Sist oppdatert : 15.10.2019

Primary Financial Statements project

IFRS



The International Accounting Standards Board work on improving the formatting and structure in IFRS financial statements through its Primary Financial Statements project.

Chair of the International Accounting Standards Board (IASB), Hans Hoogervorst, delivered a speech at a seminar in Mexico where he amongst others described the Board’s work on improving the formatting and structure in IFRS financial statements through its Primary Financial Statements project.

The objective of the Primary Financial Statements project is to provide better formatting and structure in IFRS financial statements, especially in the income statement. Currently the IFRS income statement is relatively form-free. Revenue and Profit or Loss is defined, but not all that much in between.

The speech included interesting information of the Board’s thoughts on the following issues:

Chair of the International Accounting Standards Board (IASB), Hans Hoogervorst, delivered a speech at a seminar in Mexico where he amongst others described the Board’s work on improving the formatting and structure in IFRS financial statements through its Primary Financial Statements project.

The objective of the Primary Financial Statements project is to provide better formatting and structure in IFRS financial statements, especially in the income statement. Currently the IFRS income statement is relatively form-free. Revenue and Profit or Loss is defined, but not all that much in between.

The speech included interesting information of the Board’s thoughts on the following issues:

  • Lack of guidance in use of subtotals has had the unintended consequence of stimulating the use of self-defined subtotals, also known as non-GAAP measures. Non-GAAP measures are often non-comparable. Subtotals like Operating Profit and EBITDA are very commonly used, but in practice companies define these subtotals in very different ways. Moreover, many non-GAAP measures tend to paint a very rosy picture of a company’s performance, almost always showing a result that is better than the official IFRS numbers.
  • Providing more structure to the financial statements is also important as more financial information is produced and consumed digitally. There is more and more automated investing going on and increasingly artificial intelligence is used to help investors digest information from vast numbers of financial statements.
  • Operating profit is the most commonly used subtotal around the world and it currently lacks an IFRS definition. The IASB have decided to define operating profit as profit excluding financing, tax and income/expenses from investments, and are convinced that this definition of operating profit shows what most would view as the results of a company’s main business activities.
  • The definition of operating profit as profit excluding financing, tax and income/expenses from investments does not work for financial entities, such as banks. For a bank, clearly providing loans to customers is a main business activity, so excluding all financing expenses from operating profit makes no sense. For this reason, the IASB has decided to require financial entities to include expenses from financing activities relating to the provision of financing to customers in operating profit. We have found similar solutions for insurers and investment companies.
  • Below Operating Profit, the IASB have created what can loosely be called an Investment Category. This category includes income and expenses from investments, from financial investments to associates and joint ventures. Investors tend to look at such investments separately from operating profit.
  • A second important subtotal that the IASB has decided to define is what we call Profit before Financing and Tax. As the name indicates, this subtotal excludes expenses from financing activities (such as interest expense on loans or bonds) and tax. Users often want to compare companies’ performance before the effects of financing and this subtotal enables that comparison. In other words, the profit before financing and tax subtotal enables comparison of companies with different capital structures. It creates better comparability of the performance of companies independent of their degree of leverage.
  • The Board has looked seriously at the possibility of us trying to define and own the very commonly used non-GAAP measures of EBIT and EBITDA. The problem with the terms EBIT and EBITDA is that they have evolved gradually over time, without clear underlying concepts. The acronyms are used very loosely and their components often differ significantly from their literal meaning. The lack of conceptual clarity and precision makes the use of these subtotals very problematical. Apart from that, there are many people who have serious qualms about the information value of a subtotal like EBITDA.
  • In addition to improving the structure of the income statement, they have developed guidance that will improve disaggregation. Currently, all too often, many components of the income statement are lumped together in ‘other income or expenses’. For many investors this is a big source of frustration and our guidance will make excessive aggregation much more difficult.
  • Companies will be required to disclose in the notes which components of income or expense they judge to be ‘unusual’, either in size or in frequency. Adjustments for unusual items are now very commonly done in the realm of non-GAAP. Clearly, this is important information for investors in their efforts to predict future cash flows. Yet, it is also one of the areas of non-GAAP where a lot of cherry picking is going on. Unsurprisingly, companies tend to focus on what they see as unusual expenditures rather than on identifying windfall profits.

This is all a part of the Better Communicatio initiativ.

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