Primary Financial Statements project – Redeliberations begin by the IASB on the exposure draft: General Presentation and Disclosures that propose substantial changes to reporting financial performance

Thu 29 Apr 2021

At the March 2021 International Accounting Standards Board’s (“IASB”) meeting, the Board members began the anticipated task of redeliberating the proposals set out in the exposure draft: General Presentation and Disclosures (“ED”), which was published in December 2019 (and was open for comment until 30 September 2020).

For a summary of the original proposals, please refer to our previous blog article: Substantial changes have been proposed regarding the reporting of financial performance under IFRS, leading to a proposed new IFRS that will replace IAS 1

March meeting – Summary of discussions

The Board members have a long list of topics for redeliberation, given that there were 215 comment letters received (for an overview of the feedback summary prepared by IASB staff, please refer to the December 2020 staff paper), and so this first redeliberation meeting began discussing the following aspects:

1. Operating profit – Subtotals and categories in the statement of profit or loss, focusing on the requirement to present a new “operating profit” subtotal and on its definition.
2. Management performance measures – Disclosures required in the notes on management performance measures (“MPMs”) and whether the scope of MPMs should be expanded.
3. Statement of cash flows – Amendments to the statement of cash flows focusing on the scope of these amendments and certain specific proposals.

Operating profit (in the statement of profit or loss)

The IASB has tentatively decided to:

• require entities to present a new “operating profit” subtotal in the statement of profit or loss;
• confirm that the “operating” category  will continue to be defined by what it is not (i.e. it is a “residual” or “default” category) and therefore it should not include items of income and expenses that are classified in the “investing”, “financing”, “income tax” or “discontinued operations” categories. The IASB will discuss the definitions of the “investing” and “financing” categories at a future meeting (including how these apply to banks and other financial institutions for which investing and financing are main business activities). The proposal that income and expenses from equity-accounted associates and joint ventures should be excluded from operating profit will also be discussed at a future meeting;
• not directly define the “operating profit” subtotal; and
• confirm that the “operating” category:
  • will comprise all income and expenses arising from an entity’s operations, including volatile and unusual items arising from these operations (for instance litigation or restructuring costs). “Operating profit” would not therefore only relate to profit from recurring operations, as it is sometimes used by entities; and
  • will include, but will not be limited to, income and expenses from an entity’s main business activities. For example, operating profit could include income and expenses from a subsidiary whose operations are (currently) ancillary to the entity’s main business activities. The IASB’s perspective is, therefore, that secondary or supporting activities are part of an entity’s operations.

Management performance measures (“MPMs”)

The IASB has tentatively decided to:

• require entities to present disclosures on MPMs in the notes to the financial statements, thereby confirming one of the key original proposals in the exposure draft; and
• explore possible approaches to expand the scope of the requirements on MPMs beyond what was envisaged in the exposure draft (which was limited to certain subtotals of income and expenses). This was not unanimously approved (10 votes out of 13), as some of the Board members were concerned that the project would be delayed by the additional work required to identify a suitable approach.

Statement of cash flows

The IASB has tentatively decided to:

• retain the scope of its work as set out in the original proposals in the exposure draft, thereby only to make a few limited-scope amendments to IAS 7. The IASB will, however, discuss the possibility of closer alignment between the categories in the statement of profit or loss and the categories in the statement of cash flows at a future meeting (when it will also discuss the definitions of the “investing” and “financing” categories in the statement of profit or loss). At the same time, the Board will consider the labels to be used for the categories in the statement of profit or loss, to avoid any ambiguity over the extent of this alignment – this change being as a result of many comments received on this issue;
• require entities to use the new “operating profit or loss” subtotal as the starting point for the indirect method of presenting cash flows from operating activities;
• confirm the proposals in the exposure draft on the classification of interest paid and dividend cash flows for entities other than those for which investing and financing are main business activities, thereby, in practice: (a) interest and dividends paid would be classified as cash flows arising from financing activities; and (b) dividends received would be classified as cash flows arising from investing activities. The IASB will decide on the classification of interest received at a future meeting (at the same time as it discusses the definitions of the “investing” and “financing” categories in the statement of profit or loss).