IASB Update May 2018

Primary Financial Statements (Agenda Paper 21)

The Board met on 22 May 2018 to discuss:

1. a summary of the results of a survey the staff have conducted on aggregation and disaggregation requirements in different jurisdictions;
2. additional proposals to improve the level of aggregation and disaggregation of line items in the primary financial statements and in the notes;
3. analysis of expenses by function or by nature; and
4. outstanding issues on management performance measures and adjusted earnings per share.

Additional proposals on aggregation and disaggregation (Agenda Paper 21A)

The Board discussed a staff proposal to consolidate the aggregation and disaggregation characteristics mentioned in IAS 1 Presentation of Financial Statements and in other IFRS Standards into a single list. Seven of 14 Board members agreed and seven disagreed with the staff proposal. Consequently, the Board tentatively decided not to develop a single list of aggregation and disaggregation characteristics. Instead, the Board asked the staff to continue working on proposals for improving disaggregation in the financial statements, which may include illustrating how different characteristics could be used to aggregate or disaggregate financial information. The Board asked the staff to clarify that any further guidance developed in this respect would not override specific aggregation or disaggregation requirements in individual IFRS Standards.

The Board also discussed whether to introduce thresholds or rebuttable presumptions for aggregating or disaggregating financial information. Seven of 14 Board members agreed with the introduction of such thresholds or rebuttable presumptions and seven disagreed. Consequently, the Board tentatively decided not to introduce thresholds or rebuttable presumptions for aggregating or disaggregating financial information.

The Board tentatively decided:

1. not to develop examples of the disaggregation of groups of items to illustrate when it is not acceptable to disclose large residual balances or ‘other’ balances. Ten of 14 Board members agreed and four disagreed with this decision. The Board asked the staff to explore whether principle-based guidance could be developed to encourage further disaggregation of large residual balances or ‘other’ balances.
2. to include a principle for determining the location of financial information in the primary financial statements or the notes that is based on the role of the primary financial statements and the role of the notes suggested in Discussion Paper Disclosure Initiative—Principles of Disclosure. That principle would not override the specific requirements of IAS 1 for the presentation of minimum line items and subtotals in the primary financial statements. An entity should also apply that principle when a Standard allows entities to determine whether to provide financial information in the primary financial statements or in the notes. All 14 Board members agreed with this decision.

Analysis of expenses by function or by nature (Agenda Paper 21B)

At its September 2017 meeting, the Board discussed proposals to improve the analysis of expenses by function and by nature required by paragraph 99 of IAS 1. At this meeting the Board tentatively decided to:

1. add to the requirements in IAS 1 the following factors to consider in deciding whether by-function or by-nature methodology provides the most useful information about financial performance:
   1. which method provides the best information about the key components or drivers of profitability;
   2. which method most closely matches how management reports internally to the board or key decision makers and the way the business is run;
   3. peer industry practice; and
   4. whether the allocation of expenses to functions would be so arbitrary that it would not provide a sufficiently faithful representation of the composition of an entity’s functions. In such cases, a ‘by-nature’ method should be used.

All 14 Board members agreed with this decision.

2. require additional information on the nature of the expense when an entity provides an analysis of expenses using a by-function methodology.This information would be provided at an entity level, not as a breakdown of each functional line presented. Ten of 14 Board members agreed and four disagreed with this decision.

Outstanding issues on management performance measures and adjusted EPS (Agenda Paper 21C)

At its April 2018 meeting, the Board tentatively decided that all entities shall identify a measure (or measures) of profit or comprehensive income that, in the view of management, communicates to users the financial performance of the entity. It also decided that if this measure is not a subtotal or total required by paragraph 81A of IAS 1, it would be a management performance measure and specific disclosure requirements would apply. For the purposes of these proposals, paragraph 81A of IAS 1 would include the existing subtotals in that paragraph and the proposed required subtotals developed as part of this project, for example, profit before investing, financing and tax.

At this meeting the Board tentatively decided to expand the list of subtotals and totals that would not be considered management performance measures to include the following commonly used subtotals:

1. profit before tax;
2. profit from continuing operations; and
3. gross profit, defined as revenue less cost of sales.

Thirteen of 14 Board members agreed and one disagreed with this decision. Some Board members advised caution in drafting to clearly distinguish these three commonly used subtotals from those that are specifically required to be presented by all entities in paragraph 81A of IAS 1. Some Board members asked the staff to consider whether to specifically require any of these three subtotals to be presented by all entities.

At this meeting the Board considered whether entities that identify more than one management performance measure would be required to disclose multiple adjusted EPSs. In the light of these discussions, the Board tentatively decided that no entities should be required to disclose adjusted EPS. This reverses the April 2018 Board decision to require entities to disclose adjusted EPS in the notes. However, the Board reconfirmed the April 2018 decision to require entities to disclose in the notes the effect of tax and non-controlling interests separately for each of the differences between the management performance measure and the most directly comparable subtotal or total in paragraph 81A. Thirteen of 14 Board members agreed and one disagreed with this decision.

