Every now and then, the Deller household comes under scrutiny for the dreaded ‘R-word’: redecoration. In terms of house design, I fall into every single stereotype that people have of accountants. I am plain, without creativity and I don’t see the need for dramatic changes. It is things like this that perpetuate the assumption that accountants are boring, and for that I ask your forgiveness.
Many of us feel the same towards sets of financial statements and accounting standards. It may not be accompanied by a living stress-dream through Ikea, but the question still comes: ‘Do we really need to change things?’
The Primary Financial Statements project is proposing two new subtotals: operating profit, and profit before financing and income tax
Well, the International Accounting Standards Board (IASB) has decided that the answer to that is yes, and change is coming. Previously, this column looked at the way forward proposed by the IASB’s workplan and identified that there are three candidates to become the next new IFRS accounting standard.
We looked at the first of these in my earlier article ‘Subsidiaries prepare for reporting change‘ but the one that will have the widest impact by far is the Primary Financial Statements project.
The Primary Financial Statements project aims to replace IAS 1, Presentation of Financial Statements, immediately highlighting that this could have an impact on the majority of entities. The stated aim is to improve communication on the financial statements, with a focus on information in the profit or loss. There are three major areas of focus:
- subtotals, taking a look at specific line items to improve comparability
- management performance measures, looking at the way in which management reflects information and how that can be reconciled to the financial statements
- disaggregation, focusing largely on whether additional information is required, and how that may be best presented.
The major headlines are that the proposals will require additional defined subtotals in the statement of profit or loss, additional disclosures about management performance measures, and a requirement to disaggregate information further.
Each of these areas will be examined in more detail as the details of any new standard are finalised and issued; this article will focus on the proposed changes surrounding the subtotals in the statement of profit or loss.
IAS 1 currently requires revenue and total profit, but no specific subtotals between the two. The IASB found that 63 of 100 sampled reported some form of operating profit subtotal but noted nine different definitions of how that arose.
An underlying aim is to establish a comparable figure for operating profit; this is surely a good aim
As a response to this, the Primary Financial Statements project is proposing two new subtotals: operating profit, and profit before financing and income tax.
This would lead to the creation of three categories in the statement of profit or loss: operating, investing and financing. In this sense, these would effectively mirror the categories in the statement of cashflows.
- Operating section: would go from revenue to the newly created operating profit subtotal. This section would become the default place to recognise any expenses that don’t meet the criteria for inclusion in the investing or financing categories. This means that items such as restructuring costs, gains or losses on non-current assets and unusual items would be included in here.
- Investing section: would go below operating profit and go up to the new subtotal ‘profit before financing and income tax’. The investing section would include items held under the equity method, and any income or expenses relating to items that generate a return independently from other resources held by an entity. This would mean that this section would contain income and expense from associates, joint ventures, investment properties, financial assets and dividends received.
- Financing section: would start at the new subtotal ‘profit before financing and income tax’ and go down from there, likely to a subtotal of profit before tax. This section contains income and expenses that only involve the raising of finance. Therefore, it would include items relating to interest on loans, financial liabilities, leases, pension liabilities and decommissioning liabilities.
This is the equivalent of repainting the lounge, including vacuuming behind the couch
One of the underlying aims is to try to establish a comparable figure for operating profit. In the financial reporting world of adjusted subtotals and varying management performance measures, this is surely a good aim. These proposals will create more lines in the financial statements, and the disaggregation will be examined in a future article.
The new sections and subtotals may have to be examined differently by different entities. For example, entities such as banks provide finance to customers as a main business activity. This means that the operating section for these entities will include income/expenses that non-financial entities include in investing or financing.
The issue of any new IFRS accounting standard as a result of the Primary Financial Statements project is the one that is likely to have significant changes on the presentation of the statement of profit or loss for many companies.
Many changes to IFRS Standards may be the equivalent of getting a boiler serviced or fixing a toilet, but the Primary Financial Statements project is different. This is the equivalent of repainting the lounge, including vacuuming behind the couch.
Watch and learn
Watch Adam Deller’s series of videos explaining the fundamentals of IFRS