The Financial Reporting Facility has closely examined proposals in the IASB’s General Presentations and Disclosures document with members and interested parties. Here are three perspectives on the changes.
Views from ICAEW
The July 2020 edition of By All Accounts contained an article highlighting the International Accounting Standards Board’s (IASB’s) proposed changes to IFRS accounts contained in their Exposure Draft, General Presentation and Disclosures. Since then, the Financial Reporting Faculty has been busy delving into the detail of the proposals, with our final comments being submitted to the IASB last September (ICAEW Rep 75/20). These views, some of which are outlined below, were formulated over the course of many months through discussions with members and volunteers working in practice, business, academia and the investment community.
Support for a new standard
Overall, we welcome the proposals and support the proportionate and pragmatic approach that has been adopted. For example, the decision to carry forward certain requirements from IAS 1 Presentation of Financial Statements while making targeted changes to address specific issues is preferable to a complete re-draft. Although we highlight some areas where we consider further thought is needed, we believe this project has the potential to improve the presentation of information in IFRS accounts.
Integral and non-integral associates and joint ventures
We agree with the IASB’s proposal to have a distinction between income and expenses arising from associates and joint ventures that are considered ‘integral’ (which would appear as a separate category on the income statement) versus ‘non-integral’ (which would appear within the investing category on the income statement). We believe this will provide helpful information to users of the financial statements.
However, we have concerns around how entities would make the distinction between ‘integral’ and ‘non-integral’. We suggest that it would be more appropriate to develop a ‘management perspective’ approach where management is required to assess and identify whether it views an associate or joint venture as integral, and to explain why it has reached this conclusion. In our view, this would avoid the risk of arbitrary classifications being made that do not reflect the underlying operations of the entity.
Unusual income and expenses
On balance, we agree that defining and presenting information on unusual income and expenses will be helpful for users of financial statements. For preparers, however, we accept this will inevitably be open to interpretation and will require judgement to be exercised.
As well as defining unusual income and expenses, the IASB is proposing the information be presented in a separate note. We suggest a better approach might be for the IASB to expand the guidance on the aggregation and disaggregation of information presented in the financial statements and to provide clear principles for the disaggregation of items that meet the definition of unusual income and expenses. Under this approach, we do not believe it would be necessary for unusual items to be disclosed in a separate note as they would be presented throughout the financial statements.
Management performance measures (MPMs)
We support the IASB’s efforts to improve the disclosure of MPMs within the financial statements and support many of the proposals. For example, the requirements to:
- explain how MPMs are calculated;
- outline how they provide useful information about the entity’s performance; and
- reconcile them with a comparable subtotal, as defined in the proposed new standard
We also support the proposed definition for MPMs, although as currently drafted it may be too broad. In particular, one of the criteria refers to subtotals ‘used in public communications outside financial statements’. In our view, it would be more appropriate and realistic for the criteria to refer to any subtotals of income and expenses that are used within the ‘annual/interim reporting package’, eg, the annual or interim report, and results announcements or investor presentations relating to the same period as the report.
Our full response to the IASB can be found at icaew.com/representations
We will be monitoring progress on this project closely and will provide further updates and guidance to faculty members in due course.
An investor's view
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Many of the proposals in the IASB’s Exposure Draft will enhance the usefulness of financial statements for investors. The new classification in profit and loss, specified subtotals, and greater consistency in how associates are presented should end the current operating profit free-for-all and make performance measures more comparable and understandable. Bringing MPMs within audited financial statements is also welcome. However, perhaps the most significant benefit to investors is the potential for better disaggregation, particularly within profit and loss. Disaggregation helps investors understand the persistency of income and expense items. Non-recurring, infrequently recurring and recurring but volatile are all characteristics that warrant separate presentation. Disaggregation is also vital where underlying economic drivers differ (such as for energy costs versus employment costs) and where items represent value changes, re-measurements or prior period catch-up adjustments rather than current period ‘flows’. The proposals for a principles-based disaggregation reflecting the extent of shared or differing characteristics, a mandatory ‘by-nature’ analysis, and disclosure of unusual items, will all contribute to better informed investors. However, the IASB should go further. For example, defining unusual items in a narrow way, based on them not being expected to recur for several periods, would miss out most restructuring costs, where their recurring but volatile nature makes separate presentation important. The final standard needs a more effective approach to ensure investors receive the disaggregation they require. Steve Cooper, independent analyst, and author of The Footnotes Analyst blog |
A preparer's view
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From a preparer’s standpoint, I welcome the approach that the IASB has taken in not going ahead with the total redesign of the primary statements (especially that of profit or loss) that was talked about for a number of years and would have been extremely difficult to implement. The IASB’s proposals build on how most companies currently disclose their results and so maintain the link with how most businesses are managed. As always though, the devil is in the detail. How do we decide, and agree with our auditors, what is an unusual income or expense when the definition requires it to be based on an assessment of what items will arise in the future? Hopefully down the line, regulators will not use the benefit of hindsight to ask why items were, or were not, disclosed as unusual. I understand, and agree with, the IASB’s efforts to include rules on disclosures of MPMs in an accounting standard. However, the proposed definition is not the same as that of alternative performance measures (APMs). This will lead to one disclosure note on MPMs – which will cover just subtotals of income and expense, eg, adjusted operating profit – and another on APMs which will cover the rest. This second note will not only include measures related to the balance sheet and cash flow statement, but also profit or loss related metrics such as adjusted revenue, operating profit margin and earnings before interest, tax and amortisation (EBITA) to interest. This could end up being quite convoluted, with users not understanding the difference. Vanessa Gough, Group Financial Controller, Electrocomponents plc |
