Transcript Title / divider screen title

International Financial Reporting Standards
Performance Reporting and
Economic Consequence
Wei-Guo Zhang, IASB member
The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or IFRS Foundation.
© 2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Agenda
• Introduction
• Historical debates on earning numbers in the US
• IASB’s recent thinking in CF DP
• Research implications
2
3
International Financial Reporting Standards
Introduction
The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or IFRS Foundation
Objective of financial reporting
4
To provide financial information about the reporting entity that is
useful to existing and potential investors, lenders and other creditors
in making decisions about providing resources to the entity. (OB 2)
Users need information to help them assess the prospects for future
net cash inflows to the entity (OB 3)
Information about resources
and claims against the entity,
and changes to them (OB 4)
Not provide information
about the entity’s value
Information to assess effective
and efficient management of
resources (OB 4)
Elements in IASB’s Framework
• Financial position
•
•
•
Assets
Liabilities
Equity
• Performance
•
Incomes
•
•
•
Expenses
•
•
5
Revenue
gains
Expenses from ordinary activities
losses
5
Elements in FASB’s Framework
6
Elements in FASB’s Framework
7
Elements in FASB’s Framework
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Elements in FASB’s Framework
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10
International Financial Reporting Standards
Historical debates on
earning numbers in the US
The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or IFRS Foundation
Historical debates on earning numbers
11
• Newly formed SEC (1933-34) required an income
statement to include sales and cost of sales
• In 1936, AAA issued “A Tentative Statement of
Accounting Principles Underlying Corporate Financial
Statements’ (Revised 1941, 1948,1957)
Strong support for what later became the “all inclusive
income” or “clean surplus” perspective
SEC supported the AAA Statement’s conclusions
11
Historical debates on earning numbers
12
• Committee on Accounting Procedure generally favored
the “current operating performance theory of income”
(Storey & Storey, p.27)
Exclude from net income extraordinary and non-recurring
gains and losses “to avoid distorting the net income for the
period” (Storey & Storey, p.27)
Focus was on a “non-distorted” income number but the
benchmark for “non-distortion” was not stated
12
Historical debates on earning numbers
13
• APB adopted the clean surplus or “all inclusive”
income statement but also agreed on notions of
extraordinary items
 Events and transactions that “will be of a character
significantly different from the typical or customary business
activities of the entity” (APB-9-para. 21)
 APB 30 (para. 20) established the Unusual Nature and
Infrequency of Occurrence criteria
• Extraordinary items were separately displayed but
included in net income
Historical debates on earning numbers
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• Ideas of reporting “non-distorted income” continued to
be debated in the early years of work on the FASB
Conceptual Framework
• Presentation of items in or out of income statement
remained controversial
• Creation of debits and credits on the balance sheet to
avoid “distortion of net income”
• Not recognizing assets and liabilities to avoid
“distortion of net income”
Historical debates on earning numbers
• FASB Conceptual Framework Public Hearings
Q. One of your criteria for capitalization is that net income not be
materially distorted. Do you have any operational guidelines to
suggest regarding material distortion?
A. The profession has been trying to solve that one for a great many
years and has been unsuccessful. I really do not have an answer.
Q. Then, is material distortion a useful criterion that we can work with?
A. Yes, I believe it is. Despite the difficulty, I think it is necessary to work
with that criterion. It is a matter of applying professional judgment.
“Board Members were not satisfied with the kinds of answers just
illustrated.” (Storey and Storey)
15
Historical debates on earning numbers
• FASB continued to espouse the all inclusive
notion of income except that support soon
eroded:
–
–
–
–
–
SFAS 12
SFAS 52
SFAS 115
SFAS 133
SFAS 158
16
Historical debates on earning numbers
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• Those who defended erosion of “all inclusive
income” and clean surplus would:
 Require a statement of comprehensive income as a
single statement (with subtotals???)
