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

In September 2022, the IASB completed redeliberations on key aspects of the proposals in the Exposure Draft ED/2019/7 General Presentation and Disclosures. In this session, the IASB will discuss the feedback from targeted outreach conducted between September and December 2022 and continue discussing the proposals from the ED.

Disclosure of operating expenses by nature in the notes (Agenda Paper 21A)

Background

This session followed the IASB’s tentative decision to revise the proposal in paragraph 72 of the ED. Paragraph 72 requires that an entity that presents operating expenses using the function of expense method disclose in the notes an analysis of total operating expenses by nature. At the July 2022 meeting, the IASB tentatively decided to revise the proposal to require that an entity disclose the amount of depreciation, amortisation and employee benefits included in each line item in the statement of profit or loss (the ‘revised proposal’). The analysis and recommendations in the paper related to the proposed requirements for entities that present function line items in the statement of profit or loss.

Staff recommendation

The staff recommended that the IASB amend the specific disclosure requirement for operating expenses by nature to require an entity to disclose the amounts of depreciation, amortisation, employee benefits, impairments and write-downs of inventory included in each line item in the statement of profit or loss and confirm the proposal in the ED that the information required by the specific disclosure requirement for operating expenses by nature be given in a single note.

In addition, the staff recommended that the IASB provide application guidance clarifying that expense amounts would not be required and requiring that when the amounts disclosed include amounts that have been included in the carrying amount of assets, an entity provide a qualitative explanation indicating that the amounts disclosed include amounts that have been included in the carrying amount of assets. It would also disclose the assets in which those amounts have been included.

Lastly, the staff recommended that the IASB expand the scope of the proposed exemption from the general requirement to disaggregate material information, as tentatively agreed in January 2023, to include the disaggregation of amounts of nature expenses required to be disclosed by other IFRS Accounting Standards into the function line items in the statement of profit or loss in which they are included.

IASB discussion

IASB members were generally supportive of the staff’s recommendation to expand the scope of specific disclosure requirement for operating expenses by nature to include impairments and write down of inventory for cost-benefit reasons. Some IASB members raised the concern that this proposal may extend the scope of this project while other IASB members said that it is always challenging requiring disclosure of specific items given IFRS are principle-based standards. Some IASB members asked the staff to confirm whether they believe that without the proposal explicitly requiring preparers to disclose impairments and write down of inventory that information may be lost. The staff clarified that there is a risk that information may not be presented when more line items are included together. Some IASB members asked the staff to include in the basis for conclusions (BC) that the rationale for this proposal is because users said that having information on these items would be useful and therefore, the additional costs would be justified. The IASB members have asked the staff to confirm whether impairment losses from financial instruments would be within the scope of this requirement. The staff clarified that they cannot preclude preparers from including them. 

IASB members were supportive of the staff’s recommendation to confirm the proposal in the ED that information required by the specific disclosure requirement for operating expenses by nature be given in a single note, given the precedent set in IFRS 16. Some IASB members would prefer the staff to provide clarity about the information required to be given to fulfil the specific disclosure requirement (i.e. expense amounts). However, the staff said that they would not be able to rephrase the question given the cost is not defined. In addition, the staff said that this proposal is about providing further disaggregation on information already provided by companies. 

IASB members were supportive of the staff recommendation to provide application guidance clarifying that expense amounts would not be required and requiring that when the amounts disclosed include amounts that have been included in the carrying amount of assets, an entity provide a qualitative explanation indicating that the amounts disclosed include amounts that have been included in the carrying amount of assets because feedback from stakeholders suggest that this proposal achieves the correct cost benefit balance.

IASB members raised concerns about adding specific disclosure requirements for operating expenses by nature for interim financial reporting periods given there was no consultation on this previously.

IASB decision

All IASB members agreed with the staff recommendation to amend the specific disclosure requirement for operating expenses by nature to require an entity to disclose the amounts of depreciation, amortisation, employee benefits, impairments and write-downs of inventory included in each line item in the statement of profit or loss

They also agreed to confirm the proposal in the ED that the information required by the specific disclosure requirement for operating expenses by nature be given in a single note.

