thought additional disclosure in the notes could be helpful. She said the Board should not drop the idea but that considering it as part of the PIR of IFRS 12 would be acceptable.

The staff were asked if the messages from users was clear. They said that although users said the split “could potentially be interesting” it was a luke-warm rather than enthusiastic response. The fieldwork has shown that it simply did not work and the proposed guidance effectively gave a free choice. It would need a lot of work to remedy this because the guidance fell at the first hurdle, being the assumptions behind what differentiates integral and non-integral associates and joint ventures.

Several Board members said the effort should go into deciding where the line item should be presented, and more thought needs to be given to that fact that it is a post-tax number.

Feedback summary – Disaggregation – general proposals and minimum line items (Agenda Paper 21E)

Background

This paper analysed feedback from comment letters and outreach on the general proposals relating to disaggregation set out in the ED.

Staff analysis

Many respondents commented on the roles of primary financial statements and notes and most agreed with the proposals. Most respondents commented on the principles of aggregation and disaggregation and the proposals relating to disaggregation and labelling of items described as ‘other’. Many did not express agreement or disagreement and instead commented on the need for additional guidance or clarifications, particularly on the proposal relating to items labelled as ‘other’. Some respondents commented on the requirements for minimum line items and asked for further guidance and clarification.

Board discussion

Several Board members were surprised, and concerned, that the fieldwork led to less disaggregation than the current model. One member thought that the focus on ‘other’ might have been a distraction. He was as concerned with items that are appropriately described but should be disaggregated. He, and other members, saw this as an important part of the project.

The Vice-Chair asked if the proposals were designed to elicit more disaggregation. The staff clarified that the disaggregation proposals were intended to apply to the primary financial statements and the notes and that they expected to have more disaggregation. They plan to go back to fieldwork participants to understand how they were interpreting the proposal, particularly given that two participants aggregated expenses into one line.

One member said the term ‘clutter’ was unclear. It is difficult to translate so the staff should think about how to define or describe it. They should also think about the Disclosure Initiative and the importance of having clear disclosure objectives for the revised Standard. Two Board members emphasised that goodwill is different from other intangible assets.

Feedback summary – Disaggregation – analysis of operating expenses (Agenda Paper 21F)

Background

This paper analysed feedback from comment letters and outreach on the proposals relating to the analysis of operating expenses set out in the ED.

Staff analysis

Most respondents commented on the proposals relating to the presentation of operating expenses in the statement of profit or loss. Many respondents (mainly accountancy bodies and standard-setters) agreed and some (mainly preparers and their representative bodies) disagreed with the proposal to require an entity to select the method of analysis of operating expenses that is most useful. Many respondents (mainly users, accountancy bodies and standard-setters) agreed and many (mainly preparers and their representative bodies along with a few users) disagreed with the proposal to prohibit an entity from mixing the methods of analysis of expenses. Many respondents (mainly users, standard-setters and accountancy bodies) agreed and many (mainly preparers and their representative bodies) disagreed with the proposal to require an entity to disclose an analysis of expenses by nature in the notes if they present analysis of expenses by function.

Board discussion

A Board member opened the discussion by saying that users on the whole seem open to some flexibility. One member said that users want a full matrix by nature and function. However, Users want to relate the expenses such as depreciation and amortisation to the various functions. He added that his own research had indicated that many entities applying US GAAP apply a mixed approach—i.e. some expenses by nature and some by function. He said that some industries are worried about moving away from that approach and that he has some sympathy for investigating this further. Other Board members supported considering a mixed approach, and should be sensitive to the comments received. Board members would be misleading themselves if they prohibited mixed presentation.

In terms of costs, one member said he had asked many German companies about their ability to meet the proposed requirements. The feedback he received was that some companies had built consolidation systems for one approach and there are large costs to process the elimination entities necessary to meet this requirement for the other approach. It is more complex than simply adding line items to a consolidation package.

One member supported a mixed approach because it was a way of addressing persistence. He emphasised the need to link the elements of the project together. A mixed approach is one way to convey information about persistence.

One member was surprised that a lot of the feedback suggested that it was a free choice. The staff will follow up on this. And two members commented on feedback about analysing restructuring charges and whether restructuring costs should be classified by function or nature.

Feedback summary – Disaggregation – unusual income and expenses (Agenda Paper 21G)

Background

This paper analysed feedback from comment letters and outreach on the proposals relating to unusual items set out in the ED.

Staff analysis

Most respondents who commented on this question, including almost all users of financial statements, agreed with the Board defining unusual items. However, most of these respondents, including some users, did not agree with the Board’s definition of unusual items and made varying suggestions to change it. There was no clear consensus on what an alternative definition should be. Respondents were split evenly on whether or not they agreed with the proposed disclosure in a single note.

Board discussion

Some Board members were critical that respondents had not suggested better definitions. Most Board members thought the issue they were looking for was persistence and providing users with information that would help them forecast the performance of the entity. One member thought that the ‘unusual’ label is a coarse partition and will not always pick up persistence. It was suggested that more should be done on thinking about persistence so that the type of activity or information that should be labelled unusual could be drawn from that. Others also suggested that entities be required to discuss persistence in a note, rather than labelling individual items as unusual.

