General presentation and disclosure – the unusually problematic nature of unusualness

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 recently looked at some of the reaction relating to the following proposed definition and related note disclosure requirements:

  • 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.

Let’s look at that a little more today. Based on my review of a small sample of the comment letters, most respondents agreed with the basic premise at least. The New Zealand Accounting Standards Board is one that didn’t:

  • We do not agree with the IASB’s proposals to define and require disclosure by all entities of unusual income and expenses.
  • IAS 1 already includes a requirement to separately disclose the nature and amount of material income and expenses (paragraph 97). Paragraph 98 of IAS 1 includes examples of circumstances that would give rise to the separate disclosure of income and expenses…
  • Our suggestion is that the IASB relies on the existing requirements in IAS 1 (existing paragraphs 97 and 98) for the disclosure of material items, adds “occurrence of other unusual or infrequently occurring items” to the list of circumstances that would give rise to the separate disclosure of items of income and expense, and adds requirements for the fair presentation of these unusual or other infrequently occurring items.

The Accounting Standards Board of Japan mused on the difficulties attaching to the central notion of “limited predictive value”:

  • Even if income or expenses are similar in amount, they may have no predictive value. For example, even if the disposal of property, plant and equipment that are similar in amount occurred for two consecutive years, it may be merely a coincidence.
  • Even if income or expenses are not similar in amount, that does not mean there is no predictive value. For example, if a trend of a steady increase in revenue of 20% per year is observed, that information may have predictive value even if income or expenses are not similar in amount.

This led them to a similar recommendation, that the IASB should refrain from defining unusual items or requiring specific disclosures about them, while emphasizing the requirement to achieve a fair presentation by making additional disclosures when necessary. But as I mentioned in my last post, many respondents thought the IASB should evolve more rather than less detailed requirements. So where that ends up is anyone’s guess…

The IASB proposed that unusual items needn’t be presented on the face of the income statement, taking 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.” Some respondents, such as the New York State Society of Certified Public Accountants, saw this a different way also:

  • …we recommend that the Board retain its definition of unusual income and expenses and require a separate presentation of such amounts in the statement of profit or loss, after the operating, investing and financing categories…with two additional disclosures. The additional disclosures would be 1) which categories the unusual items would be included if they had been included in the subtotals and 2) the income tax expense related to the unusual item. The first additional disclosure would permit financial statement users to add back the unusual items to the appropriate categories if they believe that analysis to be useful. The second additional disclosure would likely be useful to users.

Finally, Australia’s Institute of Public Accountants raised a specific point that also came up elsewhere:

  • We are deeply concerned with the characterization of restructuring costs as unusual items. Such costs are within the purview of management to control and are instigated by management to obtain a benefit in future periods. It is naïve to consider restructuring costs as unusual items. Given restructuring “initiatives” are often multi-period, the rate of change, effects of new technology and disrupters in the modern business environment, restructuring of some nature is ongoing characteristics of many businesses. Restructuring costs should be specifically excluded as “unusual” item, unless management can demonstrate that no restructuring has occurred in the last economic cycle.

As I anticipated in my original post, it was always going to be easy to take issue on this aspect of the proposals, and the current pandemic only made it easier. Did I mention there were 215 comment letters…?

The opinions expressed are solely those of the author.

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