General presentation and disclosures – the unusual business

As we discussed last time, the IASB has issued for comment its long-awaited exposure draft General Presentation and Disclosures, with comments to be received by June 30, 2020.

Here’s one of the proposed new sections:

  • Unusual income and expenses are income and expenses with limited predictive value. Income and expenses have limited predictive value 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.
  • An entity shall, in a single note that includes all unusual income and expenses, disclose:
  • (a) the amount of each item of unusual income or expense recognised in the reporting period;
  • (b) a narrative description of the transactions or other events that gave rise to that item and why income or expenses that are similar in type and amount are not expected to arise for several future annual financial reporting periods;
  • (c) the line item(s) in the statement(s) of financial performance in which each item of unusual income or expense is included; and
  • (d) an analysis of the included expenses using the nature of expense method, when an entity presents an analysis of expenses in the statement of profit or loss using the function of expense method.
  • Income and expenses from the recurring remeasurement of items measured at a current value are expected to change from period to period. They would not normally be classified as unusual income and expenses.

Most of us can probably intuitively agree with the premise here, while easily comprehending the difficulties. If in your regular life you’re trying to predict your outflows for next year, then you’re certainly justified in using this year as a starting point, and justified in excluding the large amount you lost as a result of the unprecedented accident. You might also argue for excluding the amount you lost on your ill-fated trip to Vegas…unless, that is, you’ve taken equally ill-fated trips to Vegas for ten years in a row. On the other hand, if you’ve now undergone hypnosis that renders you physically incapable of gambling, then maybe that past history can be sealed off. But who wants to trust a hypnotist? Obviously one could go on like this indefinitely.

The IASB is certainly aware “that any requirement to disclose unusual income and expenses would require entities to exercise judgement in deciding which income and expenses are unusual.” It gives the example of an earthquake in a non-earthquake prone zone as an event which may be assessed as being unusual in nature, such that the related expenses aren’t reasonably expected to arise for several future annual reporting periods. But on the other hand, an earthquake may give rise to increased costs that are expected to arise for a number of years, and as such are not unusual expenses. Therefore: “the Board did not include reference to the nature of underlying transactions and other events in the definition of unusual income and expenses.” Regarding the Vegas example: “the occurrence of income or expense in the past does not necessarily indicate that similar income or expense will occur in the future.” But of course, sometimes it does. As we might glean from all this, it’s hard to pin down the nature of unusual items, as their unusualness perhaps demands. It’s easy to imagine commentators being somewhat dissatisfied with the proposed definition, which isn’t to say they’ll necessarily be able to think of a better one.

You might take the view that if these unusual items are of such interest, then they should be highlighted on the face of the income statement. But the IASB took the view that “disclosure in the notes would enable entities to provide a more complete description and analysis of such income and expenses. Disclosure in the notes also provides users of financial statements with a single location to find information about such income and expenses and addresses some stakeholders’ concerns that unusual income and expenses may be given more prominence than other information in the statement(s) of financial performance.” I’m not sure whether to read the proposals as prohibiting the disclosure of unusual items on the face of the income statement in all circumstances, as long as the note disclosure is provided as well. I take it they don’t quite do that, but maybe this will be clarified before the final version.

The illustrative examples include fact patterns relating to tax expense, restructuring charges, litigation expense and reversal of write-downs of raw material. Perhaps the latter best illustrates the fine lines in operation here. The example posits that “during 20X0, Country D, a large consumer of (a particular) raw material, was hit by a huge earthquake and the market demand for the raw material fell significantly. This in turn lead to a sharp drop in its market price.” The unusual expense (and in the following year, a rebound-driven unusual income) flows from there. But earthquakes probably occur more often in writings on unusual items than they do in life in general, and one can anticipate many cases where one person’s never-to-be-repeated calamity (market crash, strike etc.) will seem to another just like a different manifestation of the annually recurring chaos. Should get, uh, unusually interesting!

The opinions expressed are solely those of the author

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