Mr Hoogervorst's speech followed two tracks. First he showed how the IASB's projets on primary financial statements and on wider corporate reporting will help companies to better explain their long-term performance to investors. He then turned to the accounting treatment of equity investments.

In the exposure draft of a new standard on general presentation and disclosures in financial statements the IASB published earlier this week, the IAS proposes defining operating profit, which will enhance comparability and become a powerful instrument for companies to explain their long-term performance to investors. The exposure draft also proposes a note in which companies will have to identify elements of income and expense which are ‘unusual’ in the sense they have limited predictive value. The IASB believes that the proposals will help investors gain insight into the persistence of earnings and will also help companies better explain their long-term strategy.

The IASB also believes that the work around updating the Management Commentary Practice Statement is important in helping companies tell their long-term story to investors. Elements that may be essential to a company’s long-term strategy often escape the financial statements, such as its business model, its intangible resources, the business environment it operates in, and more forward-looking information. Especially on information on intangibles and sustainability, which are becoming critical a company’s long-term viability, the current practice statement says little.

Mr Hoogervorst then turned to short-term volatility vs. the long-term perspective. He explained that looking at the long term does not imply that that short-term economic phenomena can be ignored:

If short-term volatility in the financial statements reflects real economic volatility, it should not be discarded or ironed out in an artificial way. [...] Companies or investors that take a long-term view, must be able to withstand the inevitable short-term fickleness of the marketplace. 

Mr Hoogervorst noted that in IFRS 9 the IASB abolished the available-for-sale (AFS) category for equity investments and fair value through profit or loss became the default requirement for equity investments. He stated that ever since, some stakeholders have suggested this accounting treatment is a disincentive for long-term investment in equity instruments as it could lead to more short-term volatility in the income statement. And he noted that he could perfectly well understand these comments as "the AFS category for equity investments in IAS 39 [...] provided a perfect instrument for companies to smooth their income statement over time".

Mr Hoogervorst actually provided an example of an actual company that tended to release larger quantities of AFS reserves when its net earnings before AFS were under pressure. This form accounting was perfectly in accordance with the requirements of IAS 39, yet it did not fully reflect the performance of the company: The deteriorating performance of the company was less clearly visible to investors. Therefore, Mr Hoogervorst stated, he strongly believed in accounting standards that minimise the scope for earnings management. Nevertheless, stated the belief that AFS will probably be one of the hot topics in the post-implementation review of IFRS 9, which will be able to draw on the experience of companies around the world that have already adopted IFRS 9.

Mr Hoogervorst concluded his speech by stating that: "Long-term goals should also be subject to the scrutiny of shorter-term performance measures. Otherwise, how would you know that you are on track?"

Please click to access the full transcript of Mr Hoogervorst's speech on the IASB website.

Mr Jones’ first term as chair will last until 30 June 2023, when he will be eligible for a second term lasting three years.

Mr Jones is chief accountant and partner at Ernst & Young LLP. He is a former member of the FASB’s Financial Accounting Standards Advisory Council and the AICPA’s Accounting Standards Executive Committee.

For more information, see the press release on the FAF’s website.

Florian Esterer, Koei Otaki, Anthony Scilipoti, Sunil Singhania and Joao Toniato will join the CMAC for a three-year term beginning 1 January 2020, renewable once for an additional three-year term.

Additional information, including information on the backgrounds of the new members, is available on the IASB website.

Until now, the core taxonomy included in ESEF was the 2017 IFRS Taxonomy. The amendment replaces that version with the most recent one published by the IFRS Foundation in March 2019.

The ESEF will be amended on a yearly basis to reflect updates to the IFRS Taxonomy published by the IFRS Foundation.

Please click to access the updated regulation in the Official Journal.

The 15-minute podcast features discussions related to financial instruments on the following topics:

• Proposals outlined in the newly-published ED on general presentation and disclosures.
• Progress related to amendments to IFRS 17 Insurance Contracts as well as developments in the IBOR reform project and financial instruments with characteristics of equity.
• Business combinations under common control and what work will be done on this project in 2020.
• More details on the review of the IFRS for SMEs Standard.
• Difference between the IFRS for SMEs Standard and a separate research project that deals with subsidiaries that are SMEs.
• Proposed amendments to IAS 8.
• Highlights from 2019.

The podcast can be accessed through the press release on the IASB website. More information on the topics discussed is available through our comprehensive notes taken by Deloitte observers at the December IASB meeting.

The final report makes recommendations to the European Commission for action in key areas. Decisive actions are recommended for areas such as the disclosure of Environmental, Social and Governance (ESG) factors. These include:

• amending the Non-Financial Reporting Directive to establish principles for high quality non-financial information along with a limited set of specific disclosure requirements;
• promoting a single set of international ESG disclosure standards; and
• requiring the inclusion of non-financial statements in annual financial reports.

Other areas investigated included the use of fair value measurement in financial statements. ESMA did not identify any need for amending existing requirements in the area of fair value measurement, particularly with respect to the treatment of equity and equity-like instruments in IFRS 9 Financial Instruments, to address concerns with undue short-termism.