All IASB members agreed with the staff recommendation to provide application guidance clarifying that expense amounts would not be required and requiring that when the amounts disclosed include amounts that have been included in the carrying amount of assets, an entity provides a qualitative explanation indicating that the amounts disclosed include amounts that have been included in the carrying amount of assets. It would also disclose the assets in which those amounts have been included.

12 of the 13 IASB members agreed with the staff recommendation to expand the scope of the proposed exemption from the general requirement to disaggregate material information, as tentatively agreed in January 2023. This is to include the disaggregation of amounts of nature expenses required to be disclosed by other IFRS Accounting Standards into the function line items in the statement of profit or loss in which they are included.

Management performance measures—rebuttable presumption (Agenda Paper 21B)

Background

This paper set out staff analysis and recommendations responding to feedback received in targeted outreach relating to the IASB’s tentative decision to establish a rebuttable presumption that a subtotal of income and expenses included in public communications outside the financial statements represents management’s view of an aspect of the entity’s financial performance.

Staff recommendation

The staff recommended that the IASB explain in the application guidance for the rebuttable presumption that reasonable and supportable information for rebutting the presumption would be consistent with the way management uses or communicates the subtotal. For example, a subtotal being included in multiple locations with extensive analysis throughout an entity’s public communications would not be consistent with the assertion that it does not communicate management’s view. In addition, a subtotal being used internally by management would not be consistent with the assertion that it does not communicate management’s view. Many subtotals included in public communications would not be consistent with asserting that none of those subtotals communicate management’s view.

IASB discussion

IASB members were supportive of the staff’s recommendation but some raised concerns around using the term ‘reasonable and supportable’ as a threshold. This is because this concept may not be applied consistently by preparers. These IASB members suggested that the rebuttable presumption can be used if management can demonstrate this is not how they use or communicate the subtotal. Other IASB members were cautious about being too prescriptive. The staff said that they are cognisant of changing the terminology as this may be perceived by users as a signal that a different threshold should be applied. Many IASB members thought the application guidance should not include the example in paragraph 43(c) that many subtotals included in public communications would not be consistent with asserting that none of those subtotals communicate management’s view. IASB members did not consider this to be persuasive evidence and said it would be difficult to illustrate in the application guidance. 

IASB decision

All IASB members agreed with the staff recommendation to explain in the application guidance for the rebuttable presumption that reasonable and supportable information for rebutting the presumption would be consistent with the way management uses or communicates the subtotal. For example, a subtotal being included in multiple locations with extensive analysis throughout an entity’s public communications would not be consistent with the assertion that it does not communicate management’s view. In addition, a subtotal being used internally by management would not be consistent with the assertion that it does not communicate management’s view. Many subtotals included in public communications would not be consistent with asserting that none of those subtotals communicate management’s view.

Management performance measures—Relationship with the requirements of other IFRS Accounting Standards (Agenda Paper 21C)

Background

This paper analysed the relationship between the proposals in the ED for management performance measures (MPMs) and the requirements in IAS 8 and IAS 34. This paper should be read in conjunction with Agenda Paper 21D Management performance measures—tax disclosures.

Staff recommendation

In relation to IAS 8, the staff recommended that the IASB confirm the proposed disclosure requirements in paragraphs 108(a) and 108(b) of the ED that if an entity changes the calculation of its MPMs, introduces a new MPM or removes a previously disclosed MPM from its financial statements, it shall disclose sufficient explanation for users of financial statements to understand the change, addition or removal and its effects. It would also disclose the reasons for the change, addition or removal.

Additionally, the staff recommended that the IASB amend the proposed disclosure requirement in paragraph 108(c) of the ED so that if an entity introduces a new MPM or changes an existing MPM, it need not provide the comparative information for the new or changed MPM if it is impracticable to do so.

Lastly, the staff recommended that the IASB add a requirement that if an entity does not provide comparative information about a new or changed MPM because it is impracticable to do so, the entity shall disclose the reason for not providing the comparative information for MPM and clarify that the choice of a MPM, including how it is calculated, is not an accounting policy as defined in IAS 8.

