Redeliberations continue on Primary Financial Statements project

Keywords: Mazars, Thailand, IFRS, IFRS IC, IASB, IAS 1

20 October 2022

This month, the Board reached decisions on the presentation of the income statement for entities with specified main business activities (such as banks and insurers) and on disclosures relating to operating expenses required in the notes.

These decisions are still tentative and will be confirmed once the final standard is published, which is currently scheduled for 2023.

Presentation of the income statement for entities with specified main business activities

At the July meeting, the IASB continued with the redeliberations on this topic, which began in March 2022.

Readers will remember that the December 2019 exposure draft proposed that the categories in the income statement should be the same for all entities, but the content of each category could vary depending on the company’s business model. Thus, an entity should classify income and expenses from investments made in the course of the entity’s main business activities in the “operating” category rather than the “investing” category; and should classify income and expenses from financing activities, where these arise from the provision of financing as a main business activity, in the “operating” category rather than the “financing” category.

As regards the “investing” category, the IASB reached the following tentative decisions in July:

• to rephrase paragraph 48 of the exposure draft, which currently states that an entity shall not classify in the “investing” category income and expenses specified in paragraphs 47(a)-47(b) generated “in the course of its main business activities”. Instead, it will specify that an entity that invests as a main business activity must classify in the “operating” category income and expenses from assets that would otherwise be classified in the “investing” category. This will make it simpler and clearer;
• to permit entities to make use of judgement when determining whether their investments constitute a main business activity, assessing this at the level of a group of assets with similar characteristics rather than at the level of individual assets. The way an entity groups financial assets in this context should be consistent with the way it groups financial assets into classes for the purposes of disclosures about financial instruments in accordance with IFRS 7;
• to add application guidance in order to clarify that income and expenses from financial assets arising from providing financing to customers as a [main] business activity shall be classified in the “operating” category of the income statement.

The IASB also discussed a number of topics specific to the “financing” category, and reached the following tentative decisions:

• to confirm the accounting policy choice proposed in paragraph 51 of the exposure draft, which permits an entity that provides financing to customers as a main business activity to classify income and expenses from liabilities arising from transactions that involve only the raising of finance either (i) solely in the “operating” category; or (ii) by making a split between the “operating” and “financing” categories based on whether or not the liabilities are related to the entity’s main business activity of providing finance to customers;
• to confirm, in line with the change in the definition of the “financing” category that was decided in July 2021, that the accounting policy choice mentioned above does not apply to specified income and expenses arising from other liabilities (i.e. 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). These must always be classified in the “financing” category of the income statement;
• to confirm the proposal in the exposure draft that entities that invest in financial assets as a main business activity should classify income and expenses from cash and cash equivalents in the “operating” category;
• to explore the possibility of withdrawing the accounting policy choice permitted to entities that provide financing to customers as a main business activity by paragraph 51 of the exposure draft, which currently specifies that they may classify income and expenses from cash and cash equivalents in either the “operating” category or the “financing” category. For entities that do not also invest in financial assets as a main business activity, the withdrawal of this choice would require them to classify all these items in the “investing” category. This would be the same accounting treatment as for entities that do not have specified main business activities, following the decision reached in May 2021 to require income and expenses related to cash and cash equivalents to be classified in the “investing” category. The Board will carry out targeted outreach to help it reach its decision.

Disclosures of operating expenses by nature in the notes

Also in July, the IASB continued redeliberations on a thorny issue, namely the level of disclosures required in the notes where an entity has elected to present its operating expenses by function in the income statement.

The exposure draft states that, if an entity opts for presentation by function in the income statement, it must also disclose an analysis of its total operating expenses using the nature of expense method in a single note to the financial statements (though this does not need to be broken down by line item).

Following initial discussions in October 2021, and drawing on additional work and further discussions with stakeholders, the IASB reviewed the scope of disclosures to be required in the notes in order to achieve a better balance between costs for preparers and benefits for users.

Thus, the Board has tentatively decided to require entities to disclose in the notes the amounts of depreciation, amortisation and employee benefits included in each line item in the statement of profit or loss (e.g. the “cost of sales” line item). This is still a more onerous requirement than the current paragraph 104 of IAS 1, which does not require these amounts to be broken down by line item.

The IASB also tentatively decided to explore a more broadly applicable approach that would require an entity to disclose, for all operating expenses disclosed in the notes, the amounts included in each line item in the income statement. The staff will carry out targeted outreach to test this proposal. If the Board ultimately opts for this broader requirement, it would de facto include the more specific requirement set out above regarding depreciation, amortisation and employee benefits. The IASB would also then need to decide whether a cost relief would be required to help entities to implement the broader requirement.

The results of the outreach work will be presented at the January 2023 Board meeting.