Cover note and summary of feedback and redeliberations (Agenda Paper 21)

In December 2019, the IASB published Exposure Draft ED/2019/7 General Presentation and Disclosures. The comment period ended on 30 September 2020. In this meeting, the IASB continues its redeliberations of the proposals in the ED.

Unusual income and expenses (Agenda Paper 21A)

Background

This paper continued the IASB’s discussions on unusual income and expenses. It set out a summary of the IASB’s redeliberations on this topic so far, and an analysis of whether the IASB should continue to propose a definition of unusual income and expenses.

Staff recommendation

The staff recommended that the IASB does not proceed with any specific requirements for unusual income and expenses as part of this project.

IASB discussion

IASB members emphasised the importance of unusual income and expenses as a specific requirement but acknowledged that deliberating this further may result in unnecessary delays to the completion of this project.  Many IASB members believed that the research should be captured so the definition of unusual income and expenses may be explored in the future. Many IASB members also believed that communication of why the IASB reached this decision should be clearly explained to avoid unintended signalling to the stakeholders.

IASB decision

All the IASB members agreed not to proceed with any specific requirements for unusual income and expenses as part of this project.

Entities with specified main business activities—Associates and joint ventures (Agenda Paper 21B)

Background

This paper set out the staff analysis and recommendation relating to the proposal in the ED for entities with specified main business activities to classify income and expenses from associates and joint ventures accounted for using the equity method outside of the operating category.

Staff recommendation

The staff recommended that the IASB require entities with specified main business activities to classify income and expenses from associates and joint ventures accounted for using the equity method in the investing category. As a result, all entities would classify income and expenses from associates and joint ventures accounted for using the equity method in the investing category.

IASB discussion

Some IASB members expressed concern over the recommendation to require entities with specified main business activities to classify income and expenses from associates and joint ventures accounted for using the equity method in the investing category because there are businesses whose main business activity is to invest in associates and joint ventures and by requiring the income and expenses from associates and joint ventures accounted for using the equity method to be accounted for in the investing category would not be reflective of the performance of the entity. Therefore, some IASB members believed that there should be an exception for some businesses such as insurers to classify income and expenses from associates and joint ventures accounted for using the equity method in the operating category. Other IASB members asked whether it would be possible to address this in a narrow-scope amendment to IFRS 17. However, many IASB members disagreed with allowing exceptions for specific industries as these would be made on an arbitrary basis.

IASB decision

9 of the 11 IASB members voted in favour of requiring entities with specified main business activities to classify income and expenses from associates and joint ventures accounted for using the equity method in the investing category. As a result, all entities would classify income and expenses from associates and joint ventures accounted for using the equity method in the investing category.

Investments in subsidiaries, associates and joint ventures (Agenda Paper 21C)

Background

This paper set out the staff analysis and recommendations for aspects of the proposals relating to investments in subsidiaries, associates and joint ventures in the ED. This paper discussed the feedback on, and clarifications required, for classification of income and expenses from investments in subsidiaries, associates and joint ventures in separate financial statements as well as clarification of the classification of income and expenses from investments in subsidiaries accounted for at fair value through profit or loss in accordance with IFRS 9 in consolidated financial statements as a consequence of the clarifications related to separate financial statements. This paper also considered whether the IASB should provide guidance on assessing whether investments in subsidiaries, associates and joint ventures are investments as a main business activity.

Staff recommendation

The staff recommended that the IASB clarify that income and expenses from associates and joint ventures not accounted for using the equity method includes income and expenses from associates and joint ventures accounted for at cost and in accordance with IFRS 9 applying IAS 27 and at fair value through profit or loss (FVTPL) in accordance with IFRS 9 applying IAS 28. The staff also recommended the IASB to require income and expenses from investments in subsidiaries not accounted for using the equity method to be classified in the investing category unless investing in subsidiaries is a main business activity and clarify that income and expenses from subsidiaries not accounted for using the equity method includes income and expenses from all subsidiaries that are accounted for FVTPL in accordance with IFRS 9 applying IFRS 10 and at cost and in accordance with IFRS 9 applying IAS 27. Furthermore, the staff recommended the IASB require that an entity classifies income and expenses from subsidiaries accounted for using the equity method in the investing category in its separate financial statements. Lastly, the staff recommended the IASB clarify that the way an entity groups subsidiaries, associates and joint ventures for the purposes of assessing whether investing in subsidiaries, associates and joint ventures is a main business activity should be consistent with the way it groups investments into categories for determining the measurement basis (paragraph 10 of IAS 27).

