IASB Proposes Changes to Reporting of Profit and Income

IASB Proposes Changes to Reporting of Profit and Income
Hans Hoogervorst, IASB

The International Accounting Standards Board on Tuesday proposed improvements to the statement of profit or loss and a more disciplined and transparent approach to the reporting of management-defined (or “non-GAAP”) performance measures.

The standard-setter is hoping to nudge companies to make the comparison of financial statements easier and more meaningful.

Companies would be required to provide three new profit subtotals: “operating profit,” “operating profit and income and expenses from integral associates and joint ventures,” and “profit before financing and income tax.”

In a study of 100 companies, the IASB found that 63 companies reported operating profit in the financial statements, using at least nine different definitions.

“Operating profit of one company can’t be compared with operating profit of another,” said Hans Hoogervorst, chair of the IASB. ” We [and investors] find that a very unsatisfactory situation.”

A second part of the proposal would require issuers to disclose management performance measures — subtotals of income and expenses that are not specified in International Financial Reporting Standards — in a single note to the financial statements.

“In this note, companies would be required to explain why the measures provide useful information, how they are calculated, and … provide a reconciliation to the most comparable profit subtotal specified by IFRS standards,” according to the proposal.

In an analysis of the 2017-2018 annual reports of 100 listed companies, the IASB said, the most common management-defined performance measures were adjusted profit (33%), adjusted operating profit (29%), adjusted EBITDA (20%), and adjusted EBIT (11%).

The new standards would “probably decrease the need for companies to have non-GAAP measures; however, we do not have the illusion that companies will no longer use non-GAAP measures,” Hoogervost said.

The final part of the proposal addresses what the IASB called “improved disaggregation of information.”

Under that proposal, issuers would be required to provide a better analysis of their operating expenses and to identify and explain in the notes any unusual income or expenses. “These requirements would help investors analyze companies’ earnings and forecast future cash flows,” according to IASB.

Companies are currently required to analyze operating expenses in the statement of profit or loss either “by nature” (showing line items such as employee benefits and depreciation) or “by function” (showing line items such as cost of sales and general and administrative expenses). But investors have raised concerns that companies are not always choosing the best method or are mixing methods.

The three proposals would result in a new IFRS standard that sets out general presentation and disclosure requirements relevant for all companies, replacing IAS 1 Presentation of Financial Statements.

Stakeholder comments are due by June 30. The standards are unlikely to become effective before 2023.

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