Redeliberations continue on Primary Financial Statements project

Keywords: Mazars, Thailand, IFRS, IASB, Financing, IAS 7

20 July 2021

Two topics were discussed in the light of the comments received:

• the definition of the “financing” category for companies that do not provide financing to their customers or invest in financial assets as part of their main business activities (banks and insurance companies will be discussed separately later);
• the presentation of a subtotal for “profit or loss before financing and income tax”.

Readers will remember that the exposure draft proposed:

• that the “financing” category of the statement of profit or loss should include income and expenses from cash and cash equivalents, income and expenses on liabilities arising from financing activities (loans, lease liabilities, trade payables, etc.) and interest income and expenses on other liabilities (the interest component of pension liabilities, the unwinding of discounts on long term liabilities, etc.) with a view to enabling investors to compare entities’ performance independently of the impact of those entities’ financing decisions;
• that “financing activities” should be defined as those that involve the receipt or use of a resource from a provider of finance, with the expectation that (a) the resource will be returned to the provider of finance and (b) the provider of finance will be compensated through the payment of a finance charge that is dependent on both the amount and the duration of the credit. An amendment to IAS 7 was intended to specify the definition of “financing activities” to be used in the statement of cash flows in relation to borrowings, and would be based on the definition above;
• that entities should be required to present a new subtotal in the statement of profit or loss, namely “profit or loss before financing and income tax”, thus creating a clear distinction between the “operating”, “integral associates and joint ventures” and “investing” categories on the one hand, and the “financing” and “income tax” categories on the other.

On the first topic, the IASB provisionally decided:

• not to amend IAS 7 and to retain the current definition of financing activities. The Board felt that the addition originally proposed would not in fact reduce diversity in practice where transactions involve a financing activity and another activity (operating or investing) and that the addition could in some cases result in a less relevant presentation in the statement of cash flows by preventing entities from using the financing category for the part of the cash outflow that does in fact relate to a financing activity;
• to redefine the items to be presented within the “financing” category of the statement of profit or loss in line with the objective for this category, as set out in the exposure draft. The IASB, with the help of the staff, will explore a new approach under which the following would be classified in this category:
  • all income and expenses from liabilities arising from transactions that involve only the raising of finance; and
  • interest income and expenses from other liabilities.

This means that the definition of “financing activities” presented in the exposure draft will be removed – as stakeholders pointed out several practical difficulties with interpreting this definition – and will be replaced by a simpler, clearer approach. However, the change is not expected to result in a substantially different classification than the one the IASB was aiming for with the proposals set out in the exposure draft.

On the second topic, the IASB provisionally decided:

• to retain a separate “investing” category within the statement of profit or loss, with the exact definition to be discussed at a later date, in addition to the two broad categories of “operating” and “financing”. Readers will remember that the objective of the investing category is to communicate information about returns from investments that are generated individually and largely independently of other resources held by the entity;
• to retain the requirement to present a subtotal for “profit or loss before financing and income tax”;
• to require entities to classify income and expenses related to cash and cash equivalents in the “investing” category. Many stakeholders questioned whether it was appropriate to have different presentation requirements for, on the one hand, income from investments in cash and cash equivalents as defined in IAS 7 (which should be presented in financing according to the proposals in the exposure draft) and, on the other, income from short-term investments (which should be presented in investing according to the proposals in the exposure draft), given that some entities treat all these as a component of net debt. In its redeliberations, the IASB concluded that it is easier to justify presenting all income and expenses from excess cash and investment of this excess cash in the “investing” category. In practice, this would mean that entities would no longer be permitted to include a “cost of net financial debt” subtotal in the statement of profit or loss.

Redeliberations on the Primary Financial Statements project are expected to continue over the next few months.