A member thought this is one of the most complex issues they face and questioned whether the term unusual could ever be used objectively. He thought that what was unusual reflected the view of management. He also thought that the Board might need to think more radically. Another member agreed and said that the types of disclosures required by IFRS 13 might provide a better direction, because it would be more objective based (rather than focusing on a definition of unusual).  

The next steps should be on clarifying the problem they are trying to solve.

Feedback summary – Management performance measures (Agenda Paper 21H)

Background

This paper analysed feedback from comment letters and outreach on the proposals relating to management performance measures set out in the ED.

Staff analysis

Many respondents, including almost all users, agreed with the Board’s proposals to require the disclosure of management performance measures in the notes to the financial statements. However, most respondents raised concerns about the definition of management performance measures, including requiring disclosure of all management performance measures used in ‘public communications’ being too wide in scope and management performance measures do not include measures that would, in their view, equally benefit from being disclosed in the financial statements. Some respondents disagreed with including management performance measures in the financial statements because in their view non-GAAP measures are either outside the scope of financial statements or do not achieve the objective of financial statements in IAS 1 or in the ED. Some respondents also disagreed with including management performance measures in the financial statements because it would increase the costs of preparing financial statements or it may be challenging to audit such measures. A few respondents disagreed with including management performance measures in the financial statements because many of these measures are subjective. Most respondents agreed with the Board’s proposed disclosure requirements including requirement to reconcile management performance measures to the most directly comparable subtotal specified in IFRS Standards. However, there was mixed feedback on the Board’s proposal to require the disclosure of the tax and non-controlling interest effects of reconciling items between the management performance measure and the most directly comparable subtotals specified in IFRS Standards. This was because the respondents believe it would be costly to obtain the information and it is a more onerous disclosure requirement or it is contrary to management performance measures communicating a management view to require the information. Most respondents, including most users, agreed with the Board’s proposal not to define earnings before interest, tax, depreciation and amortisation (EBITDA). However, some respondents, including some users, disagreed saying the Board should define EBITDA because it is a widely used measure that would benefit from a consistent definition.

Board discussion

The main issues Board members discussed were scope and auditability. Issues around scope

Some Board members thought the Board should look at calls to expand the scope seriously. The goal is better information, so could the same principles apply to other metrics. One member struggled to see why one metric is defined as an MPM but another metric that is equally as important in that sector would not be an MPM (because it was cash flow or balance sheet related) and therefore have no rigour around it. One member thought this was a good opportunity to link the connected principles in other standards and bring them together to get better principles. Other Board members were hesitant to expand the scope and thought that doing so could put the work undertaken so far at risk.

The issue of auditability was a concern, although some Board members challenged that and thought the information would be auditable. There seemed to be general agreement that they needed to work on the definition of public communication and that the staff should explore more why many respondents thought it would not be possible to audit some of the information.

It was also noted that there was a lot of pushback on disclosing the tax and NCI components of MPMs. However, one Board member notes that a jurisdiction says it has required this information for some time and not encountered problems. That could be investigated further. Members also observed that sub-totals are not automatically an MPM and that although the papers says the Board has not defined EBITDA, it has and this has created confusion. Both issues should be looked at further.  

Feedback summary – Statement of cash flows (Agenda Paper 21I)

Background

This paper analysed feedback from comment letters and outreach on the proposals relating to the statement of cash flows set out in the ED.

Staff analysis

Many respondents did not respond to the proposals but of those respondents that did, many agreed with the proposals. The main concern of those that did not agree was lack of alignment between the statement of cash flows and the statement of profit or loss, which was also raised as a concern by some fieldwork participants. Some respondents requested a comprehensive review of IAS 7.

Board discussion

This paper was not discussed. The staff plan to bring it back at the next meeting.

Feedback summary – Other topics (Agenda Paper 21J)

Background

This paper analysed feedback from comment letters and outreach on the proposals not specifically discussed in questions set out in the ED.

Staff analysis

Most of the comments not responding to the specific question identified additional work respondents would like the Board to undertake, mostly as separate projects. Respondents also provided feedback on proposals relating to other comprehensive income and interim financial reporting as well as comments on the proposed implementation period.

Board discussion

This paper was not discussed. The staff plan to bring it back at the next meeting.

Feedback summary – Users of financial statements (Agenda Paper 21K)

Background

This paper analysed feedback from user comment letters and user outreach meetings on the proposals set out in the ED.

Staff analysis

All users expressed strong general support for the project. Most users expressed their appreciation to the Board for undertaking this project, for example saying that they expect the proposals will significantly enhance the value of financial statements for investors.

Users particularly welcomed the proposals on the structure of the statement of profit or loss, in particular a defined operating subtotal, and on management performance measures because of the enhanced comparability and transparency of financial information they would provide.

Many users asked for the Board to extend the scope of the proposals, in particular in relation to management performance measures, the statement of cash flows, segment reporting and interim reporting.

Board discussion

This paper was not discussed. The staff plan to bring it back at the next meeting.

Feedback summary – Literature review (Agenda Paper 21L)

Background

This literature review summarised the evidence from academic papers on topics relevant to the questions in the ED resulting from the Primary Financial Statements project.

Board discussion

This paper was not discussed. The staff plan to bring it back at the next meeting.

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