After years of deliberation and consultation with stakeholders, the long-awaited Exposure Draft ED/2019/7, General Presentation and Disclosures (ED) was issued in December 2019. Originally slated for June 2020, the deadline for comments was delayed to the end of September 2020 due to the global pandemic.
The ED is a response to demands from users for a revised performance reporting accounting standard and includes proposals by the International Accounting Standards Board (IASB) to improve how information is communicated in financial statements, with a focus on information about performance in the statement of profit or loss.
The most far-reaching change proposed is the reorganisation of the profit or loss presentation
Reorganisation
Perhaps the most far-reaching change proposed is the reorganisation of the profit or loss presentation. The ED proposes the classification of income and expenses included in the statement of profit or loss (other than income or expenses related to income taxes or discontinued operations) to be segmented into four categories: operating, integral associates and joint ventures, investing, and financing categories.
The operating category is framed as a residual category which comprises all income and expenses included in profit or loss that are not classified in the other categories. Because of the way amounts excluded are defined, the operating category would include income and expenses from an entity’s main business activities.
The integral associates and joint ventures category would include income and expenses from integral associates and joint ventures.
The investing category would include income and expenses (including related incremental expenses) from investments that generate a return individually and largely independent of other resources held by an entity, unless they are investments made in the course of the entity’s main business activities.
The investing category would also include income and expenses from non-integral associates and joint ventures.
The financing category would include income and expenses from assets and liabilities related to an entity’s financing activities.
The board argues that the reorganisation of the profit or loss will increase comparability and consistency among entities.
The ED proposes that all entities have a new subtotal for ‘operating profit or loss’
New subtotals
Currently, IAS 1, Presentation of Financial Statements requires no specific subtotals besides profit or loss. This has led to diversity in the presentation and calculation of subtotals even among entities in the same industry. Subtotals with the same label may mean different things, making it difficult for users of financial statements to understand the information provided and compare it across entities.
The ED proposes that all entities present in the statement of profit or loss have a new subtotal for ‘operating profit or loss’, which is the sum of all income and expenses included in profit or loss that are not classified as income or expenses from integral associates and joint ventures, investing or financing, income taxes or discontinued operations. The operating category would therefore include income and expenses from an entity’s main business activities.
Respondents generally agree that requiring this subtotal will increase comparability.However, some believe that the determination of what is the entity’s ‘main business activities’ may involve significant judgment.
Others point out that the concept of ‘main business activities’ is ambiguous and should be elaborated on to ensure consistency during preparation of the financial statements.
In addition, the ED allows entities that provide financing to customers as a main business activity to classify in the operating category either (i) income and expenses from financing activities, and from cash and cash equivalents, that relate to the provision of financing to customers; or (ii) all income and expenses from financing activities and all income and expenses from cash and cash equivalents.
The standard setters justify the policy choice by arguing that allocating expenses from financing activities to these two activities may be difficult because some entities both provide financing to customers and invest in the course of their main business activities.
Equity method
Another important change proposed is the presentation of the share of profit or loss of associates and other joint ventures accounted for using the equity method. Currently, there is significant diversity in practice, with some entities presenting this line item as part of the measure labelled operating profit or loss, other entities presenting it just below the measure labelled operating profit or loss, while others present it after the tax line item.
As the activities of some associates and joint ventures may or may not be integral to the entity’s main business activities, the board proposes that if an entity has associates and joint ventures, it is required to classify them as either integral or non-integral, and to present the share of profit or loss of these investees separately. Distinguishing between investees may provide greater insight into the entity’s business model.
The proposed separation of integral and non-integral associates may involve a significant amount of judgment
The board proposes that the share of profit or loss of integral associates and joint ventures be classified as a separate category, 'Integral associates and joint ventures’, and be presented immediately after the ‘Operating profit or loss’ subtotal. A new subtotal, ‘Operating profit or loss and income and expenses from integral associates and joint ventures’, is to be presented immediately thereafter.
This is because many users of financial statements analyse the results of investments in these investees separately from the results of an entity’s operating activities.
On the other hand, if an entity has non-integral associates and joint ventures, it is required to classify the ‘Share of profit or loss of non-integral associates and joint ventures’ in the investing category, as it meets the definition of income and expenses from investments.
Investments in these investees usually have little or no effect on the reporting entity’s main business activities. Presenting it separately would give users a better perspective of profit from these activities.
Although this proposal seeks to reduce significant diversity in practice, many respondents feel that the proposed separation of integral and non-integral associates and joint ventures may involve a significant amount of judgment; hence, creating diversity in interpretation and impairing comparability, and thereby increasing the cost of financial report preparation.
Financing category
Many users of financial statements analyse an entity’s performance independently of distributions to capital providers and tax authorities. The 'profit or loss before financing and income tax' subtotal is commonly used by analysts for screening, ratio analysis and financial forecasting.
A study of Euro Stoxx 50 companies by Mazars in 2016 found that few reported this subtotal. To facilitate such an analysis, the proposed ‘profit or loss before financing and income tax’ subtotal would present profit or loss of the entity before income and expenses classified in the financing category, income tax and discontinued operations.
Respondents generally agree with this proposal to have a separate financing category. However, the general concern is with the definition of ‘financing activities’ in paragraph 50 of the ED, which may not be sufficiently robust to address issues such as quasi-loan arrangements, sales transactions that include significant financing components under IFRS 15, Revenue from Contracts with Customers and whether payment of a finance charge would include notional interest.
Most respondents support the board’s efforts to improve how information about performance is communicated
Judgment call
While most respondents generally support the board’s efforts to improve how information about performance in the statement of profit or loss is communicated, the majority believe that several new concepts are subjective and require judgment.
In particular, the determination of ‘main business activities’ may involve significant judgment. This necessitates providing additional guidance, including illustrative examples that would be helpful to support their consistent application among entities in practice, and is key to classifying income and expenses in the different categories in the statement of profit or loss.
The challenge here is to strike the right balance between satisfying the needs of users by providing a harmonised structure and content of the statement of profit or loss, and minimising costs incurred by entities in providing that information.