In relation to IAS 34, the staff recommended that the IASB confirm the consequential amendment to IAS 34 proposed in the ED to require in interim financial reports the MPM disclosures required by paragraph 106 of the ED and expand the proposed amendment to IAS 34 to include in the list of other disclosures required by paragraph 16A, the requirements of paragraph 108 of the ED that apply when there are changes to an entity’s MPMs.

IASB discussion

IASB members were supportive of the staff proposal because although there may be instances where it is impracticable to provide comparative information, they considered that this is likely to be in limited circumstances only based on past experience. In general, management would want to provide comparative information. Other IASB members said that this is an extremely high hurdle. Some IASB members said that the clear disclosure should be provided in circumstances where it is not be possible to provide a comparative for the change in the MPM. However, other IASB members questioned whether providing comparatives is useful information if management have genuinely changed their measure. Some IASB members asked how this proposal would be applied if there was a fundamental change in the business. The staff clarified that absence of a comparative is acceptable (i.e. where there was no figure for the MPM in the prior year).

Some IASB members considered that the change in MPM is not a change in accounting policy but the rationale should be explained. The IASB members asked the staff to clarify this in the BC.

IASB members asked the staff to confirm what would happen if an entity provided MPMs in their annual financial statements but have not provided MPMs in their interim financial statements. The staff confirmed they consider if timing of public communication will create MPMs in a future meeting.

IASB members asked the staff to make it clear in the drafting whether the requirement should disclose MPMs from the most recent interim to the current interim reporting period.

IASB decision

In relation to IAS 8, all IASB members agreed with the staff recommendation to confirm the proposed disclosure requirements in paragraphs 108(a) and 108(b) of the ED that if an entity changes the calculation of its MPMs, introduces a new MPM or removes a previously disclosed MPM from its financial statements, it shall disclose sufficient explanation for users of financial statements to understand the change, addition or removal and its effects. It would also disclose the reasons for the change, addition or removal.

All IASB members agreed with the staff recommendation to amend the proposed disclosure requirement in paragraph 108(c) of the ED so that if an entity introduces a new MPM or changes an existing MPM, it does not need to provide the comparative information for the new or changed MPM if it is impracticable to do so.

All IASB members agreed with the staff recommendation to add a requirement that if an entity does not provide comparative information about a new or changed MPM because it is impracticable to do so, the entity shall disclose the reason for not providing the comparative information for MPMs and clarify that selecting an MPM, including how it is calculated, is not an accounting policy as defined in IAS 8.

In relation to IAS 34, all IASB members agreed with the staff recommendation to confirm the consequential amendment to IAS 34 proposed in the ED to require in interim financial reports the MPM disclosures required by paragraph 106 of the ED and expand the proposed amendment to IAS 34 to include in the list of other disclosures required by paragraph 16A, the requirements of paragraph 108 of the ED that apply when there are changes to an entity’s MPMs.

Management performance measures—tax disclosure (Agenda Paper 21D)

Background

This paper set out staff analysis and recommendations on outstanding matters relating to the IASB’s tentative decision on the ED to require an entity to disclose the tax effect and the effect on non-controlling interests (NCI) for each item disclosed in the reconciliation between a MPM and the most directly comparable subtotal or total specified by IFRS Accounting Standards. The outstanding matters are consideration of whether a wider range of approaches to calculating the income tax effect would improve the balance between costs and benefits and consideration of whether the IASB should require specific disclosure requirements for the approach(es) an entity uses to calculate the income tax effect.

This paper should be read in conjunction with Agenda Paper 21C Management performance measures—Relationship with the requirements of other IFRS Accounting Standards.

Staff recommendation

The staff recommended that the IASB retain the option in its tentative decision from May 2022 of calculating the tax effects of the reconciling items at the statutory tax rate(s) applicable to the underlying transaction(s) in the relevant jurisdiction(s).

In addition, the staff recommended that the IASB replace the alternative option in its tentative decision from May 2022 of adding an allocation of other income tax effects to the tax effects described in above with options to calculate the tax effects of the reconciling items on the basis of a reasonable pro rata allocation of the current and deferred tax of the entity in the tax jurisdiction(s) concerned calculate the tax effects of the reconciling items by another method that achieves a more appropriate allocation in the circumstances.

