Here’s an extract from a recent IASB staff paper, prepared in connection with the Primary Financial Statements project:
- The staff recommends the IASB explores an approach that would require that an entity discloses, for all operating expenses disclosed in the notes, the amounts included in each line item in the statement of profit or loss.
- The staff recommends this approach because:
- preparers may be able to provide the information if the general requirement is accompanied by an appropriate cost relief…
- users have indicated that having such information would be useful
- it would build on existing disclosure requirements in IFRS Accounting Standards, thus:
- build on information an entity is already collecting;
- be futureproofed to the extent specific disclosure requirements in IFRS Accounting Standards are added or amended;
- be consistent with:
- existing disclosure requirements in IFRS Accounting Standards which require an entity to provide information on the line items in the statement of comprehensive income in which an expense item is included; and
- the IASB’s proposal for unusual income and expenses in paragraph 101 of the Exposure Draft and the IASB’s tentative decision for reconciling items—which both require the relationship between an (expense) item and the statement of profit or loss to be disclosed.
This would be in preference to a requirement to make such disclosure only for specified expenses commonly included within multiple line items (for example, depreciation, amortization and employee benefits). On the usefulness point, the IASB’s Capital Markets Advisory Committee had for example opined that “having information on the amounts of depreciation, amortization, employee benefits, and impairment included in each line item in the statement of profit or loss was most important and would generally be useful regardless of the industry in which an entity operates (for example, to understand better fixed expenses of an entity).” Then, beyond that:
- Some CMAC members said that having disaggregated information on other expense items (such as foreign exchange gains/losses, gains/losses on derivatives/hedging instruments, restructuring expenses or research and development expenses) would also provide useful information. However, those members also acknowledged that the benefits of having such information would often depend on the industry in which an entity operates.
- Some CMAC members also said they would be interested in having more information on:
- whether a specific expense item was fixed or variable in nature or whether it was a non-cash item or a cash item; and
- expense items that result from a shift in the business model of an entity. For example, if an entity starts outsourcing labour, this could lead to the outsourcing expenses being included in other line items in the statement of profit or loss than the (previously incurred) employee benefits’ expenses.
Those last two points are certainly worth considering, but perhaps better suited to MD&A or other management commentary. The staff paper also cited some feedback from the IASB’s Global Preparers Forum, some members of which said providing such line-item expense amounts would be challenging in particular for entities using standard costing systems, and for non “one-off” type items, and that the IASB should carefully consider the costs and benefits of requiring such information.
I’d be inclined to support the general idea. Financial statements, for all the information they contain, still only provide a highly summarized representation of an entity’s complexities. Given the increased technological capacity both to generate information and to engage with it, I think the general momentum should be to reduce the perceived supremacy of the core financial statements, in part by allowing better transparency regarding their construction (which should facilitate a better understanding of their reliance on estimates and uncertainties, and an enhanced capacity to grapple with the impact of possible changes in those items). Anyway, at its July meeting, the IASB tentatively decided to indeed explore such an approach, while at least requiring disclosure of the amounts of depreciation, amortization and employee benefits included in each line item. So we’ll have to wait and see.
By the way, if you’re interested in the project more broadly (which in all truth already seems like a bit of a relic, as the world’s main attention moves on to the sustainability-related standards), you may recall that the IASB proposes that all expenses be classified either as operating, financing, investing, or as relating to associates and joint ventures. At that same July meeting, the IASB also tentatively decided, among other things, to require an entity that invests as a main business activity to classify in the operating category income and expenses from assets that would otherwise be classified in the investing category. For an entity that provides financing to customers as a main business activity, it proposes to allow a defined accounting policy choice in determining the income and expenses to be included in that operating category. And so they march slowly on…
The opinions expressed are solely those of the author