Please click for the following additional information:

• Final report (link to ESMA website)
• Our news item on the July 2019 consultation
• Our news item on the responses to the July 2019 consultation

The register was created to increase transparency and "continue demonstrating the Board’s independence and accountability and is also in line with stakeholder feedback." The register includes speaking engagements and face-to-face, web-based or phone meetings of more than 30 minutes duration. The register is sorted monthly by IASB member and details for each engagement: the stakeholder name, category of engagement, and location.

For more information, see the press release and stakeholder engagement register on the IASB’s website.

Background

The Agenda consultation 2015 revealed that respondents wanted the Board to prioritise projects that are important to users of financial statements, including the disclosure initiative and the primary financial statements project. The Board took up discussions in the project in April 2016.

The Board decided to focus on four main areas:

• Introduction of defined subtotals and categories in the statement of profit or loss
• Introduction of requirements to improve aggregation and disaggregation
• Introduction of Management Performance Measures (MPMs) and accompanying disclosures in financial statements
• Introduction of targeted improvements to the statement of cash flows

In May 2019, the Board also decided that a discussion paper is not required and that as a next project step, the Board will develop an exposure draft for a new standard replacing IAS 1 Presentation of Financial Statements. The related requirements in IAS 1 will be brought forward to the new standard with limited wording changes. Other requirements of IAS 1 will be moved to IAS 8 (which would be renamed to Basis of Preparation, Accounting Policies, Changes in Accounting Estimates and Errors) and IFRS 7.

Key proposals

On the four above mentioned areas, ED/2019/7 General Presentation and Disclosures proposes the following:

• The introduction of defined subtotals and categories in the statement of profit or loss aims at additional relevant information and a P&L structure that is more comparable between entities. The proposals include:
  • Require all entities to present an operating profit or loss subtotal in the statement of profit or loss, which is defined as profit from continuing operations before tax and before investing (defined as returns from investments that are generated individually and largely independently of other resources held by an entity), financing (defined as income and expenses from assets and liabilities related to an entity’s financing), and the share of profit of integral associates and joint ventures; whether an item is ‘unusual’ does not affect whether it is included in operating profit; there is a separate proposed approach to operating profit for financial entities.
  • Require entities to present separately ‘integral’ and ‘non-integral’ associates and joint ventures in statements of financial performance and cash flows, where a significant interdependency between an entity and an associate or joint venture would indicate that the associate or joint venture is integral to the main business activities of the entity (the definition would be supplemented with indicators for determining whether a joint venture or associate is ‘integral’ or ‘non-integral’).
  • Not to define EBITDA, but to use ‘operating profit or loss before depreciation and amortisation’, which would provide similar information to many of the EBITDA measures that are currently being used and is clearly understood.
• The introduction of requirements to improve aggregation and disaggregation aims at additional relevant information and insuring that material information not being obscured. The proposals include:
  • Remove the free choice whether the analysis of operating expenses is by nature or by function; instead the Board proposes to provide a set of factors for entities to consider when making this assessment; remove the option to present an analysis of expenses in the notes only; if the statement of profit or loss presents an analysis by function, there is no requirement to analyse each functional line item by nature in the notes (analysis would be of total operating expenses).
  • Require the entities to identify assets, liabilities, equity, income and expenses that arise from individual transactions or other events and classify them into groups based on shared characteristics, resulting in line items in the primary financial statements that share at least one characteristic, then separate them based on further characteristics, resulting in the separate disclosure of material items in the notes; there may be a need to aggregate immaterial items with dissimilar characteristics to avoid obscuring relevant information; companies should use a descriptive label or, if that is not possible, provide information in the notes about the composition of such aggregated items.
  • Define unusual income and expenses as income and expenses with limited predictive value when it is reasonable to expect that income or expenses that are similar in type and amount will not arise for several future annual reporting periods; income and expenses from the recurring remeasurement of items measured at a current value would not be expected to be classified as unusual; unusual income and expenses would be disaggregated by line items presented in statement of profit or loss and line items disclosed in the analysis of operating expenses by nature, if the entity analyses expenses by function in the statement of profit or loss.
• The introduction of Management Performance Measures (MPMs) and accompanying disclosures in the financial statements aims at transparency and discipline in the use of such measures and disclosures in a single location. The proposals include:
  • Require disclosure in the notes of subtotals of income and expenses that are used in public communications with users of financial statements, outside financial statements, complement totals or subtotals included in IFRSs, and communicate management’s view of an aspect of an entity’s financial performance; they would be accompanied by disclosures in a single note to enhance transparency.
  • MPMs would be accompanied by disclosures in the notes offering a description of why the MPM provides management’s view of performance, how the MPM has been calculated, how the measure provides useful information about an entity’s financial performance, a reconciliation of the MPM to the most directly comparable subtotal or total specified by IFRSs, a statement that the MPM provides management’s view of an aspect of the entity’s financial performance, the effect of tax and non-controlling interests separately for each of the differences between the MPM and the most directly comparable subtotal or total specified by IFRSs; if there is a change in how the MPM is calculated, an explanation would be provided to help users understand the reasons for and effect of the change.
  • Specify that as regards adjusted earnings per share, the numerator of adjusted EPS can only be either a subtotal specified by IFRSs or a management performance measure.
• The introduction of targeted improvements to the statement of cash flows aims at improved comparability between entities. The proposals include:
  
  • Require entities to use operating profit as the single starting point for the indirect reconciliation.
  • Remove the classification options for interest and dividends.

