IASB plans ‘game changer’ on financial reporting

Hans Hoogervorst, chair of the International Accounting Standards Board (IASB) has described its primary financial statements project as a ‘game changer’ in financial reporting

Speaking at a conference in Mexico, Hoogervorst said the last five years had seen the release of what he called ‘the big four standards—IFRS 9, 15, 16 and 17’.

Looking ahead, he said the board’s future focus is more on how financial information is presented. The objective of the primary financial statements project is to provide better formatting and structure in IFRS financial statements, especially in the income statement.

Hoogervorst said IASB’s lack of guidance thus far has had the unintended consequence of stimulating the use of self-defined subtotals, or non-GAAP measures.

While saying IASB does not intend to root them out, Hoogervorst stated: ‘Many non-GAAP measures tend to paint a very rosy picture of a company’s performance, almost always showing a result that is better than the official IFRS numbers.

‘This is the second reason why we decided it was important the IFRS standards themselves provide more detail and structure.’

He also pointed out that the growing adoption of digital working and the use of artificial intelligence increased the requirement for data to be properly structured, consistently defined and tagged.

Hoogervorst said: ‘The first subtotal we have looked at is operating profit. This is the most commonly used subtotal around the world and it currently lacks an IFRS definition.

‘We have decided to define operating profit as profit excluding financing, tax and income/expenses from investments. We are convinced that our definition of operating profit shows what most would view as the results of a company’s main business activities’.

However, this definition does not work for financial entities, such as banks. For this reason, the IASB has decided to require financial entities to include expenses from financing activities relating to the provision of financing to customers in operating profit.

Hoogervorst highlighted two advantages in having an IFRS-defined subtotal of operating profit. First, investors will have at least a common denominator of operating profit that is comparable across companies and industries. Secondly, if companies want to present an adjusted measure of operating profit, the official IFRS definition will serve as an additional anchor in the income statement to which the adjusted number can be reconciled. This way, adjustments to operating profit will become much more transparent, leading to better comparability.

IASB has also decided to define profit before financing and tax. Hoogervorst indicated that the board has looked seriously at the possibility of trying to define and own the very commonly used non-GAAP measures of EBIT and EBITDA, but had concluded the ‘lack of conceptual clarity and precision makes the use of these subtotals very problematical’.

‘Moreover, over time preparers and users might start using the subtotals that we have defined as building blocks for their own analyses. They might find our definitions workable for their own subtotals, whether EBIT or EBITDA or others, and they might wish to reduce the need for reconciliation. Over time, some spontaneous convergence between non-GAAP and GAAP might take place,’ he said.

IASB is also developing guidance to tackle excessive aggregation. It will also require companies to disclose in the notes which components of income or expense they judge to be ‘unusual’, either in size or in frequency, which Hoogervorst said was one of the areas of non-GAAP ‘where a lot of cherry picking is going on’.

‘Unsurprisingly, companies tend to focus on what they see as unusual expenditures rather than on identifying windfall profits. While it will never be perfectly possible to identify unusual items, we aim to develop principles that will strengthen discipline in this area,’ he said.

Hoogervorst concluded: ‘Overall, our decisions thus far will create much more structure in the income statement and will definitely enhance comparability. Our work is not done yet, and we still have some tough nuts to crack. I am optimistic, though, that our work on the primary financial statements can become a real game changer in reporting.’

Speech: The Primary Financial Statements project—a game changer in financial reporting? is here.

Report by Pat Sweet

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