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Article:

Profit or loss statements may be changing

13 February 2020

The International Accounting Standards Board (IASB) has issued an exposure draft for a new IFRS standard to replace IAS 1 Presentation of Financial Statements, setting out general presentation and disclosure requirements in financial statements. The new standard would apply to all companies reporting under IFRS and would result in changes to the way statements of profit or loss and related disclosure notes are presented.

The exposure draft is part of an IASB project considering primary financial statements and the IASB’s wider work on ‘Better Communication in Financial Reporting’. The main objective is to improve the reporting of information about financial performance to address investor concerns about the comparability of information in the statement of profit or loss. The IASB also wants to introduce a more disciplined and transparent approach to the reporting of management-defined performance or ‘non-GAAP’ measures.

We highlight and explain some of the key proposals below.

The exposure draft includes a number of other proposed changes, including limited changes to cash flow statements to reduce diversity in classification and presentation, for example, in relation to the classification of interest and dividends. Related amendments are also proposed to other IFRS standards, including moving some of the existing requirements from IAS 1 to other standards.

Require companies to present additional defined subtotals and categories in the statement of profit or loss

Proposed changes

  • The exposure draft defines three new profit subtotals which entities would be required to present in the statement of profit or loss:
    1. Operating profit
    2. Operating profit and share of profit or loss of integral associates and joint ventures
    3. Profit before financing and income tax.
       
  • Entities would also classify income and expenses into four defined categories in the profit or loss:
  • Operating (includes income and expenses from the company’s main business activities and is the default category)
  • Integral associates and joint ventures
  • Investing
  • Financing.
     
  • These requirements would be applied differently by entities whose main business activities relate to financing such as banks and investment entities, and by insurers.

Why?

  • This is intended to improve the structure and comparability of statements of profit or loss between different entities.
     
  • Currently IAS 1 only requires entities to report revenue and profit or loss for the year, but no other specific subtotals. Many entities do report an operating profit subtotal, but there is inconsistency in how it is calculated. For example, some entities may include or exclude the share of profit or loss of equity accounted associates and joint ventures or interest cost on defined benefit pension schemes.

 

Require companies to disclose information about Management Performance Measures in the notes

Proposed changes

  • The exposure draft introduces a proposed definition of Management Performance Measures (MPMs) as subtotals of income and expenses that are used in public communications outside the financial statements, complement totals or subtotals specified by IFRS standards and communicate management’s view of an aspect of a company’s financial performance. Not all non-GAAP measures would meet this definition.
     
  • Entities would be required to disclose MPMs in a single note to the financial statements. Specifically, the IASB proposes to prohibit the use of columns to present MPMs in the statement of profit or loss.
     
  • Proposed disclosure requirements about MPMs include:
  • A reconciliation to measures specified by IFRS standards (including the effects of tax and non-controlling interests),
  • Explanations of why the MPMs provide useful information and
  • How they are calculated.

Why?

  • The proposals are intended to improve the transparency and discipline around non-GAAP measures and also make these disclosures easier to find in annual reports.
     
  • Many entities use non-GAAP measures (also referred to as Alternative Performance Measures or APMs) defined by management in their investor communications and financial reports, including the narrative ‘front end’ sections of annual reports. These are useful to investors, but there are concerns around quality of disclosures and undue prominence compared to IFRS measures. Regulators, including the Financial Reporting Council, also frequently raise points on the reporting of non-GAAP measures as part of their monitoring work.
     
  • Including MPMs in the financial statements would result in reporting that is more consistent across companies and bring MPMs within the scope of IFRS reporting requirements and principles.

 

Strengthen requirements for aggregation and disaggregation of information

Proposed changes

  • The exposure draft introduces new guidance to help companies improve the presentation of disaggregated information in the financial statements.
     
  • Entities would be required to present an analysis of operating expenses by nature or by function in the statement of profit or loss (not in the notes), and disclose an analysis of total operating expenses in a single note to the financial statements.
     
  • Entities would also be required to identify and explain in the notes any unusual income or expenses (income and expense with limited predictive value where similar items will not arise for several future reporting periods). These would not be presented in a separate category in the statement of profit or loss.

Why?

  • These proposals are intended to provide additional relevant information for investors, avoid obscuring material information and improve the consistency of reporting about operating expenses and income and expenses that are not expected to recur in the near future.
     
  • Many companies currently report non-recurring or exceptional items and sometimes adjust for these in their non-GAAP measures, but this is not always done consistently and is an area regulators frequently comment on.


The exposure draft is open for comments until 30 June 2020. The proposals do not include an effective date, but that is expected to be 18-24 months after the date the new standard is published.

Read the exposure draft General Presentation and Disclosures