Primary Financial Statements project

Transcription

1 IFRS Foundation 1 Primary Financial Statements project Michelle Fisher, Senior Technical Manager Fred Nieto, Head of Investor Engagement Stockholm, September 2017 The views expressed in this presentation are those of the presenter, not necessarily those of the International Accounting Standards Board (Board) or IFRS Foundation. Copyright 2017 IFRS Foundation. All rights reserved

2 Agenda 2 Background on the Primary Financial Statements Project Main themes in stakeholder feedback to the IASB Scope of the project Possible approaches

3 3 Background on the Primary Financial Statements (PFS) Project Copyright IFRS Foundation. All rights reserved

4 Central theme of the Board s work 4 Better Communication in Financial Reporting Primary Financial Statements Disclosure Initiative IFRS Taxonomy Content and its organisation Content delivery

5 Project timetable 5 Early-stage research project December 2016: Board tentatively decided to focus on targeted improvements to: - statement(s) of financial performance - statement of cash flows Early 2018: Discussion Paper or Exposure Draft (tbc)

6 Recent key steps 6 May 2016 Board instructed staff to carry out initial research on scope of research project Project Scoping Jun-Oct 2016 Staff undertook research and outreach activities to gather evidence about perceived problems Nov-Dec 2016 Staff presented the results of research to the Board Board discussed scope of the project Project Discussion 2017 Board started discussing topics in the scope

7 7 Main themes in stakeholder feedback to the Board Copyright IFRS Foundation. All rights reserved

8 Comparability vs flexibility feedback 8 Comparability Lack of comparability negatively affects usefulness of IFRS financial information Due to lack of comparability, users prefer financial statements standardised by data aggregators vs Flexibility Flexibility allows preparers to tell their own story As long as necessary information is available in the notes, primary financial statements can be concise Recognition and measurement should be principles-based but presentation should be more structured IFRS Standards should keep their principles-based nature

9 Structure problems 9 Inconsistencies in structure even within the same industry Company A Company B Company C Company D Revenue Revenue Revenue Revenue Cost of goods sold Distribution cost Marketing and administrative cost R&D cost Other cost Cost of goods Operating sold expenses Selling cost (including marketing costs) General and administrative cost R&D cost Other cost Adjusted Adjusted Adjusted operating profit operating profit operating profit Non-recurring items Non-recurring items Non-recurring items Operating profit Operating profit Operating profit Operating profit Example of preparers having flexibility to tell their own story? Lack of comparability? Could differences in subtotals be misleading?

10 Performance measures feedback 10 Increasing use of performance measures indicates that financial statements are losing their relevance Performance measures are misleading investors By presenting more performance measures in financial statements, transparency, comparability and discipline will be enhanced and measures will be audited The Board should develop mechanisms to allow preparers to present more performance measures in financial statements

11 Performance measures problems 11 Some companies communicate performance mainly through APMs: Annual report Outside of annual report Income statement MD&A Press release Presentation for investors Revenue IFRS IFRS IFRS Revenue increase excluding currency effect APM APM APM Operating profit Own definition Own definition Own definition Limited use Adjusted operating profit (excluding infrequent/non-recurring items etc) APM APM Limited use Adjusted operating profit increase excluding currency effect APM APM Adjusted operating margin ratio (Adjusted operating profit / Revenue) APM APM Adjusted operating margin ratio increase excluding currency effect APM APM APM Net income IFRS IFRS IFRS Limited use Adjusted net income APM APM Comprehensive income IFRS Basic EPS IFRS IFRS IFRS Limited use Diluted EPS IFRS Adjusted EPS APM APM Limited use Adjusted EPS increase excluding currency effect APM APM APM APM used to refer to entity-defined performance measures provided outside the IFRS financial statements

12 Amendments to IAS 1 12 Issued December 2014 requirements for subtotals IFRS recognition and measurement Clear and understandable comprised of line items made up of amounts recognised and measured in accordance with IFRS Standards presented and labelled in a manner that makes the line items that constitute the subtotal clear and understandable Consistent consistent from period to period Not prominent not displayed with more prominence than subtotals and totals specifically required in IFRS Standards Reconciliation reconcile any additional subtotals in statement(s) of financial performance with subtotals or totals required in IFRS Standards

13 13 Scope of the PFS project Copyright IFRS Foundation. All rights reserved

14 Scope of project 14 Statement(s) of financial performance Requiring EBIT/other comparable subtotal Providing guidance on presentation of management performance measure and alternative EPS Better ways to communicate other comprehensive income (OCI) Statement of cash flows Eliminating classification options (interest/dividends) Aligning the operating section between the statements of cash flows and financial performance Requiring a consistent starting point for the indirect method Developing templates for primary financial statements Achieving greater disaggregation Statement of financial position Statement of changes in equity No planned change except possible development of templates for primary financial statements and greater disaggregation

15 Main areas where IFRS Standards may change as a result of the project 15 Introducing new sub-totals into IFRS: Requiring additional P&L subtotals, for example earnings before interest and tax (EBIT) Updating presentation requirements in IFRS Removing some of the options for presentation of income and expenses that exist today (eg presentation of net interest cost on the net defined benefit liability) Addressing the use of Performance Measures Providing guidance on the use of performance measures (eg. separate presentation of non-recurring, unusual or infrequently occurring items)

16 16 Possible approaches Copyright IFRS Foundation. All rights reserved

17 Structure possible approaches 17 Develop detailed chart of accounts for primary financial statements Develop financial statements templates and require/ encourage preparers to use them Require comparable subtotals such as EBIT Allow companies to present financial statements as they like Should we improve the structure to achieve more comparability?

