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Reporting comprehensive income (performance reporting)

The IASB worked on this project on its own from 2001 to 2004. The US Financial Accounting Standards Board (FASB) was also working on a similar project. In April 2004 the boards agreed that, in the interests of convergence, a project on this topic should be conducted jointly. They will regard the past work of each organisation as a useful resource, but will not feel bound by it.

So, in a sense, the project had a 'fresh start' in November 2004. The new project is called Financial Statement Presentation. This web page reflects project information prior to November 2004. Some of the information on this page is out of date, but is retained here for historical reasons. We have created a new and separate project page on financial statemenmt presentation, which has information about the new joint IASB-FASB project starting in November 2004.

Background

This project addresses broadly the issues related to the display and presentation in the financial statements of all recognised changes in assets and liabilities from transactions or other events except those related to transactions with owners as owners (sometimes called comprehensive income). Thus, it will consider items that presently are reported in the income statement, cash flow statement, and statement of changes in equity.

Currently, IAS 1 Presentation of Financial Statements permits but does not require a single comprehensive performance statement.

This project might lead to changes to the IASB Framework in addition to an accounting standard.

Tentative decisions to date

  • Terminology. The Board has begun to use the term 'statement of comprehensive income' rather than 'statement of performance'. This is consistent with the terminology in FASB Statement 130.
  • Scope. The scope of the project includes the income statement, the cash flow statement, and the statement of changes in shareholders' equity. Financial ratios and narrative reports should be excluded from the project. However, the financial metrics currently used by users, such as EBITDA, should not be obscured.
  • Single performance statement. An entity should present a single statement of all recognised income and expense items as a component of a complete set of financial statements.
  • All inclusive. The statement should include the effects of all changes in net assets during the period other than transactions with owners.
  • Predictive ability. The single performance statement should categories and display all income and expenses for the period in a way that enhances users' understanding of the entity's achieved performance and that assists users in forming expectations of future performance.
  • No 'recycling'. Recycling of income and expense items should not be allowed, that is, items should be reported in the performance statement as income or expense only once.
  • Realised vs. unrealised. Profits should not be based on a notion of realisation. The Board noted that realisation means something different in different countries. In Europe and Asia realisation refers to net profit available for distribution. However, in the United States realisation refers to capital maintenance. A critical issue in Europe would be whether 'mark to market' gains are distributable. The Board noted that distributable profits are not an accounting issue but a legal issue of countries concerned. The focus of the standard should be to provide greater transparency and useful information to the investors. Transitional provisions will include disclosures (particularly narrative) as well as possibly dual reporting.
  • Operating vs. investing and financing activities. A split between (a) operating and (b) investing and financing activities is useful.
  • Trading vs. holding gains. Differentiation between income/expenses arising from initial recognition of an item and income/expenses arising from remeasurements of previously recognised items is useful.
  • Fair value changes. Changes in fair values of assets in a period should be split based on causes of the change, for example, value changes resulting from performance during the period, changes in economic conditions, and changes in market expectations. Some Board members raised concerns regarding the significant amount of judgement that would be required to make this split and its usefulness in helping to predict with the future. The concept was accepted but the detail will be developed at a later stage of the project.
  • Changes in estimates. No changes are proposed to the IAS 8 treatment, but the difference between a change in estimate, change in accounting policy, and an error need to be more clearly defined.
  • Change in accounting policy. There should be only one method of accounting for changes in accounting policy, namely restatement of prior periods, unless impractical to do so.
  • Correction of errors. The distinction between fundamental errors and errors should be removed. All errors should be treated in the same way - as changes in accounting policy.
  • Extraordinary items. The extraordinary item category should be abolished.
  • Format of performance statement. A prescribed format and subtotals for the performance statement is needed, but management should be given freedom to specify key performance indicators by having discretion over line items provided and the sequencing of those items. Management would not be allowed to add their own subtotals. Presentation of the performance statement needs to be discussed before the detail of this principle is decided.

Proposed format for the statement of comprehensive income

Column 1
Total (Columns 2 + 3)

Column 2
Income and expenses other than remeasurements

Column 3
Income and expenses resulting from revisions to prior expectations about future periods (remeasurements)

Operations

xxx

xxx

xxx

Financing and investing activities

xxx

xxx

xxx

Income taxes

xxx

xxx

xxx

Discontinuing operations

xxx

xxx

xxx

Net income or comprehensive income

xxx

xxx

xxx

Subtotals within comprehensive income (for example, 'operating profit') will be prohibited except when they are subtotals of other amounts required to be displayed on the face. The Board will consider how to report per share amounts at a future meeting.

Financial instruments

Board deliberations focused on the display of the performance of financial instruments, specifically where to set the dividing line between the two columns envisaged for the performance statement: current performance in column 1 and revisions of past measurements in column 2:

Column 1
Income and expenses other than remeasurements

Column 2
Income and expenses resulting from revisions to prior expectations about future periods (remeasurements)

Total

The two columns are a consequence of the following principle previously approved by the Board:

Income and expenses resulting from the remeasurement of an asset or liability should be reported separately. 'Remeasurement' refers to the revision of estimates embedded in the carrying values of assets and liabilities.