IASB discussion

IASB members agreed with the staff’s recommendation to clarify that income and expenses from associates and joint ventures not accounted for using the equity method includes income and expenses from associates and joint ventures accounted for at cost and in accordance with IFRS 9 applying IAS 27 and at FVTPL in accordance with IFRS 9 applying IAS 28 because this achieves a more aligned and consistent presentation in specific jurisdictions.  However, some IASB members questioned whether the choice to account for investments in subsidiaries using the equity method should determine the classification of income and expenses from subsidiaries because if a preparer had chosen to account for its investments in subsidiaries at cost or at FVTPL, it could classify its investments in subsidiaries in the operating category. The staff clarified the classification of investment in subsidiaries is determined by the entity’s main business activity.

IASB decision

The IASB voted in favour of clarifying that income and expenses from associates and joint ventures not accounted for using the equity method includes income and expenses from associates and joint ventures accounted for at cost and in accordance with IFRS 9 applying IAS 27 and at FVTPL in accordance with IFRS 9 applying IAS 28.

All IASB members voted in favour of requiring income and expenses from investments in subsidiaries not accounted for using the equity method to be classified in the investing category unless investing in subsidiaries is a main business activity

They also voted in favour of clarifying that income and expenses from subsidiaries not accounted for using the equity method includes income and expenses from all subsidiaries that are accounted for FVTPL in accordance with IFRS 9 applying IFRS 10 and at cost in accordance with IFRS 9 applying IAS 27.

All IASB members voted in favour of requiring that an entity classifies income and expenses from subsidiaries accounted for using the equity method in the investing category in its separate financial statements.

Lastly, all IASB members voted in favour of clarifying that the way an entity groups subsidiaries, associates and joint ventures for the purposes of assessing whether investing in subsidiaries, associates and joint ventures is a main business activity should be consistent with the way it groups investments into categories for determining the measurement basis (paragraph 10 of IAS 27).

Classification of incremental expense (Agenda Paper 21D)

Background

This paper set out staff analysis and recommendations which respond to stakeholder comments relating to the proposed requirement in the ED for an entity to classify incremental expenses incurred generating income and expenses from investments in the investing category (i.e. ‘incremental expenses in the investing category’). The analysis considered the effects of the IASB’s tentative decisions in redeliberations relating to the classification of income and expenses in the investing category.

Staff recommendation

The staff recommended that the IASB withdraw the proposed requirement in the ED for an entity to classify incremental expenses in the investing category.

IASB discussion

IASB members agreed to withdraw the proposed requirement in the ED for an entity to classify incremental expenses in the investing category because the costs outweigh the benefits. However, one IASB member questioned whether an exception could be made for transaction costs being incremental costs. Many IASB members disagreed with the suggestion because they would want the requirements to be principle-based rather than rule-based. The IASB members agreed that this consideration can be reflected in the basis for conclusion (BC).

IASB decision

All IASB members voted in favour of withdrawing the proposed requirement in the ED for an entity to classify incremental expenses in the investing category.

Specified subtotals (Agenda Paper 21E)

Background

This paper addressed stakeholders’ feedback on the proposals in the ED for subtotals specified by IFRS Accounting Standards (referred to as ‘specified subtotals’). This paper also presented the staff analysis on whether, in light of the tentative decisions on other topics in the project, the IASB should revise the list of specified subtotals proposed in the ED.

Staff recommendation

The staff recommended that the IASB confirm the proposal that the specified subtotals listed in paragraph 104 of the ED are not management performance measures (MPMs) and add ‘operating profit or loss and income and expenses from investments accounted for using the equity method’ to the list of specified subtotals in paragraph 104 of the ED. In addition, the staff recommended the IASB confirm the examples of subtotals similar to gross profit listed in paragraph B78 of the ED and clarify in the application guidance that MPMs can be reconciled to a specified subtotal regardless of whether or not the subtotal is presented in the statement of profit or loss.

