On 17 December 2019, the International Accounting Standards Board (IASB) published an exposure draft of a new standard 'General Presentation and Disclosures' that is intended to replace IAS 1 'Presentation of Financial Statements'. Comments are requested by 30 June 2020.
Exposure draft ED/2019/7 forms part of the IASB’s work on Better Communication in Financial Reporting that includes various projects that focus on the content and delivery of information in the financial statements. This includes projects regarding:
- Primary Financial Statements, aimed to improve how information is communicated in the financial statements, with a focus on information in the statement of profit of loss. The ED is the result of the IASB’s work on this project.
- Disclosure Initiative – Accounting Policies, aimed at developing guidance and examples to help entities apply materiality judgements to accounting policy disclosures. An Exposure Draft was issued in 2019.
- Disclosure Initiative – Targeted Standards-level Review of Disclosures, aimed at improving the way the Board develops and drafts disclosure requirements. An Exposure Draft is expected in the second half of 2020.
- Management Commentary, aimed at revising and updating the IFRS Practice Statement 1 Management Commentary by considering how management commentary provided outside the financial statement could better complement and support the financial statements. An Exposure Draft is expected in the second half of 2020.
The proposed requirements
Below are summarised main changes which are proposed in the exposure draft of a new IFRS standard General Presentation and Disclosures.
General presentation and disclosure requirements
The IASB proposes to define the roles of the primary financial statements and the notes to help preparers of financial statements decide in which of those parts information should be provided.
A set of illustrative examples would accompany the new Standard to help stakeholders understand the proposals and illustrate how it can be applied in practice.
Statement(s) of financial performance
The new Standard would require an entity to classify income and expenses included in profit or loss into one of the following categories:
- Integral associates and joint ventures
- Income tax
- Discontinued operations.
Integral associates and joint ventures are those where the activities are closely related to the reporting entity’s main business activities. Non-integral associates and joint ventures are those where the activities have little or no effect on the reporting entity’s main business activities and the related share of profit or loss would be presented in the investing category in the profit or loss statement.
Foreign exchange differences would be presented in the same category of the statement of profit or loss as the income and expenses that give rise to foreign exchange differences.
The new Standard would require an entity to present the following three new subtotals in the statement of profit and loss:
- Operating profit or loss
- Operating profit or loss and income and expenses from integral associates and joint ventures
- Profit or loss before financing and income tax
The IASB decided not to define EBIT, but to use ‘profit or loss before financing and income tax’ as it allows users of financial statements to compare entities independently of how they are financed.
The IASB removed the free choice whether the analysis of operating expenses is by nature or by function. Instead, the IASB proposes to provide a set of factors for entities to consider when making this assessment. A mix of both methods would be prohibited.
Statement of financial position
The IASB proposes to require an entity to present goodwill separately from intangible assets.
In line with the proposals for the profit or loss statement, an entity would be required to present investments in integral associates and joint ventures separately from investments in non-integral associates and joint ventures.
Statement of cash flows
The IASB also proposes consequential amendments to IAS 7 Statement of Cash Flows. In particular, when using the indirect method to determine operating cash flows, an entity would start with its operating profit or loss subtotal. This would limit the number of adjustments that are currently required to derive this figure.
Furthermore, an entity would no longer have a choice as to how to classify dividends and interest. For most entities, the new Standard would require the following:
- Dividends and interest paid would be cash flows from financing activities
- Dividends and interest received would be cash flows from investing activities
Notes to the financial statements
Unusual income and expenses
The IASB proposes to define unusual items as income or expenses with limited predictive value, i.e. when it is reasonable to expect that income or expenses that are similar in type and amount will not arise for several future annual reporting periods.
Unusual income and expenses would be disaggregated by line items presented in the statement of profit or loss and line items disclosed in the analysis of operating expenses by nature, if the entity analyses expenses by function in the statement of profit or loss.
It is proposed to clarify that income and expenses from recurring measurement of items measured at current value would not normally be classified as unusual.
Management performance measures
The IASB proposes to define management performance measures (MPMs) as subtotals of income and expenses that are used in public communications with users of financial statements, complement totals or subtotals in IFRS Standards, and communicate to users of financial statements management’s view of an aspect of the entity’s financial performance. Subtotals that are defined in IFRS Standards would not be considered MPMs.
MPMs can be non-financial performance measures or financial performance measures. They would be accompanied by disclosures in a single note which would include a statement that the MPMs provide management’s view of an aspect of the entity’s financial performance and are not necessarily comparable with measures with a similar description provided by other entities.
Transitional provisions, effective date and comment period
The ED does not contain a proposed effective date, but proposes to set the effective date so that the new standard would become effective approximately 18-24 months after being published in its finalised form.
The standard would be applied retrospectively and early adoption would be permitted.
The comment period for the ED ends on 30 June 2020.
You can find more information in our IFRS in Focus newsletter from January 2020 or in Exposure draft ED/2019/7.
Sources: IFRS in Focus January 2020, ED/2019/7