- The International Accounting Standards Board (IASB) is proposing changes to the IFRS standards
- This is in response to investors’ demand to improve performance reporting, so it mainly affects profit or loss statements
- CA ANZ will lodge a submission with the IASB on the proposals, and members’ contributions are vital to inform our policy positions
The International Accounting Standards Board (IASB) has responded to investor demand by proposing changes to how information is communicated in financial statements, focusing on the statement of profit or loss.
The proposals are contained in its Exposure Draft ED/2019/7 General Presentation and Disclosures as part of its Primary Financial Statements project.
The outcome will be a new standard, replacing IAS 1 Presentation of Financial Statements, and a number of other standards will be amended.
The ED is in response to growing concerns from investors and other users of financial reports about the transparency and comparability of entities' performance reporting.
What is being proposed and how might it affect us?
1. Defined subtotals
Currently only 'revenue' and 'profit or loss' are required to be presented in the statement of profit or loss, but no specific subtotals in between.
The proposed changes include classifying income and expenses into four defined categories (operating, integral associates and joint ventures, investing and financing) and presenting three subtotals (operating profit, operating profit and income and expenses from integral associates and joint ventures, profit before financing and income tax).
'Operating' would be the default category (unless items are classified in another category) and would include results related to the entity's main business activities. The investing category aims to capture results of 'stand-alone' investments.
The financing category would include income/expenses from cash and cash equivalents; liabilities arising from financing activities; and other liabilities such as the unwinding of a discount on pension liabilities and provisions.
Whether associates and joint ventures are 'integral' depends on if they are 'closely related' to the entity's main business activities (i.e. whether they generate returns individually and are largely independently of the entity's other assets).
Although the categories proposed for the statement of profit or loss have the same labels as the statement of cash flows (operating, investing and financing), the investing category has a different meaning, so they are not aligned. For example, cash flows from property, plant and equipment are included in the investing category in the statement of cash flows, but income and expenses from those assets would be included in the operating category in the statement of profit or loss.
2. Disaggregating information
Operating expenses are required to be presented in the statement of profit or loss or disclosed in the notes either by 'nature' (showing line items such as employee benefits and depreciation) or by 'function' (showing line items such as cost of sales and general and administrative expenses).
Under the proposals, the option to disclose in the notes would be removed and entities would be required to use the method that provides "the most useful information to investors". A set of indicators to help entities make this assessment would be provided. However, entities that present operating expenses by function in the statement of profit or loss would also be required to disclose in a single note to the financial statements an analysis of their total operating expenses by nature.
A new term – "unusual income and expenses" – is proposed with a definition linked to items having "limited predictive value" (i.e. reasonably expected not to arise for several future reporting periods). The statement of profit or loss is unaffected, instead unusual items would be identified separately and explained in a single note to the financial statements.
3. Management performance measures
Many companies provide 'alternative performance measures' in market communications. These can be useful because they provide insight into how management views the entity's performance and, in many cases, can be complementary to measures specified by IFRS standards.
The proposal calls these "management performance measures" (MPMs) and defines them as subtotals of income and expenses that:
- are used in public communications outside financial statements
- complement totals or subtotals specified by IFRS standards (see below)
- communicate management's view of an aspect of an entity's financial performance.
An entity would be required to disclose any MPMs in single notes to the financial statements, accompanied by a few specific disclosures – including a reconciliation of MPMs to IFRS totals or subtotals. These therefore would be subject to audit. While this would help enhance credibility, it could also give rise to challenges, given the boundary is not restricted to the financial statements themselves.
Subtotals specified by IFRS standards would include:
- the three new subtotals
- 'operating profit/loss before depreciation and amortisation'
- 'gross profit/loss' and similar subtotals such as 'net interest income'
- 'profit/loss before income tax'
- 'profit/loss from continuing operations'.
Consequently, these would not be MPMs. EBITDA was considered for this list but disregarded as it is not clear what the 'E' (i.e. 'earnings') represents, so it would be an MPM.
However, the reporting implications of these proposals in Australia and New Zealand is somewhat limited. Many entities are already subject to similar requirements by virtue of ASIC's Regulatory Guide (RG) 230: Disclosing non-IFRS financial information, and the FMA's Guidance Note of the same name. Although not all 'non-GAAP' measures would be MPMs.
4. Statement of cash flows
A complete overhaul of the statement of cash flows is not within the scope of this project. Here the amendments being suggested:
- Currently entities are required to report cash flows from operating activities using either the 'direct' or 'indirect' method. Under the indirect method, a reconciliation between profit or loss and cash flows from operating activities is required. It is proposed that the starting point for this be 'operating profit'.
- Cash flows from investments in integral and non-integral associates and joint ventures would need to be split (consistent with the proposed approach for the statement of profit or loss).
- The classification choice for interest and dividend cash flows would be removed (for most entities).
5. Statement of financial position
The proposed changes are:
- a new line item for goodwill
- new line items for integral and non-integral associates and joint ventures (consistent with the proposed approach for the statement of profit or loss).
The IASB is seeking comments by 30 June. We need your feedback to help inform our submission. We are particularly interested in whether these proposals would result in financial statements that are more useful to users, and whether there are any unintended consequences. If you have any thoughts on the proposals, please let us know or make a submission directly to the IASB.
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