General presentation and disclosures: how unusual does this normality look to you?

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’ve already looked at the reaction to a couple of the proposals. Here’s another one:

  • 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.

Based on my review of just a small sample of the comment letters, the IASB received support for the general notion – however, almost everyone found some aspect to take issue with. It’s hard to imagine the IASB would be surprised by this: it was certainly aware that the propoals would require the exercise of significant judgment. The Accounting Standards Committee of Germany (in a letter signed by future IASB Chair Andreas Barckow) cites the current pandemic in drawing out some elements of this:

  • The beginning, end, and expected duration of a crisis are difficult to determine. For example, as of 31 December 2019, it was hardly possible for entities to forecast the effects of the Covid-19 pandemic. Currently, entities are confronted with the questions of how long the crisis will last and how it will impact their business. In this context, the extent to which the crisis affects several future reporting periods is also important for assessing whether income and expenses incurred due to the Covid-19 pandemic would qualify as ‘unusual’.
  • The expectation of what is to be considered as usual ‘under normal circumstances’ has to be revised to a yet unknown ‘new normal’ course of business (post-crisis). Therefore, it will be difficult to separate the portion of ‘unusual’ income and expenses as the expectation of what would have been considered as ‘usual’ income and expenses is unknown (e.g. entities in some industries, e.g. online retailers, are currently generating ‘unusual’ additional revenue due to the Covid-19 pandemic).
  • In defining ‘unusual income and expenses’ the IASB seems to have in mind individual events or transactions (e.g. a fire at an entity’s factory) that are clearly identifiable and whose effects on the statement of profit or loss can easily be isolated and quantified. However, an individual event (such as the Covid-19 pandemic) may have an impact on many transactions and business activities, making it difficult to determine what had been the cause for that singular event and how the ‘normal’ course of business would have been without that event (e.g. whether an insolvency was caused by the crisis or whether an entity was threatened by insolvency before).

The letter makes many other points (perhaps suggesting that the whip will be cracked with more detailed relish in the upcoming Barckow regime), one of its main recommendations in this area being that “the IASB not define unusual income and expenses. Instead, entities should be required to develop, apply and disclose their own accounting policy regarding the definition of unusual income and expenses.”

The IASB couldn’t possibly have predicted what a convenient backdrop the pandemic would provide for assessing this particular issue. The Corporate Reporting Users’ Forum provides another example:

  • COVID-19 is impacting the world so fundamentally as to change even the structure of society. There are companies worldwide presenting financial performance excluding impacts from COVID19 amid this environment. If COVID-19 eventually ends like an earthquake, unusual items may occur. However, if the social structure at that time has already been transformed by COVID-19, the unusual items today will become the new normal in practice. The definition of the unusual items should be reconsidered based on the attributes of the event that generates income and expenses, not simply based on the possibility of recognition in the following year.

Rather than continue at unusual length, I’ll leave it there for this time…

The opinions expressed are solely those of the author

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