18 1. Require EBIT subtotal 18 Concerns raised Users need comparable subtotals as a starting point for their analysis Many companies present EBIT-type subtotal, but it varies and is not comparable Presentation of financing income/expenses varies, even among peers (eg net interest on defined benefit liability) Possible solutions Require presentation of comparable EBIT subtotal Define EBIT as profit before finance income/expenses and tax Describe finance income/expenses as income/expenses related to the entity s capital structure, in order to have a comparable EBIT subtotal for entities with different capital structures

19 2. Allow/require management performance measure 19 Concerns raised Preparers want flexibility and users want information about progress towards management s business objective or strategy Users need information about persistency of income and expenses to develop forecasts Items classified as infrequent/nonrecurring vary and are not transparent. Some infrequent items occur regularly Possible solutions Allow/require presentation of management performance measure, rather than defining operating profit Require additional transparency about management performance measure and infrequently occurring items

20 Proposed subtotals 20 Possible solution: introduce two subtotals to better communicate performance Revenue 10,000 Cost of goods sold -4,000 Gross profit 6,000 Selling, general and admin costs (SG&A) -2,500 Management performance measure 3,500 Infrequently occurring income and expenses -500 EBIT 3,000 Finance income 200 Finance expenses -1,200 Pre-tax profit 2,000 Taxation -600 Profit 1,400 Flexibility - Performance measure that management uses to communicate progress towards its business objective/strategy Items between two subtotals show how Management Performance Measure is different from EBIT Comparability - Introducing a comparable performance measure between companies as an anchor

21 3. Providing guidance on the presentation of alternative EPS 21 Concerns raised Alternative earnings per share figures are widely used for communication with users of financial statements Calculation of these figures is often not transparent Possible solutions Presentation of alternative earnings per share in statement(s) of financial performance if consistent with management performance measure Require additional transparency of the calculation

22 4. Better ways to communicate OCI 22 Concerns raised Users do not understand amounts presented in other comprehensive income (OCI) Current OCI category includes items with different nature Some think all items reported in OCI should be recycled; others disagree Possible solutions Explore ways to make the OCI category more understandable to users Consider dividing OCI into different categories and labelling them in a more understandable way (eg income and expense to be recognised in profit or loss in the future')

23 5. Targeted improvements on cash flows from operating activities 23 Concerns raised Because of the options permitted to present interest and dividends in different cash flow categories, operating cash flows are not comparable Statement of cash flows has an operating section that is not required in the statement(s) of financial performance Different entities use a different starting point for the indirect reconciliation of cash flows Possible solutions Eliminate options for presenting interest and dividends Cash flow item Interest paid Dividends paid Interest received IFRS classification Operating or financing Operating or financing Operating or investing Dividends received Operating or investing Align the concept of operating between statements of cash flows and financial performance Require a consistent starting point (eg EBIT)

24 Cash flow illustration 24 Cash flows from operating activities EBIT Adjustments for depreciation Interest expense Increase in trade and other receivables Interest paid Income taxes paid Net cash from operating activities Cash flows from investing activities Cash flows from financing activities Interest paid Income taxes paid Net increase in cash Cash at beginning of period Cash at end of period

25 6. Provide illustrative examples/templates 25 Concerns raised Financial statements are not comparable even among peer companies Possible solutions Provide illustrative examples/ templates of structure and format for some industries (eg, nonfinancial, bank, insurance and property) Require or encourage use of those templates

26 Illustrative examples/templates 26 Example (non-financial), by function presentation Revenue Cost of goods sold Gross profit Selling costs General and administrative costs Research and development costs Management Performance Measure Infrequently occurring income and expense EBIT Finance income Finance expense Pre-tax profit Taxation Profit Specified long term revaluations Income and expense to be recognised in profit or loss in the future Comprehensive income

27 Illustrative examples/templates 27 Example (bank) Interest income Interest expense Net interest income Fee and commission income Fee and commission expense Net fee and commission income Net income from instruments held for trading Net income from other instruments at FVTPL Operating expenses Management Performance Measure Infrequently occurring income and expense (EBIT) (Finance income) (Finance expense) Pre-tax profit Taxation Profit Specified long term revaluations OCI items that will be reclassified Comprehensive income Example (property) Rental income Service charge income Service charge expense Net rental income Sales of inventory property Cost of sales of inventory property Profit on sale of inventory property Profit on disposal of investment property Valuation gain from investment property Net gains on investment property Administrative expense Management Performance Measure Infrequently occurring income and expense EBIT Finance income Finance expense Pre-tax profit Taxation Profit Specified long term revaluations OCI items that will be reclassified Comprehensive income

28 7. Develop principles for aggregation/ disaggregation of information 28 Concerns raised Some entities do not present analysis of expenses by nature or by function in the statement(s) of financial performance (eg they present operating expenses as a single line item) Some entities present a large other category in primary financial statements that makes it difficult to compare items presented by different entities Possible solutions Identify basic principles to guide aggregation/disaggregation (eg dissimilar items should be separated) Require analysis of expenses in statement(s) of financial performance and/or prescribe type of analysis Set thresholds to prevent overaggregation Additional minimum line items

29 Activities in the next 12 months 29 Focus on exploring targeted improvements, with Board discussions throughout 2017 Implications regarding structured electronic reporting will be examined as relevant Possible output: Discussion Paper or Exposure Draft in early 2018

30 Contact us 30 6 Keep up to IFRS Foundation IFRS Foundation Comment on our work go.ifrs.org/comment