Redeliberations on Primary Financial Statements project

Keywords: Mazars, Thailand, IFRS, IASB, Primary Financial Statements  

27 October 2021

Readers will remember that the exposure draft proposed that profit or loss should be classified into the following categories (although redeliberations are ongoing as to whether these categories should be retained in the final standard, and how they should be defined if so):

• Operating
• Integral associates and joint ventures
• Investing
• Financing
• Income tax

Three topics were discussed in the light of comments received:

• classification of income and expenses in the “Financing” category of the statement of profit or loss;
• classification of fair value gains or losses on derivatives and hedging instruments in the statement of profit or loss;
• classification of foreign exchange differences in the statement of profit or loss.

Classification of income and expenses in the “Financing” category

Following on from its initial redeliberations in May 2021, the IASB has now provisionally decided that the following items should be classified in the “Financing” category of the statement of profit or loss:

• income and expenses from liabilities arising from “transactions that involve only the raising of finance”, a concept that will be clearly defined in the final standard; and
• interest expenses and the effect of changes in interest rates related to liabilities arising from transactions that do not only involve the raising of finance.

This provisional decision by the Board implies that income and expenses from cash and cash equivalents cannot be classified in the “Financing” category of the statement of profit or loss (and should thus be presented in the “Investing” category as provisionally decided last May). Thus, in practice, it will no longer be possible to include a “Cost of net financial debt” subtotal in the statement of profit or loss, even though many entities have been using a “carry cost” category that includes financial debt and investments.

Furthermore, regarding the specific case of hybrid contracts with host liabilities and embedded derivatives, the IASB has provisionally decided:

• to require entities to classify income and expenses related to separated host liabilities in the same way as income and expenses related to other liabilities;
• to require entities to classify income and expenses related to separated embedded derivatives in the same way as income and expenses related to stand-alone derivatives (see below); and
• to require entities to classify income and expenses related to contracts that are not separated in the same way as income and expenses related to other liabilities.

Classification of fair value gains or losses on derivatives and hedging instruments in the statement of profit or loss

On this topic, the Board has provisionally decided:

• to classify gains or losses on derivatives designated as hedging instruments under IFRSs in the category of the statement of profit or loss affected by the hedged risk (with some exceptions);
• to classify gains or losses on derivatives used as hedging instruments but that are not designated as such under IFRSs in the category of the statement of profit or loss affected by the hedged risk. However, if this classification would require undue cost or effort, the entity shall classify all fair value gains or losses on the derivative in the “Operating” category;
• to classify gains or losses on derivatives not designated as hedging instruments either by the entity or under IFRSs in the “Operating” category of the statement of profit or loss. However, if the derivative relates to financing activities and is not used in the course of the entity’s main business activities, the entity shall classify all gains or losses on the derivative in the “Financing” category.

These provisional decisions are much more prescriptive than the current requirements of IAS 39 or IFRS 9 on the classification of the impacts of derivatives in the statement of profit or loss. It is thus possible that some entities may have to reclassify some of the impacts of hedging from the financial result to the “Operating” category (particularly for operating derivatives that are not designated as hedging instruments under IFRSs).

Classification of foreign exchange differences in the statement of profit or loss

On this last topic, the IASB has provisionally decided that entities should classify foreign exchange gains and losses (transaction risk) in the same category of the profit or loss statement as the income and expenses relating to the items that gave rise to the foreign exchange differences. However, if this would require undue cost or effort, an entity may classify the foreign exchange differences in the “Operating” category.

Here again, the decisions arising from the redeliberations are more prescriptive that the current standards on the classification of foreign exchange differences in the statement of profit or loss. Some entities, which currently recognise foreign exchange gains or losses on operating receivables or liabilities within the financial result, may henceforth need to classify them in the “Operating” category. Entities may thus need to review their automated recognition and/or remeasurement processes in order to identify the foreign exchange differences that relate to financing transactions and that should therefore remain in the “Financing” (rather than “Operating”) category.