Ongoing IASB deliberations on the presentation of financial statements

Keywords: Mazars, Thailand, IFRS, IASB, IAS 1, IFRS 12, EBITDA

30 December 2021

The subjects discussed were:

• the classification and presentation of income and expenses from associates and joint ventures in the statement of profit or loss;
• the presentation of operating expenses in the statement of profit or loss and disclosures in the notes;
• the operating profit or loss before depreciation and amortisation as a specified subtotal in the statement of profit or loss.

Classification and presentation of income and expenses from associates and joint ventures in the statement of profit or loss

Readers will remember that the December 2019 exposure draft proposed that the share of profit or loss of integral associates and joint ventures would be presented below operating profit as defined by the IASB in the draft text, in connection with the new “operating” category in the income statement. The share of profit of non-integral associates and joint ventures would be presented in profit before financing and tax, in the “investing” category. IFRS 12 would need to be amended to provide guidance for distinguishing between 'integral' and 'non-integral' entities.

This distinction, along with the classification in the statement of profit or loss of income and expenses of entities accounted for under the equity method, was by no means unanimously supported, as an analysis of the comment letters received by the IASB showed.

October’s redeliberations arrived at the following tentative decisions (taken unanimously):

• confirmation of the proposal to require an entity to classify income and expenses from equity-accounted associates and joint ventures outside the operating category;
• withdrawal of the proposal to require an entity to present the subtotal ‘operating profit or loss and income and expenses from integral associates and joint ventures’.
• withdrawal of the proposal to require an entity to identify and present income and expenses from integral associates and joint ventures separately from income and expenses from non-integral associates and joint ventures.

By a very narrow majority (the President having used his additional casting vote) the IASB also tentatively decided that income and expenses from equity-accounted associates and joint ventures would be presented after the new mandatory subtotal for operating profit and before the new mandatory subtotal for profit before financing and income tax. However, the IASB deferred a decision on whether to include such income and expenses in the investing category until such time as it has considered the definition of the investing category. While profit before financing and income tax should include both the operating and investing categories of the income statement and the single line of income and expenses from equity-accounted entities, there is therefore still uncertainty as to the level of the income statement at which this line will be presented.

Presentation of operating expenses in the statement of profit or loss and disclosure in the notes

In terms of the aggregation and disaggregation of information, the December 2019 exposure draft proposed:

• to prohibit a “mixed” presentation of operating expenses in the statement of profit or loss (i.e. broken down by both nature and function). The presentation either by nature or by function would not be a free choice for issuers but should be made in the light of a set of factors to be proposed by the IASB;
• an entity opting for a presentation by function would also be required to disclose a disaggregation of its operating expenses by nature in the notes. The level of detail of this information would no longer be left to the entity’s discretion, as currently authorised by IAS 1, since the exposure draft calls for a complete analysis by nature of all operational expenses (but without requiring a “matrix” approach to operating expenses).

Here again, the IASB's proposals were far from unanimously welcomed, with a fairly marked contrast between users of financial statements, who were generally in favour of the proposals, and preparers, who were generally opposed.

On these sensitive issues, the IASB has essentially set the stage for future decisions by deciding to explore:

• retaining the proposal to require an entity to analyse and present operating expenses in the statement of profit or loss based on their nature or function;
• withdrawing the proposed prohibition on a mixed presentation, instead providing application guidance in order to improve comparability and help achieving faithful representation; and
• retaining the proposal to provide application guidance which entities could use to determine which presentation method would provide the most useful information (but modifying that guidance as a consequence of withdrawing the proposal to prohibit a mixed presentation).

The IASB also tentatively decided, where an entity presents operating expenses by function:

• to explore the possibility of supplementing the exposure draft by providing specific application guidance on how to combine and allocate operating expense in the income statement by the ‘function of expense’ method in order to allocate these expenses to the different functions identified;
• not to develop a definition of the item ‘cost of sales’ (though this is a separate line to be presented in the income statement, if this method of presenting operating expense is adopted);
• to explore providing application guidance to explain that, as a minimum, cost of sales would include inventory expense (if applicable), calculated in accordance with IAS 2.

While the IASB tentatively decided not to explore providing partial cost relief for the disclosure of information about operating expenses by nature when an entity presents an analysis by function in the statement of profit or loss, the Board deferred a decision on the exact extent of information to be provided under these circumstances, pending detailed analysis of feedback.

Operating profit or loss before depreciation and amortisation

As a reminder, in the December 2019 Exposure Draft the IASB had identified specific non-mandatory income statement subtotals that are not management performance measures (MPMs). The operating profit or loss before depreciation and amortisation was hence identified as a ‘specified subtotal’. In addition, the IASB had indicated in its call for comments that it was not proposing a definition of EBITDA ("earnings before interest, tax, depreciation and amortisation"), which is nevertheless frequently used in entities' financial reporting. In practice, in some situations, and depending on an entity's definition of EBITDA, the ‘operating profit before depreciation and amortisation’ subtotal could be equal to EBITDA, in which case EBITDA would not be a MPM. In other cases, these two subtotals in the statement of profit or loss could be different.

At the October meeting, the IASB tentatively decided to change the wording and therefore the interpretation of the specified subtotal presented above and initially proposed in the exposure draft, by excluding from this subtotal impairments of assets within the scope of IAS 36. This specified subtotal would therefore be known as ‘operating profit or loss before depreciation, amortisation, and specified impairments’.

The IASB also tentatively decided not explicitly to prohibit the use of ‘EBITDA’ as a label for this subtotal as now defined, but to explain in the Basis for Conclusions that such a label would rarely be a faithful representation of the subtotal. Finally, the IASB would include no further specific requirements in relation to this subtotal.

The Board will continue to redeliberate the project proposals in the coming months.