The deadline for submitting comments has been extended until 30 September 2020.

Effective date and transition

The ED does not contain a proposed effective date as the IASB will decide on the effective date only upon completion of its redeliberations. The expectation is currently that the standard will become effective approximately 18-24 months after being published in its finalised form.

The standard would be applied retrospectively and early adoption would be permitted.

Additional information

Please click for:

• IASB press release (link to IASB website)
• Access to the consultation documents on the IASB website:
  • Exposure draft
  • Basis for conclusions
  • Illustrative examples
• IASB Snapshot document summarising the proposals
• Debrief with IASB Chairman Hans Hoogervorst on YouTube (approx. five minutes)
• Our IFRS in Focus newsletter explaining the exposure draft
• Our IAS Plus Project page on Primary financial statements

Amendments to IFRS 17 Insurance Contracts: The Board continued its discussions about ED/2019/4 Amendments to IFRS 17. The Board unanimously supported all of the staff recommendations (about the amendments identified in November as not requiring significant redeliberation and about insurance acquisition cash flows and reinsurance contracts held).

IBOR reform and the effects on financial reporting: The Board decided that IFRS 9 and IAS 39 be amended to allow entities to continue a hedging relationship (i.e. no derecognition) when modifications to the interest rate benchmark on which a financial instrument’s contractual cash flows are based are a direct consequence of IBOR reform and are done on an economically equivalent basis.

Accounting policies and accounting estimates (Amendments to IAS 8): The Board gave the Staff permission to prepare the final amendments to IAS 8. They will apply to annual periods beginning on or after 1 January 2022 and are expected to be published in the first half of 2020.

Implementation matters:

Onerous contracts: The Board gave staff permission to prepare the final amendments to IAS 37. They will apply to annual periods beginning on or after 1 January 2022 and are expected to be published in the first half of 2020.

Annual improvements: The Board gave staff permission to prepare the final amendments for annual improvements to IFRS 1 (subsidiary as a first-time adopter), IFRS 9 (fees included in the ‘10 per cent’ test for derecognition of financial liabilities) and IAS 41 (taxation in fair value measurements). The amendments will apply to annual periods beginning on or after 1 January 2022. The amendment to the illustrative example accompanying IFRS 16 takes effect when it is published. Staff do not expect to publish the package of amendments until the second quarter of 2020.

IFRS 3 reference to the Conceptual Framework: The Board decided to confirm the proposal to add, within the section headed ‘Exception to the recognition principle’, an exception to the recognition principle for liabilities and contingent liabilities within the scope of IAS 37 or IFRIC 21. It also decided to clarify that updating the reference to the Conceptual Framework does not change IFRS 3 requirements for recognition of assets and liabilities whose fair values are subject to measurement uncertainty.

Subsidiaries that are SMEs: The Chair of the Australian Accounting Standards Board gave a presentation on their proposal for a simplified disclosure standard, similar to the one the IASB is looking to develop. (It was an information-only session).

Business combinations under common control: The Board decided that the acquisition method, as set out in IFRS 3, be required for transactions that affect non-controlling shareholders of the receiving entity. However, the receiving entity should recognise any excess of the fair value of the acquired identifiable net assets over the consideration transferred as an increase in the receiving entity’s equity (contribution), not as a gain on a bargain purchase in profit or loss.

SME Standard review and update: The Board gave staff permission to prepare the Request for Information, with a comment period of 180 days. 

Financial instruments with characteristics of equity: The Board began its discussion about classifying financial instruments that will, or may, be settled in the issuer’s own equity instruments (both derivative and non-derivative instruments), focusing on what clarifications could be made to the underlying principle of the fixed-for-fixed condition.

Please click to access the detailed notes taken by Deloitte observers for the entire meeting.

In light of the feedback received on the proposed amendments, the staff recommended that the DPOC:

• amend the description of agenda decisions by removing the statement that "explanatory material should be seen as helpful, informative and persuasive";
• amend the description of agenda decisions by replacing "new information that was not otherwise available and could not otherwise reasonably have been expected to be obtained" with "additional insights that might change an entity’s understanding of the principles and requirements in IFRS Standards";
• amend the due process relating to agenda decisions by asking Board members whether they object to the publication of an agenda decision with explanatory material so that an agenda decision will only be published if no more than three Board members (of a Board of 14 members) object to publishing the finalised agenda decision at the Board meeting immediately following the finalisation of decision;
• not to provide the Board with a due process tool equivalent to an agenda decision.

After comprehensive discussion, the DPOC agreed with all staff recommendations. Detailed descriptions of the staff recommendations can be found in the corresponding agenda paper for the meeting. There is also an audio recording of the call (discussion of the paper in question begins at about 27 minutes into the recording) and a summary report of the meeting on the IASB's website.