Furthermore, the staff recommended that the IASB confirm the requirement in paragraph 106(d) of the ED for an entity to disclose how it has determined the income tax effects for items reconciling an MPM to the most directly comparable subtotal or total specified by IFRS Accounting Standards and provide application guidance for each reconciling item if more than one method is used to calculate the tax effect.

Lastly, the staff recommended that the IASB revise the requirement in paragraph 108 of the ED to require an entity to disclose changes in MPMs to apply to changes to the calculation of the tax effects of reconciling items.

IASB discussion

IASB members supported the staff recommendation to retain the option of calculating the tax effects of the reconciling items at the statutory tax rate(s) applicable to the underlying transaction(s) in the relevant jurisdiction(s). That is because users have said this is useful information and this would provide additional flexibility to the preparers. IASB members have also asked the staff to confirm that mechanically there is a difference in how tax is computed in the interim financial reporting period and this is not a change in MPM.

IASB decision

All IASB members agreed with the staff recommendation to retain the option in its tentative decision from May 2022 of calculating the tax effects of the reconciling items at the statutory tax rate(s) applicable to the underlying transaction(s) in the relevant jurisdiction(s).

All IASB members agreed with the staff recommendation to replace the alternative option in its tentative decision from May 2022 of adding an allocation of other income tax effects to the tax effects described in above. This includes options to calculate the tax effects of the reconciling items on the basis of a reasonable pro rata allocation of the current and deferred tax of the entity in the tax jurisdiction(s) concerned or calculate the tax effects of the reconciling items by another method that achieves a more appropriate allocation in the circumstances.

All IASB members agreed with the staff recommendation to confirm the requirement in paragraph 106(d) of the ED for an entity to disclose how it has determined the income tax effects for items reconciling an MPM to the most directly comparable subtotal or total specified by IFRS Accounting Standards and provide application guidance for each reconciling item if more than one method is used to calculate the tax effect.

All IASB members agreed with the staff recommendation to revise the requirement in paragraph 108 of the ED to require an entity to disclose changes in MPMs to apply to changes to the calculation of the tax effects of reconciling items.

Issues for categories in the statement of profit or loss (Agenda Paper 21E)

Background

This paper set out the staff analysis and recommendations for outstanding issues for categories in the statement of profit or loss in the ED. This paper discussed classification of foreign exchange differences on liabilities that arise from transactions that do not involve only the raising of finance (‘other liabilities’) that are denominated in a foreign currency and the gain or loss on the net monetary position recognised applying IAS 29. This paper also discussed the income and expenses from specific hybrid contracts with host liabilities that arise from transactions that do not involve only the raising of finance. This paper excluded other outstanding issues related to categories in the statement of profit or loss for which the staff conclude no further action is required, including the:

• Classification of foreign currency differences
• Classification of interest and penalties on income taxes
• Disclosure requirements for hybrid contracts designated at fair value through profit or loss with host liabilities that arise from transactions that do not involve only the raising of finance
• Classification of the change in the value of the undesignated forward element of a forward contract or the foreign currency basis spread of a financial instrument
• Classification of loan commitment fees

Staff recommendation

The staff recommended that the IASB require an entity to classify foreign exchange differences on other liabilities as described in paragraph 1(a) of this paper in the operating category of the statement of profit or loss.

The staff further recommended that the IASB amend IAS 29 and IFRIC 7 to require an entity to classify the gain or loss on the net monetary position in the operating category of the statement of profit or loss.

Lastly, the staff recommended that the IASB require an entity to classify in the financing category of the statement of profit or loss all income and expenses arising after initial recognition for hybrid contracts with host liabilities that arise from transactions that do not involve only the raising of financing and are measured at amortised cost in their entirety.

IASB discussion

IASB members did not discuss the amendments to IAS 29 and IFRIC 7.

