Redeliberations continue on Primary Financial Statements project

Keywords: Mazars, Thailand, IFRS, IASB, IASB, MPMs

24 May 2022

Entities with specified main business activities

The IASB has started redeliberating the proposals applicable to certain companies (as an exception to the general model, which the Board began discussing in March 2021. These proposals relate to companies that:

• in the course of their main business activities, invest in assets that generate a return individually and largely independently of the other assets of the entity; or
• provide financing to customers as a main business activity.

The discussion focused on the concept of “main business activities”, which is essential to deciding which items should be presented in the various categories of the income statement (“operating”, “investing” and “financing”). The IASB has proposed that the categories in the income statement should be the same for all entities, but the content of each category could vary depending on the company’s business model. Specifically, the exposure draft proposed that income and expenses from investments made in the course of the entity’s main business activities (except for investments accounted for using the equity method) should be classified in the “operating” category rather than the “investing” category. Similarly, some income and expenses should be presented in the “operating” category rather than the “financing” category, particularly income and expenses arising from financing activities, and from cash and cash equivalents relating to the provision of financing to customers.

The IASB has reached the following (tentative) decisions:

• in the proposed future IFRS Accounting Standard, entities will only need to consider their “main business activities” in order to determine whether they invest in the course of their main business activities or provide financing to customers as a main business activity. In other words, an entity will not need to consider all its activities and determine which of them are “main business activities”;
• whether an entity invests in the course of its main business activities is a matter of fact, not an assertion. This requires the use of judgement. As far as possible, the assessment should be based on observable evidence, such as operating performance measures used in public communications, or segment information published in accordance with IFRS 8. If a reportable segment comprises a single business activity, this activity is a “main business activity” for the entity. However, if an operating segment comprises a single business activity, more analysis is needed to determine whether the activity is a “main business activity”;
• subtotals that are similar to gross profit and that are not “management performance measures” (see below), such as net interest income or insurance service result (to pick two examples from the exposure draft), are examples of important indicators of operating performance for entities that invest in the course of their main business activities or provide financing to customers as a main business activity.

The IASB has also (tentatively) decided that the assessment of the main business activities should be carried out at the level of the reporting entity, i.e. at the group level for consolidated financial statements.

Finally, any change in the outcome of an entity’s assessment of its main business activities should be accounted for prospectively, without restating the comparative periods presented. In this situation, the entity must disclose the fact that the outcome has changed. It must also disclose the impact of the change to allow users of the financial statements to perform trend analysis of operating profit.

The next few months should see further clarifications of the provisions applicable to entities for which adaptations to the general model for presentation of the income statement are necessary.

Management performance measures

In March, the IASB also continued its redeliberations on management performance measures (MPMs). Readers will remember that MPMs are very narrowly defined in the exposure draft. They are measures that an entity uses in communications outside IFRS financial statements. The IASB is hoping to establish a framework for MPMs, according to which certain disclosures would be required in the notes to the financial statements.

The Board tentatively confirmed that disclosures required under the new IFRS should be presented in a single note to the financial statements.

It also decided not to add any provisions relating to the inclusion of disclosures about MPMs in the financial statements by reference to another document (such as the management report). In practice, this means that since cross-referencing will not be explicitly permitted under the new standard (contrary to what is indicated under IFRS 7 for certain disclosures on financial instruments), cross-referencing will de facto be prohibited, and all the disclosures required on MPMs will have to be presented in the relevant single note.