General presentation and disclosures – new subtitles, new game!

The IASB has issued for comment its long-awaited exposure draft General Presentation and Disclosures, with comments to be received by June 30, 2020.

It’ll take a number of articles to cover all the main points. To start off with, let’s take the following proposal:

  • The Exposure Draft proposes that an entity present the following new subtotals in the statement of profit or loss:
  • (a) operating profit or loss;
  • (b) operating profit or loss and income and expenses from integral associates and joint ventures; and
  • (c) profit or loss before financing and income tax.
  • In applying these proposed new subtotals, an entity would present in the statement of profit or loss income and expenses classified in the following categories:
  • (a) operating;
  • (b) integral associates and joint ventures;
  • (c) investing; and
  • (d) financing.

Here’s an illustration of how that would look:


The third subtotal serves a similar purpose to a consistently-defined subtotal for earnings before interest and tax (EBIT) —”it allows users of financial statements to analyse an entity’s performance independently of how that entity is financed.” As far as that subtotal goes, this would provide an objective basis for comparison, without the definitional uncertainties that may apply at present. This may immediately raise the question of EBITDA – a perhaps even more common measure that’s even more subject to such uncertainty. But on that score:

  • The Board also considered whether to define earnings before interest, tax, depreciation and amortization (EBITDA). However, the Board noted that, although EBITDA is one of the most commonly used measures in communications with users of financial statements, it is not used in some industries such as finance. Furthermore, users have no consensus about what EBITDA represents, other than it being a useful starting point for various analyses. Its calculation is diverse in practice….

However, the exposure draft does contemplate that entities may disclose a measure of “operating profit or loss before depreciation and amortization,” and that if they do, this doesn’t constitute a “management performance measure.” We’ll look more at that concept next time, but among other things, this entails that an entity might include such a measure within its financial statements without needing to explain why it made that choice. In contrast, if a particular item does constitute a management performance measure, the entity will need to provide a description of why the measure communicates management’s view of performance, including an explanation of how the measure provides useful information about the entity’s performance.

For many entities, it will only take a little reorganization of their existing income statement to accord with the new presentation illustrated above. For others it may take more work – for example to extract expenses which are currently subsumed within operations, but which under the clearer parameters set out in the exposure draft should be reanalyzed into one of the other categories. Expenses not falling within any of the other categories will be classified as operating, even if, on their own terms, that may not appear to fully reflect their nature. Among other things, the Board notes: “defining operating profit or loss as a default category is simpler than using a direct definition. This is because entities have various business activities making it difficult to arrive at a direct definition that could be applied consistently, even between entities in the same industry.”

The exposure draft retains the current requirement to present an analysis of expenses included in the operating category, using a classification based either on their nature or on their function within the entity. However, it now proposes to add: “An entity presenting an analysis of expenses classified in the operating category using the function of expense method shall also disclose in a single note an analysis of its total operating expenses using the nature of expense method.” This “reflects feedback from users of financial statements that analyzing expenses using the function of expense method can lead to a loss of useful information. Information is lost because functional line items combine expense items with different natures that respond differently to changes in the economic environment, making it difficult for users to forecast future operating expenses.” However, the document acknowledges that this may be costly for some entities to implement, and indicates the costs and benefits of this proposal will be subject to particular scrutiny.

In the accompanying news release, IASB Chair Hans Hoogervorst says that this and the rest of the proposals “represent a game changer in the comparability and usefulness of financial statements.” This seems a bit overstated to me – or at least, Hoogervorst should want it to be overstated: that is, while the proposed changes might eliminate some inefficiency and lack of clarity in some respects, and shine a bit of a better light in others, it’s hard to imagine they should cause billions of dollars to flow in new directions. Anyway, more on this to come…

The opinions expressed are solely those of the author

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