IASB discussion

Some IASB members questioned whether the specified subtotal of ‘operating profit or loss and income and expenses from investments accounted for using the equity method’ is required in call cases. The staff clarified that the specified subtotal is required if it is necessary to communicate the performance of the entity. One IASB member highlighted that it is not a strong argument to say that reconciliations between the MPM and subtotals are not required because it is apparent from their presentation in the financial statements. This is because the definitions of each metric would not only need to be apparent but would also need to be clear for the purpose of digital reporting. Some IASB members expressed concerns with allowing preparers to reconcile an MPM to a specified subtotal that is not presented in the statement of profit or loss because although users will generally understand how to reconcile to the specified subtotal, it may be difficult to obtain information to perform the calculation themselves. One IASB member highlighted that the location for presenting the reconciliation of an MPM to the specified subtotal should be next to where the MPM is presented.

IASB decision

The IASB voted in favour of confirming the proposal that the specified subtotals listed in paragraph 104 of the ED are not MPMs and add ‘operating profit or loss and income and expenses from investments accounted for using the equity method’ to the list of specified subtotals in paragraph 104 of the ED.

All IASB members voted in favour of clarifying in the application guidance that MPMs can be reconciled to a specified subtotal regardless of whether or not the subtotal is presented in the statement of profit or loss but with minimum reconciliation to a specified subtotal excluding effects of tax and non-controlling interest.

Presentation of operating expenses (Agenda Paper 21F)

Background

This paper continued the deliberations on the proposal set out in the ED relating to the presentation of operating expenses in the statement of profit or loss and asks for the IASB’s decisions on whether to confirm, withdraw or revise those proposals.

Staff recommendation

The staff recommended that the IASB expands the explanation in the description of the function of expense method to clarify how this involves allocating and aggregating operating expenses according to the activity to which the consumed economic resource relates and provides application guidance to clarify the interaction between the function of expense method and the principles of aggregation and disaggregation and the roles of the primary financial statements.

In addition, the staff recommended that the IASB requires entities to include in cost of sales the carrying amount of inventories recognised as an expense during the period when presenting cost of sales and requires entities that present functional line items to disclose a narrative description of what types of expenses (based on their nature) are included in each functional line item.

Furthermore, the staff recommended that the IASB confirms the proposal to require operating expenses to be presented in the statement of profit or loss using a classification based either on their nature or function and confirms the proposal to include application guidance on deciding which method of presenting operating expenses provides the most useful information, including the factors set out in paragraph B45 of the ED.

Moreover, the staff recommended that the IASB withdraw the proposed prohibition on a mixed presentation of operating expenses and require entities, when considering which method to use, to consider the roles of primary financial statements and provide examples when a mixed presentation might provide the most useful information.

Lastly, the staff recommended that the IASB provide application guidance to clarify the requirement for consistent presentation of operating expenses from one reporting period to the next and how to label nature line items when a mixed presentation is used.

IASB discussion

IASB members were supportive of the staff’s recommendations but expressed that it would be helpful to understand what is included in the expense by function line items. The staff clarified that preparers should consider the general requirement to present additional financial information where it is necessary for the understanding of the financial statements. The IASB members agreed that it is difficult to prohibit mixed presentation as the existing requirements may also result in mixed presentation. One IASB member asked the staff to clarify that the factors noted in paragraph B45 of the ED are not exhaustive. In addition, the IASB member asked the staff to clarify that paragraph B45(b) of the ED provides an example of the presentation method of a manufacturing company, however, this may apply to other industries. The IASB member asked the staff to clarify that when determining what is ‘most useful’ information, the preparer should apply this consistently similar to applying an accounting policy choice. In addition, the IASB member asked the staff to clarify that the preparer is firstly required to determine what is the most useful presentation and then consider the role of the financial statements.

IASB decision

All IASB members voted in favour of expanding the explanation in the description of the function of expense method to clarify how this involves allocating and aggregating operating expenses according to the activity to which the consumed economic resource relates.

They also voted in favour of providing application guidance to clarify the interaction between the function of expense method and the principles of aggregation and disaggregation and the roles of the primary financial statements.

All IASB members voted in favour of requiring entities to include in cost of sales the carrying amount of inventories recognised as an expense during the period when presenting cost of sales.