 Shift emphasis from the subtotal earnings
 Place selected items in other comprehensive income
(OCI)
• However, no definition of earnings exists
Historical debates on earning numbers
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• Comprehensive income is defined in the
Conceptual Framework: by definition, it is an allinclusive notion
 No single statement requirement for presentation of
comprehensive income
 Basis for placing items in OCI is not determinable
 Basis for recycling items out of OCI is not
determinable
19
International Financial Reporting Standards
IASB’s recent thinking in CF DP
The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or IFRS Foundation
Original project
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• Was a joint project with FASB;
• Finalized revised chapters on objectives and
qualitative characteristics;
• Published ED on reporting entity;
• Had early discussion on elements and measurement;
• Suspended because of the needs to focus on big 4
projects and issues emerging from recent financial
crisis.
April 2013 Project update and the future work plan
New project
• Re-started in 2012 after feedback from the IASB
agenda consultation in 2011;
• Will be IASB only project;
• Continues on work previously done before 2010;
• With the presumption that current Framework is
basically OK;
• Scope of amendment is limited;
• Will not progress by phases;
• DP will be published this month.
April 2013 Project update and the future work plan
21
Where are we?
• Objective of
financial
reporting
• Qualitative
characteristics
Completed
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ED
• Reporting
entity
• Everything
else on
financial
statements
Now
Timetable
Jul 2013
Issue DP
6-month
comment period
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Q4 2014
Issue ED
End 2015
Final
Current use of OCI
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Recognised asset or liability
Remeasurement gains or
losses in OCI
Recycle?
Financial assets measured at fair value through
OCI [IFRS 9 ED]
Changes in discount rate
Yes
Insurance contracts [ED]
Changes in discount rate
Yes
Financial liabilities designated at fair value
through profit/loss
Changes in fair value due to
issuer’s own credit risk
No
Property, plant & equipment, intangible assets,
exploration & evaluation assets
Revaluation gain or reversals
No
Net investment in foreign operations
(and hedges)
Exchange differences
Yes
Pensions – net defined benefit assets or
liabilities
Remeasurement
No
Designated investments in equity instruments
Change in fair value
No
Cash-flow hedging instruments
Effective portion of changes in fair
value
Yes
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Major concern
• Increasing use of OCI
• OCI become garbage box to find answers for
difficult issues
• No strong or consistent conceptual basis
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
25
Major questions asked
• How financial performance should be defined?
• How should profit or loss and OCI be defined?
• What items should be in OCI?
• Should OCI be recycled?
• Should OCI be the only decision by IASB or not?
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
26
Presentation of performance
What is performance?
• Statement of profit or loss and other
comprehensive income
• Profit or loss – widely used
• Gross profit
• EBITDA
• Statement of financial position
• Changes in financial leverage
• Statement of cash flows
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Statement of comprehensive income
Discussion paper
approach
• All items of income and expense provide
some information about financial
performance
• Make best use of subtotals or totals so
information is useful
• Present as one or two statements
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Retain profit or loss as a subtotal or
total
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• Items in profit or loss communicate the primary picture
of the return an entity has made on its resources
– A common starting point for analysis
• What distinguishes profit or loss items from OCI items?
–
–
–
–
Describe OCI (profit or loss is the default)
Changes in some current measures (remeasurements)
Decision for IASB, not preparers
IASB would not have to use OCI for all items that qualify
• Recycling
– all or some?
Distinguish using an attribute?
Profit or loss
•
•
•
•
•
•
Realised
Recurring (persistent)
Operating
Measurement certainty
Short-term
Under management control
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OCI
•
•
•
•
•
•
Unrealised
Non-recurring
Non-operating
Measurement uncertainty
Long-term
Outside management control
IASB’s view: No one way to distinguish
profit or loss and OCI
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Narrow use of OCI
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• OCI contains only some re-measurements in two
categories:
– ‘Bridging items’: arises where same asset/liability is
represented in balance sheet and profit or loss using two
different measurements (see next slides)
– ‘Mismatched remeasurements’: arises when offsetting
impact of linked transactions or other events is not yet
recognised eg cash flow hedging and foreign exchange
translation
• OCI always recycled
Narrow use of OCI (2)
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Profit or loss (default)
All recycle
All recycle
OCI
• Bridging
– IFRS 9 (ED)
– Insurance
contracts
– Others?
• Mismatched
– Cash flow hedging
– Foreign exchange
– Others?
Two different measures (bridging)
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Example (IFRS 9 2012 ED):
In 20X1, financial assets are measured at amortised cost in the
statement of profit or loss and fair value in the balance sheet.