Next steps

The Board will continue discussing topics within the scope of the project at future Board meetings.

Disclosure Initiative—Targeted Standards-level Review of Disclosures (Agenda Paper 11)

The Board met on 23 May 2018 to discuss guidance for the Board to use when developing and drafting disclosure requirements.  Specifically, the Board discussed how it will use disclosure objectives. 

Guidance for the Board—Overview (Agenda Paper 11A)

The Board discussed a summary of the staff’s proposed approach to bringing analysis and recommendations to the Board over the coming months. The Board was not asked to make any decisions.

Guidance for the Board—Disclosure objectives (Agenda Paper 11B)

The Board tentatively decided that when developing and drafting disclosure requirements in future, the Board will:

1. base all disclosure requirements on one or more specific disclosure objectives.  These objectives should explain why the information is useful to the primary users of financial statements, and what primary users of financial statements are expected to do with the information.
2. draft all disclosure requirements so they explicitly state the underlying objective(s) and clearly link each item of information included in disclosure requirements with the related objective(s).

 Thirteen of 14 Board members agreed with this decision.  One member was absent.

The Board also tentatively decided that it will continue to use high-level disclosure objectives within individual IFRS Standards. The purpose of these objectives would be to prompt entities to consider the overall disclosure relating to a particular topic in their financial statements and whether the information provided meets user information needs for that topic.

Twelve of 14 Board members agreed and two disagreed with this decision.

Next steps

The Board expects to continue its discussion on guidance for the Board to use when developing and drafting disclosure requirements at future meetings. 

Business Combinations under Common Control (Agenda Paper 23)

The Board met on 23 May 2018 to discuss the Business Combinations under Common Control research project.

The Board continued discussing approaches the staff are developing for a subset of transactions within the scope of the project, which were introduced in April.

The Board was not asked to make any decisions.

Next Steps

The Board expects to continue its discussions at future meetings on methods of accounting for transactions within the scope of the project.

Rate-regulated Activities (Agenda Paper 9)

The Board met on 23 May 2018 to discuss the possible accounting model being developed for activities subject to ‘defined rate regulation’. In particular, the Board discussed how to measure regulatory assets (Agenda Paper 9B).

The Board also received background information about the accounting model with a summary of tentative decisions to date (Agenda Paper 9A, which was provided for information only).

The Board tentatively decided that the measurement of regulatory assets should reflect:

1. estimates of the future cash flows the regulatory assets will generate. These cash flows include amounts that result from:
   1.  the costs of assets used and operating expenses incurred;
   2. any margins on the operating expenses incurred; and
   3. any interest on the operating expenses incurred or returns on the costs of assets used.
2. discounting the estimates of future cash flows if there is a significant financing component.

All 14 Board members agreed with this decision.

The Board also tentatively decided that the measurement of regulatory assets should reflect changes, if any, in the estimates of the future cash flows the regulatory assets will generate. 

All 14 Board members agreed with this decision.

The Board also tentatively decided that the discount rate established at initial recognition should remain unchanged during the subsequent measurement of the regulatory assets.

All 14 Board members agreed with this decision.

Next steps

The Board will discuss additional aspects of the measurement of regulatory assets and regulatory liabilities at a future meeting.

Goodwill and Impairment (Agenda Paper 18)

The Board met on 23 May 2018 to continue its discussions on the Goodwill and Impairment project.

The Board tentatively decided not to develop a document that would seek feedback solely about using the unrecognised headroom of a cash-generating unit (or group of units) as an additional input in the impairment testing of goodwill.

Nine of 14 Board members agreed and five disagreed with this decision.

The Board tentatively decided to pursue including in the value in use calculation expected cash flows from future restructuring and future performance enhancements that management is more likely than not to undertake.

Thirteen of 14 Board members agreed and one disagreed with this decision.

Next steps

At a future meeting, the Board will continue its discussions on the form and content of the consultation document to be issued as the next step in the project.

IFRS 16 Leases—Lease Incentives—annual improvement (Agenda Paper 12)

The Board discussed a proposal to amend Illustrative Example 13 accompanying IFRS 16 Leases as part of its next annual improvements to IFRS Standards. The proposed amendment would remove from the example the illustration of the reimbursement of leasehold improvements by the lessor.

The Board tentatively decided to propose amending Illustrative Example 13 as part of its next annual improvements to IFRS Standards.

Nine of 14 Board members agreed and five disagreed with this decision.

Next steps

The Board will discuss due process steps at a future meeting.

Insurance Contracts (Agenda Paper 2)

The Board met on 23 May 2018 to receive an update on the work to support implementation of IFRS 17 Insurance Contracts including the meeting of the Transition Resource Group for IFRS 17 Insurance Contracts held on 2 May 2018.

The Board was not asked to make any decisions.

Next Steps

The Board will continue its discussions on IFRS 17 at a future meeting.