Redeliberations continue on Primary Financial Statements project

Keywords: Mazars, Thailand, IFRS, IASB,MPMs, ASAF, Primary Financial Statements

14 November 2022

We present a summary of the most important decisions made this month, with the caveat that the content of the future standard will not be set in stone until the final standard is published (currently scheduled for 2023).

All the decisions reached by the IASB in September 2022 are available here.

Unusual income and expenses

After redeliberating this topic at several meetings, the IASB has ultimately decided that it will not proceed with its work on so-called “unusual” income and expenses. The plan had been to “only” require specific disclosures on these items in a separate note to the financial statements, as part of a broader range of new disclosures in line with the general requirement to better disaggregate information.

However, in practice, the IASB ran up against the difficulty of defining “unusual income and expenses”, after initially proposing a definition in the exposure draft that was based solely on the non-recurrence of the income or expenses. Discussions with stakeholders in parallel with Board meetings revealed that not everybody agreed on what should be classified as “unusual” income or expenses.

Given that redeliberations have now been going on for almost two years, the IASB decided not to discuss this complex and difficult issue any further, so as not to hold up the overall project.

Specified subtotals

Readers will remember that the December 2019 exposure draft identified certain “specified” subtotals, which are not required to be presented in the income statement and which are not management performance measures (MPMs) as defined in the proposed standard. MPMs are defined in the exposure draft as subtotals of income and expenses that are used in external communications and that reflect management’s view of an aspect of an entity’s financial performance. The proposed standard requires specific disclosures on MPMs, to be presented in a single note to the financial statements.

In practice, following the redeliberations in October 2021, the four specified subtotals set out in the future standard will be as follows:

• gross profit or loss (revenue less cost of sales) and similar subtotals (see below);
• operating profit before depreciation and amortisation (which entities could label as EBITDA);
• profit or loss from continuing operations;
• profit or loss before income tax.

At the September 2022 meeting, the IASB confirmed that these specified subtotals would not be MPMs. It also added a new specified subtotal to the list above: “operating profit or loss and income and expenses from investments accounted for using the equity method”. Readers will remember that, in the course of the previous redeliberations, the IASB decided that the share of profit or loss from entities accounted for using the equity method should be presented in the “Investing” category, below operating profit or loss (although the IASB did not specify the level of the “Investing” category at which this share should be presented).

The IASB also confirmed the list of “subtotals similar to gross profit” presented in paragraph B78 of the exposure draft. These are:

• net interest income;
• net fee and commission income;
• insurance service result;
• net financial result (investment income minus insurance finance expenses);
• net rental income.

Finally, the IASB also decided to specify, in the application guidance for the new standard, that if an MPM is reconciled to a specified subtotal that is not presented in the income statement, the entity is required to reconcile that specified subtotal to a subtotal that is presented in the income statement. The entity will not be required to disclose any other information on this specified subtotal.

Presentation of operating expenses

Readers will remember that the December 2019 exposure draft proposed – as part of a range of proposals relating to the aggregation/disaggregation of information – that entities should not be permitted to use a “mixed” approach (i.e. broken down by both nature and function) to present operating expenses. Presentation by nature or function would not be a free choice for entities, but should be made in the light of a set of factors proposed by the standard-setter.

The IASB made the following decisions relating to the application guidance for presentation by function:

• to expand the explanation in the description of the “presentation by function” method to clarify how this method involves allocating and aggregating operating expenses according to the activity to which the consumed economic resource relates;
• to clarify the role of primary financial statements and the aggregation and disaggregation principles in applying the presentation by function method;
• to require entities to include in cost of sales the carrying amount of inventories recognised as an expense during the period when presenting cost of sales;
• to require an entity that presents its operating expenses by function to provide a narrative description in the notes detailing the types of expenses (based on their nature) included in each functional line item.

The IASB also decided to confirm the proposals in the exposure draft to produce application guidance to help entities to assess whether presentation by nature or by function provides the most useful information. The guidance will draw heavily on the factors set out in paragraph B45 of the exposure draft.

Finally, as many preparers were no doubt hoping, the IASB has decided to withdraw its initial proposal to prohibit a mixed approach to presenting operating expenses. The final standard will provide examples of situations where a mixed presentation would provide the most useful information. Application guidance will also be produced, in order to clarify:

• the need for consistent presentation of operating expenses from one reporting period to the next; and
• how to label line items by nature when a mixed presentation is used (in order to faithfully represent the nature of the expenses included in these line items).

Furthermore, the IASB is organising consultations in different jurisdictions over the coming weeks, in conjunction with members of ASAF (the Accounting Standards Advisory Forum). This will allow it to gather feedback from stakeholders on a number of important topics that have already been redeliberated (i.e. an impact analysis) or on which the IASB is seeking input on the best way forward. These outreach meetings will also enable the IASB to assess whether it might be necessary to publish a new exposure draft of some of the proposals in this flagship project.