In 20X4, the financial assets are sold.
Statement of profit or loss
Statement of comprehensive
income
20X1
Interest income
A
20X1
Profit or loss
Impairment
(B)
OCI: Fair value changes
Profit or loss
A-B
Total comprehensive
income
C = Differences between amortised cost (in
profit or loss) and fair value (in balance
sheet)
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
A-B
C
A-B+C
Two different measures (bridging) (2)
Statement of profit or loss
Statement of comprehensive
income
20X4
20X4
Interest income
Impairment
A
(B)
Gain on sale
(reclassification
adjustment)
Profit or loss
D
A-B+D
Profit or loss
Fair value changes during
the year
Reclassification adjustment
to profit or loss
Total comprehensive
income
D = cumulative change in fair value until date of sale
= sales proceeds less amortised cost (carrying value)
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
34
A-B+D
C
(D)
A-B+C
Broad use of OCI
• OCI contains only some current remeasurements in
three categories:
– ‘Bridging items’
– ‘Mismatched remeasurements’
– ‘Transitory remeasurements’ (see next slide)
• Recycling
– All bridging items and mismatched remeasurements
– Some transitory remeasurements
– if results in relevant information
35
Broad use of OCI
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Profit or loss
Some recycle, if
relevant
All recycle
OCI
• Bridging
• Mismatched
• Transitory remeasurements
– Long-term
– remeasurement expected to reverse or change
significantly
– remeasurement enhances profit or loss as the
primary indicator of the return the entity has
made on its economic resources
– Eg pensions remeasurement
‘Transitory remeasurements’
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• Generally disaggregation (separate presentation) of
components of an item income or expense
• Must meet all conditions:
Asset realised/liability settled over the long term
Current period remeasurement is expected to
reverse fully, or change significantly, over the
holding period of the asset or liability
Current period remeasurement enhances the relevance
of profit and loss
‘Transitory remeasurements’ (2)
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Example – Pensions
20X1: Estimate of employee service cost is CU10 per year
20X2: Revised estimate of employee service cost is CU12 per year
- revision due to change in inflation forecast
Relevant
information
about 20X2
service costs
Transitory
effect of
inflation is
separately
presented
Impact on
comprehensive
income
Profit or loss
20X2
20X2
CU
Impact on
Financial position
CU
12
20X2 service cost
12
20X1 service cost
10
OCI:
Pension liability
remeasurement
2
20X1 ‘catch-up’
2
Total
14
Pension liability
24
Pensions and bridging items
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• Remeasurements of net pension liabilities (assets) do not
qualify as ‘bridging items’:
– Difficult to determine basis to recycle
– Cumulative amounts recognised in profit or loss do not reflect
an alternative ‘measure’ of the liability
– Measure should be meaningful, understandable, describable
• For example – using the previous slide:
– Remeasured pension liability = CU24
– Accumulated profit or loss:
CU10 (20X1) + CU12 (20X2) = CU22
– How do we describe the measurement of the pension liability
reflected in accumulated profit or loss?
Summary
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Narrow Approach
Broad Approach
When can OCI be
Use of OCI is only where permitted Use of OCI is only where permitted
used?
or required by IFRS
or required by IFRS
Items eligible?
Mismatched remeasurements
Mismatched remeasurements
Bridging items
Bridging items
Transitory remeasurements
Recycling
Always
Sometimes
Driven by the category and the
Bridging and mismatched always
reason why the item went into OCI
Transitory remeasurements – only if
it provides relevant information
Result
Limited items in OCI
More items in OCI (in line with
Less discretion for the IASB
current use)
More discretion for the IASB
Alternative approach not considered
Alternative approach
• No subtotal (ie profit or loss or OCI)
defined in the Conceptual Framework
• No recycling
• Not well supported
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42
International Financial Reporting Standards
Research implications
The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or IFRS Foundation
Research Implications?
43
More information
44
• Conceptual Framework website:
http://go.ifrs.org/Conceptual-Framework
• Conceptual Framework (2010):
http://eifrs.ifrs.org/eifrs/bnstandards/en/2013/conceptualfr
amework.pdf