General presentation and disclosures: our main business activity is to always want more!

Let’s return to the IASB’s exposure draft General Presentation and Disclosures.

The comment period closed on September 30, 2020, after being extended because of covid-19; there were 215 comment letters. We looked recently at some of the reaction to the proposals on “management performance measures.” Another key proposal was that an entity should present a subtotal for operating profit or loss in the income statement, based on a new definition of operating expenses. This category includes all income and expenses “from an entity’s main business activities” including income and expenses from investments made in the course of those main business activities, and (subject to an element of accounting policy choice) income and expenses relating to financing provided to customers as a main business activity. Also, under the proposals, expenses not falling within the other categories (investing, financing, or related to integral associates and joint ventures) 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.”

Here’s some of what CPA Australia had to say on that:

  • We also believe some further thought should be given to developing a more robust definition of “operating profit or loss” and “main business activities”. We believe entities should give some consideration as to what constitutes their main business activities, and not automatically adopt a residual approach in including all income and expenses that do not belong in one of the other categories, in the operating category.
  • … at the very least, the IASB should seek to develop guidance, including additional examples, to assist entities determine what constitutes their “main business activities”. For example, an entity that employs a common pool of assets to support both its main business activities and investment activities (that are not part of its main business activities) would benefit from clear principles and guidance that allows it to classify the income and expenses arising from that pool of assets between those that belong to the operating category and those that belong to the investing category.
  • … For example, for some entities that undertake retail franchise operations, the retail operations may be considered their main business activity. However, in addition, the real-estate investments they undertake in order to conduct their retail operations may either be considered as part of their main business activities or part of their investing activities. We believe the definitions, principles and guidance need to be developed further to assist preparers clearly determine what constitutes their main business activities and what constitutes their investing activities.

BDO provided some points that might helpfully be addressed in any such definition and related application guidance:

  • Whether ‘main’ is intended to address the size of the financial effect of an entity’s item of income and expenses (e.g. the largest amounts of income and expenses relating to a particular type of activities or some ‘threshold’), management’s view of the importance of those activities or some other measure;
  • Whether main business activities should be evaluated based on current activities only or by the intention of management (e.g. how main business activities might be determined for a start-up entity or an entity transitioning into another line of business);
  • Whether main business activities may change over time, and if so, whether reclassification of comparative figures would be required if such a change in main business activities were to occur;
  • If main business activities may change, what factors would need to be considered in order for main business activities to change for accounting purposes, similar to guidance provided in IFRS 9 relating to a change in business model for the reclassification of financial assets; and
  • Whether main business activities may require adjustment in a consolidated group (e.g. whether a bank included in the consolidated financial statements of a larger entity might be required to reclassify its chart of accounts to comply with the ‘main business activities’ of the consolidated group).

KPMG threw in some others, including:

  • How the determination of ‘main business activities’ interacts with similar concepts in other IFRS Standards, such as ‘ordinary activities’ in IFRS 15 Revenue from Contracts with Customers, and ‘principal revenue-producing activities’ in IAS 7 Statement of Cash Flows.
  • How the concept of ‘main business activities’ relates to the presentation and disclosure of reportable segments under IFRS 8 Operating Segments.

All valid points, and yet, thinking back to the observations I made last time, one wonders if the principle as currently laid out in the exposure draft can truly be that full of major holes, of a magnitude that will cause serious application problems and lack of comparability. If an entity can’t rationally articulate and communicate its main business activities, you might ask, how then will it ever deal with the more complex matters we hope to see it address in MD&A and elsewhere…?

Did I mention there are 215 comment letters? And some of them are really long!

The opinions expressed are solely those of the author.

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