Alongside my main job of maintaining a healthy (or maybe unhealthy) love/hate relationship with IFRS Accounting Standards, I volunteered as a youth pastor for 13 years. Part of this involved running a summer camp each year. People would think the most stressful part was managing 50-plus teenagers for a week, but the most difficult part for me was the questions before leaving.
Just when you thought everything was organised, you’d be hit with all manner of last-minute questions, from tent assignments to electricity hook-ups and everything in between. My favourite was always ‘What time is the bus leaving?’, usually the day before we left, despite the many (many) reminders that parents needed to get their children there themselves. Once the camp was up and running, it all seemed easier.
Entities will be required to disclose information about MPMs in a single note
The IFRS Interpretations Committee (IFRIC) must be starting to feel that way about IFRS 18, Presentation and Disclosure in Financial Statements. As a reminder, IFRS 18 will require changes in presentation of financial statements, particularly in relation to the statement of profit or loss and in which section of the statement items must be recorded. It also covers rules on management-defined performance measures (MPMs) and how these must be disclosed.
The standard only comes into effect for reporting periods beginning on or after 1 January 2027 but the questions continue to flood in. Some of these were covered in my previous article, ‘Queries about IFRS 18’, but, as with parents before a youth camp, the questions just keep coming. A selection of the most significant (or just my favourite) agenda decisions made by IFRIC recently are summarised below.
Public communications
In this query, the request asked whether presentations provided on a confidential basis to a small number of identifiable shareholders or potential investors would be classified as public communications for the purpose of identifying MPMs applying IFRS 18.
This is important, as MPMs are subtotals of income and expenses that are used in public communications outside financial statements.
Under IFRS 18, entities will be required to disclose information about MPMs in a single note to the financial statements. The note should include:
- an explanation of how the measure is calculated
- how it provides useful information about the entity’s performance
- a reconciliation between the measure and the most directly comparable subtotal, or total specified in IFRS Standards.
In the query, the presentations did contain measures that otherwise could meet the definition of MPMs. The presentations were not published online or made available to a broader or undefined external audience.
The complexities come when there are different main business activities
IFRIC noted that while IFRS 18 does refer to investor presentations, it should not be read that all presentations provided to investors are public communications. As a result, it was concluded that the presentations described in the query were not public communications and therefore did not qualify as MPMs. This means that the disclosures required per IFRS 18 would not be applicable.
Business activities
Under IFRS 18, an entity must record income and expenses relating to its main business activity in the operating section of profit or loss. Income and expenses from cash and cash equivalents are generally required to be recorded in the investing section of profit or loss, with income and expenses from the raising of finance in the financing section.
The complexities come when there are different main business activities and this has been the source of many questions. The IFRIC meeting in June considered three different queries relating to this topic alone, one of which had three questions contained within the query. These decisions often relate to situations where entities have potentially a few different main activities, one of which involves investing or the provision of finance.
Hypotheticals
What about hypothetical income and expenses? This question does seem dangerously close to someone at the youth camp asking about where an imaginary friend may be staying, but stick with us. The query asked if measures containing hypothetical income and expenses could meet the definition of MPMs under IFRS 18. The query defined these as income and expenses that an entity has not recognised and will never recognise under IFRS Accounting Standards.
Examples given included:
- net profit excluding the effects of a major crisis – adjusting net profit under IFRS to remove some expenses that were recognised and include estimated income and expenses that were not recognised
- pro forma gross profit – gross profit for a reporting period determined as if a business combination happened at the beginning of the reporting period, therefore including a full year’s revenue and cost of sales in the measure regardless of the date of acquisition.
While it intuitively seems odd to be able to include these items in the MPM disclosures, IFRIC recognised that there were no restrictions on how an entity calculates subtotals that qualify as MPMs. Therefore, they concluded that items involving hypothetical income and expenses could actually be classified as MPMs and therefore included in MPM disclosures.
So, we’re still a few months away from IFRS 18 being effective, but IFRIC continues to field all of the queries. I’m sure many on the team must be asking each other the timeless road-trip classic: ‘Are we nearly there yet?’
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