Redeliberations begin on Primary Financial Statements project

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

25 May 2021

There is a long list of topics for redeliberation, given the number of comment letters received. In March, the IASB began discussing the following subjects:

• 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;
• disclosures required in the notes on management performance measures (MPMs), and whether the scope of MPMs should be expanded; and
• amendments to the statement of cash flows, focusing on the scope of these amendments and certain specific proposals.

“Operating profit” subtotal

On this first topic, the IASB tentatively decided:

• to require all entities to present a new “operating profit” subtotal in the statement of profit or loss, confirming the proposal put forward in the exposure draft;
• to confirm that the “operating” category in the statement of profit or loss should not include items of income and expenses that are classified in the “investing”, “financing”, “income tax” or “discontinued operations” categories of the statement of profit or loss. The “operating” category will thus continue to be defined by what it is not (i.e. it is a “residual” or “default” category). 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;
• to 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 (e.g. litigation or restructuring costs). “Operating profit” as proposed by the IASB would therefore not be equivalent to profit from recurring operations as it is sometimes used by some entities;
  • 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. Thus, the IASB’s perspective is that secondary or supporting activities are part of an entity’s operations;
• not to directly define the “operating profit” subtotal.

Information on MPMs

On this topic, the IASB tentatively decided:

• to require entities to present disclosures on MPMs in the notes to the financial statements, thus confirming one of the key proposals in the exposure draft;
• to explore possible approaches to expanding 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

On this last topic, the IASB provisionally decided:

• to retain the scope of its work as set out in the exposure draft, i.e. to only make a few limited-scope amendments to IAS 7. The IASB will 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, in light of the many comments received on this subject;
• to 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, thus confirming one of the proposals set out in the exposure draft;
• to 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. Thus, in practice:
  • interest and dividends paid would be classified as cash flows arising from financing activities;
  • 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).

Redeliberations of the project proposals will continue at future IASB meetings.