Redeliberations on the Primary Financial Statements project

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

15 May 2023 

Four issues were discussed: 

• disclosure of operating expenses by nature; 

• management performance measures; 

• categories in the statement of profit or loss; and 

• entities with specified main business activities. 

Disclosure of operating expenses by nature 

The IASB again discussed the disclosure requirement for operating expenses by nature, where these are presented by function in the statement of profit or loss. 

It should be recalled that the Exposure Draft required full disclosure of the breakdown of operating expenses by nature. In order to achieve a better balance in terms of costs for preparers and benefits for users, the Board had tentatively decided in July 2022 to require an entity to disclose only the amounts of depreciation, amortisation and employee benefits in each function line item in the statement of profit or loss. This month, the IASB tentatively decided: 

• that entities should disclose, in addition to the amounts of depreciation and amortisation and employee benefit expenses, the amount of impairment losses (under IAS 36) and inventory write-downs (under IAS 2) included in each function line in the statement of profit or loss;  
• to confirm that an entity would disclose this information in a single note; and 
• to clarify that these amounts (e.g. depreciation) are not necessarily expenses of the period, but may have been included in the cost of assets. If this is the case, the entity will be required to disclose qualitative information if part of these costs has been capitalised; it should also disclose the nature of the assets that included these costs. 

The Board also returned to the proposed exemption from the general requirement to disaggregate material information tentatively decided on in January 2023, deciding to expand its scope to exempt an entity from disclosing: 

• a disaggregation by nature of operating expenses for each function line item in the statement of profit or loss (beyond those specifically required); and 
• for nature expenses that are required to be disclosed by another IFRS, the amounts included in each function line item in the statement of profit or loss. 

Management performance measures 

Management performance measures are defined in the Exposure Draft as subtotals of income and expenses that are used in public communications outside financial statements and reflect management’s view of an aspect of an entity’s performance. Specific disclosures on these management performance measures should be presented in a separate note. 

During earlier discussions, the IASB had introduced a rebuttable presumption that a subtotal of income and expenses included in public communications outside financial statements represents management’s view of an aspect of the entity’s financial performance (and is therefore a management performance measure). 

This month, the IASB tentatively decided to develop the application guidance on the information that would rebut this presumption in a reasonable and supportable way. The IASB will present some examples to illustrate these situations. 

The Board also returned to those cases where an entity changes the calculation of its management performance measure, introduces a new management performance measure or removes a previously disclosed management performance measure. The IASB confirmed the provisions of paragraph 108 (a) and (b) of the exposure draft requiring an entity to: 

• disclose sufficient explanations for users of financial statements to understand the change, addition or removal; 
• disclose the reasons for the change, addition or removal. 

However, the IASB intends to amend the requirements in paragraph 108(c) of the Exposure Draft to say that an entity needs not provide comparative information when the entity changes a management performance measure or introduces a new one, if it is impracticable to do so. In such cases, the entity shall disclose that fact. 

The IASB also clarified that the choice of a management performance measure, including how the measure is calculated, is not an accounting policy as defined in IAS 8. 

The Board also proposes to amend IAS 34 to require entities to disclose the following information in interim financial reports:

• the disclosure requirements in paragraph 106 of the Exposure Draft (description of the management performance measures, how they reflect management’s view of an aspect of the entity’s performance, how they are calculated, reconciliation, etc.); 
• the disclosure requirements in paragraph 108 of the Exposure Draft, as described above, concerning the change, addition or removal of a management performance measure. 

Finally, the IASB continued a discussion begun at its May 2022 meeting on a sensitive issue related to the mandatory reconciliation of a management performance measure to the most directly comparable subtotal or total in the statement of profit or loss, namely the requirement to determine the tax effect of each reconciling item. 

Readers will remember that the Exposure Draft required an entity determine the income tax effect on the basis of a reasonable pro rata allocation of the current and deferred tax of the entity in the tax jurisdiction(s) concerned or by another method that achieves a more appropriate allocation. 

The Board confirmed the decision taken in May 2022 to allow the calculation of the tax effect by reference to the tax effects of the underlying transaction, taking into account the tax rate applicable to that transaction in the relevant jurisdiction, but also proposed an alternative approach based on a pro-rata allocation of the entity's current and deferred tax (as determined in the relevant tax jurisdiction) or any other method that achieves a more appropriate allocation in the circumstances. 

Categories in the statement of profit or loss 

This month, the IASB discussed the classification of certain income and expenses in different categories in the statement of profit or loss (Operating, Investing and Financing). 

Tentative decisions were reached for: 

This month, the IASB discussed the classification of certain income and expenses in different categories in the statement of profit or loss (Operating, Investing and Financing). 

Tentative decisions were reached for: 

• foreign exchange differences on a liability that arises from a transaction that involves operating activities in addition to the raising of finance. In this very particular case, the IASB requires an entity to use its judgement to determine the category in which to classify these foreign exchange differences. Readers will remember that in July 2021, the IASB had tentatively decided that foreign exchange differences should be classified in the same category of the profit or loss statement as the income and expenses relating to the items that gave rise to the foreign exchange differences. If this would require undue cost or effort, the entity may classify the foreign exchange differences in the “Operating” category. These provisions have so far been retained; 
• the classification of all income and expenses arising after initial recognition from hybrid contracts with host liabilities that arise from transactions that do not involve only the raising of finance and that are measured entirely at amortised cost: in this particular case, the Board requires the classification of such income and expenses in the "Financing” category 

Entities with specified main business activities 

For entities with specified main business activities, the Board tentatively decided to: 

• confirm the accounting policy choice in paragraph 51 of the Exposure Draft allowing an entity whose main activity is providing financing to customers to classify expenses and income related to cash and cash equivalents (i) entirely in the Operating category or (ii) in the Operating and Investing categories, depending on whether the cash and cash equivalents are related or not to the main activity of providing financing to customers; 
• clarify the requirements in paragraph 52(a) of the Exposure Draft by stating that an entity whose main activity is investing in financial assets should classify income and expenses related to cash and cash equivalents in the Operating category, regardless of whether the entity has any other specified main business activity. 

Based on the working documents prepared by the IASB Staff, we understand that: 

• entities whose specified main business activity is not the provision of finance or investment in financial assets should present income and expenses related to cash and cash equivalents in the Investing category; 
• entities whose specified main business activity is the provision of finance or investment in financial assets could present income and expenses related to cash and cash equivalents in the Operating category, even if their other main activity is the provision of finance. In these circumstances, the accounting policy choice in paragraph 51 would not apply;  
• entities whose specified main activity is the provision of finance (but not investment in financial assets) could benefit from the accounting policy choice in paragraph 51, i.e. present in the Operating category either all income and expenses related to cash and cash equivalents or only the part related to the activity of providing financing to customers.