The principle was then discussed separately for:

  • Financial assets and liabilities measured at amortised cost.
  • Financial assets classified as available for sale.
  • Financial assets and liabilities classified as held for trading.
  • Fair value and cash flow hedges.

Financial assets and liabilities measured at amortised cost

For items measured at amortised cost, there are two performance reporting issues: interest income/expense and impairment. The staff's proposal was to have interest (as calculated under IAS 39) displayed in column 1, whilst any charge for impairment would be presented in column 2. The reason for having the latter in column 2 is that it would be interpreted as a revision to an estimate.

Although a majority of the Board supported this idea, some members expressed concern because the interest shown in column 1 would most likely include a factor covering credit risk that had been priced in the original interest rate. They felt it would seem odd that an impairment, being a revision to the original assumption about the credit risk embedded in the particular asset, would be shown in column 1, whilst the factor under revision -- the credit spread over the risk-free rate -- would be presented in column 1. After discussion, the Board agreed to the staff's proposal on the grounds that the credit risk was priced into the interest rate, not into the value of the loan.

Financial assets available for sale

The staff's proposal is that interest be presented in column 1 and any change in the fair value of the financial asset be presented in column 2. Two alternatives were discussed for measuring interest income: historical cost and fair value. The Board agreed to the general principle but decided to address the issue of measuring interest at fair value when it considers the report of the Joint Working Group on Financial Instruments.

Financial assets and liabilities held for trading

The staff's proposal is that remeasurement of fair value be recorded in column 2. There was considerable debate among the Board members on this proposition. Firstly, it was pointed out that not all assets classified as held for trading are really held for trading purposes. Derivatives are an example. The Board agreed to change the label of the category into 'financial assets and liabilities carried at fair value'.

The Board then debated whether a gain or loss on disposal of a financial asset could arise. Several Board members hold the view that recording a gain or loss for an item that is constantly remeasured to fair value is inconsistent with the notion of remeasurement. They argued that the gain or loss would show up simply because the reporting entity did not remeasure the item concerned frequently enough. They suggested the item being remeasured first before being derecognised. Upon derecognition no gain or loss would arise.

Other Board members thought that the nature of the business the reporting entity needed to be considered. They argued that if a company engaged regularly in trading activities, recording a gain or loss on disposal would be justified. The question came up whether the income should be classified as revenues or gains, but that was left open for future discussion. When the Board finally voted on the issue whether a gain or loss could be encountered on disposal (that is, recorded in column 1 rather than column 2), a slight majority of seven to six members voted against it.

Hedge accounting

Fair value hedges. The staff proposed to have all changes in fair value of both the hedged item and the hedging instrument be recorded in column 2, preferably in the same line item. The Board agreed unanimously.

Cash flow hedges. Under IAS 39, for a cash flow hedge, the gain or loss on the hedging instrument is initially recognised directly in equity. Subsequently, the amounts recognised directly in equity are included in net profit or loss in the same period or periods during which the hedged asset or liability acquisition or firm commitment or forecasted transaction affects net profit or loss (for example, when the acquired asset is depreciated or when a forecasted sale actually occurs). The result is that income or expenses on the hedging instrument is recognised in the same period as those on the hedged items. In the case of acquired assets, including the gain or loss on the hedging instrument as part of the cost basis of the acquired asset (with consequential adjustment of depreciation) is known as 'basis adjustment'.

The Board considered four alternative presentation approaches for cash flow hedges:

  • Retaining the IAS 39 approach, sometimes called 'recycling with basis adjustment'.
  • No recycling. This, in effect, is a prohibition of cash flow hedge accounting because the gain or loss on the hedging instrument would be recognised immediately rather than deferred in equity.
  • Quasi-recycling. Under this approach, income and expenses on the hedging instrument are reported in a separate 'cash flow hedging' category in the statement of comprehensive income and are subsequently recycled within the statement of comprehensive income into the same line item in which the hedged item is reported.
  • Basis adjustment. The income and expenses on hedging instruments are deferred in equity the balance sheet until the hedged item is recognised.

Conceptually, the Board favoured the 'no recycling' approach. However, it concluded that this solution should be considered as part of a future comprehensive project on accounting for financial instruments. As a compromise, a majority of the Board favoured the 'quasi-recycling' approach and a minority favoured the 'basis adjustment' approach.

The Board instructed its staff to prepare a summary paper on the project that will be discussed at meetings of the Board, national standard setters, and Standards Advisory Council in September, October and November. Field visits with financial statement preparers and users are also planned.

Regarding how to proceed in this project, the Board decided that the project should move directly to an exposure draft, rather than first issuing a discussion paper. Publication of the ED is planned for first quarter 2003. Click here for a timetable for IASB projects.

Other Items

The allocation of the unwinding of the discount on provisions was discussed. Some Board members felt this should go to column one. However, others believed that, if the operating-financing split is to be defined by reference to a net debt notion, it would need to go to column two. This issue was unresolved and will be discussed at a later meeting.

Another item discussed was the allocation on the performance statement of the difference between selling price and amount received on sales in foreign currency. While a formal vote was not taken, the Board seemed to conclude that this is s column two item to be shown in the same category as the bad debt expense (normally in administrative expenses).

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.