Some IASB members disagreed with the staff recommendation to require an entity to classify foreign exchange differences on other liabilities in the operating category of the statement of profit or loss because they considered that in countries with high inflation rates, the foreign exchange differences on other liabilities form part of financing activities. This is because entities in countries with high inflation rates would only have access to capital which is denominated in a foreign currency and should therefore form part of the entity’s financing activities. This would also be consistent with IAS 23 which states that “exchange differences arising from foreign currency borrowings to the extent they are regarded as an adjustment to interest costs.” Furthermore, some IASB members said that entities should consider the nature of foreign exchange differences when determining how to classify this in the statement of profit or loss. Feedback from users showed that there is limited utility for comparable foreign exchange differences. However, other IASB members agreed with the staff recommendation and would prefer to classify all foreign exchange differences in operating activities because they considered this is applicable to most entities.

Some IASB members expressed concerns about requiring an entity to classify in the financing category of the statement of profit or loss all income and expenses arising after initial recognition for hybrid contracts with host liabilities that arise from transactions that do not involve only the raising of financing and are measured at amortised cost in their entirety. This is because the proposal would require preparers to delineate between income and expenses associated with other financial liabilities for the purpose of presentation based on whether it is a hybrid instrument even though a preparer would not be required to do this for the purpose of measurement. Other IASB members were not convinced that this is a prevalent issue.

IASB decision

Only 5 of the 13 IASB members agreed with the staff recommendation to require an entity to classify foreign exchange differences on other liabilities in the operating category of the statement of profit or loss. As such, all IASB members agreed to extend the tentative decision made at its July 2021 meeting to require an entity to classify foreign exchange differences in the same category of the statement of profit or loss as the income and expenses from the items that gave rise to the foreign exchange differences. IASB members agreed that an entity should apply judgement when determining how to allocate between the different categories in the statement of profit or loss without bifurcating the item between the categories.

12 of the 13 IASB members agreed with the staff recommendation to require an entity to classify in the financing category of the statement of profit or loss all income and expenses arising after initial recognition for hybrid contracts with host liabilities that arise from transactions that do not involve only the raising of financing and are measured at amortised cost in their entirety.

IASB members did not discuss the amendments to IAS 29 and IFRIC 7.

Issues related to the proposals for entities with specified main business activities (Agenda Paper 21F)

Background

This paper discussed the issues related to the proposals for entities with specified main business activities in the ED. The issues discussed include the accounting policy choice for the classification of income and expenses arising from cash and cash equivalents for entities that provide financing to customers as a main business activity and feedback for which the staff conclude no further action is required. This includes classification of interest expense on lease liabilities for entities that sublease assets as an intermediate lessor and other feedback on classification of income and expenses on liabilities arising from investment contracts with participation features (in the scope of IFRS 9) or insurance contracts (in the scope of IFRS 17), when neither are issued as part of an entity’s main business activity and obtaining finance from customers as part of a main business activity.

Staff recommendation

The staff recommended that the IASB confirm the accounting policy choice proposed in paragraph 51 of the ED for the classification of income and expenses arising from cash and cash equivalents for entities that provide financing to customers as a main business activity and clarify that the requirement in paragraph 52(a) of the ED for an entity that invests in financial assets as a main business activity would apply regardless of whether the entity has any other specified main business activity.

IASB discussion

One IASB member asked the staff to clarify whether it would be possible for entities that provide financing to customers as a main business activity to calculate their ‘net interest income’ within the operating category if paragraph 51 of the ED for the classification of income and expenses arising from cash and cash equivalents is withdrawn. The staff confirmed that the entity would be able to calculate their ‘net interest income’ but it would be incomplete as income and expenses arising from cash and cash equivalents would not be classified elsewhere.

The IASB members agreed that it would be useful to clarify that the requirement in paragraph 52(a) of the ED for an entity that invests in financial assets as a main business activity would apply regardless of whether the entity has any other specified main business activity based on the feedback from outreach. Tthe analysis in Appendix B further supports this recommendation.

IASB decision

All IASB members agreed with the staff recommendation to confirm the accounting policy choice proposed in paragraph 51 of the ED for the classification of income and expenses arising from cash and cash equivalents for entities that provide financing to customers as a main business activity and clarify that the requirement in paragraph 52(a) of the ED for an entity that invests in financial assets as a main business activity would apply regardless of whether the entity has any other specified main business activity.