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Primary financial statements

Date recorded:

Scope of management performance measures (MPMs) (Agenda Paper 21A)

Background

This paper explored possible approaches to expanding the scope of the MPM requirements to include measures other than subtotals of income and expenses. These include subtotals of income and expenses used solely in a ratio. Bringing income and expense subtotals into the scope of the MPM requirements, even when those are solely used in ratios, would mean users would get benefits of transparency and discipline for all subtotals of income and expenses used in communicating performance.

Staff recommendation

The staff recommended that the Board require that, if a numerator or a denominator of a ratio meets the definition of an MPM, that numerator or denominator should be included in the scope of the MPM requirements in order to ensure all subtotals of income and expenses used in communicating performance are in the scope of MPMs. The staff did not recommend for the Board to explore expanding the scope of MPM to include measures based on line items presented in the statement(s) of financial performance, measures based on the cash flow statement, measures based on the statement of financial position or ratios because of the significant time it will require and may result in limited benefits.

Board discussion

Most Board members agreed that if a numerator or a denominator of a ratio meets the definition of a MPM, that numerator or denominator should be included in the scope of the MPM requirement. However, some Board members expressed concerns that if either the numerator or the denominator or if both the numerator and the denominator used in the ratio is an MPM, the ratio itself will not be an MPM. Therefore, it might be useful to require the users to provide a reasonable explanation of the ratio.

Some Board members did not agree with the staff’s recommendation not to expand the scope of MPMs to include additional measures based on the line items presented in the statement(s) of financial performance because they believed this is important for how an entity communicate its performance to its stakeholders. In addition, some Board members believed this would result in the loss of a subset of meaningful adjustments that management can present. However, most Board members agreed not to extend the scope of this project and risk re-exposure as the objective is to complete this project on a timely basis. Board members asked the staff to clarify that even if the term “adjusted” is not being used, if the line item is not an IFRS measure then that line item would be in the scope of MPMs.

Many Board members agreed with the proposal not to explore expanding the scope of MPMs to include measures based on the cash flow statement. This is partly to avoid scope creep but also because MPMs relating to measures based on line items presented in the statement(s) of financial performance was only considered after the improvements to the statement(s) of financial performance were made, by considering the MPMs relating to measures based on cash flows without considering the improvements to the statement of cash flows could be premature and prove to be problematic. However, given the overwhelming feedback from stakeholders that MPMs relating to measures based on cash flows are important to understanding the performance of an entity, some Board members believed it would be useful to address this issue as part of this project and not let the risk of re-exposure be a factor in making that judgement.

Some Board members asked the staff to consider whether preparers are permitted but not required to present some MPMs. Lastly, the Board asked the staff to consider the practical challenges of ratios being disclosed in the same location as MPMs but are not in the scope of MPMs.

Board decision

12 out of the 13 Board members supported the staff’s recommendation that if a numerator or a denominator of a ratio meets the definition of an MPM, that numerator or denominator should be included in the scope of the MPM requirements.

10 Board members supported the staff’s recommendation not to explore expanding the scope of MPMs to include measures based on line items presented in the statement(s) of financial performance and measures based on the cash flow statement.

11 13 Board members supported the staff’s recommendation not to explore expanding the scope of MPMs to include measures based on the statement of financial position or ratios.

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