02/11/2020 - EFRAG Final Comment Letter on Primary Financial Statements

In its Final Comment Letter, EFRAG welcomes the Exposure Draft ('ED') and the IASB's efforts to improve the structure and content of the primary financial statements.

EFRAG supports the IASB's proposals to present an operating, investing and financing category in the statement of profit or loss to improve comparability and reduce diversity in practice. However, EFRAG has reservations over some of the proposals in the ED. For example:

• clear guidance is needed on the notion of 'entity's main business activity' to distinguish between categories in the statement of profit or loss;

• the proposals should consider the interaction with existing regulatory frameworks on presentation of financial statements;

• the newly created categories in the statement of profit or loss are not aligned with the presentation of cash flows in the statement of cash flows, despite using similar labelling;

• the 'free' accounting policy choice in paragraph 51(b) of the ED (for entities that provide financing to customers as part of their main business activities), while being useful for banks, may result in the loss of relevant information for users when used by non-financial institutions (e.g. manufacturer providing financing to customers); and

• the IASB should further consider how its proposals should be applied in specific circumstances, including the interaction of the IASB's proposals with IFRS 17 Insurance Contracts and IFRS 9 Financial Instruments;

EFRAG considers that the distinction between integral and non-integral associates and joint ventures could provide relevant information to users. However, EFRAG is concerned that the IASB's proposed definition would involve significant judgement and, therefore, proposes that the IASB:

• clarifies the 'main business activity', 'generate a return individually and largely independently of the other assets of the entity' and 'significant interdependency';

• expands the new paragraph 20D of IFRS 12 Disclosure of Interests in Other Entities to widen the scope of integral associates and joint ventures, include additional indicators and more examples with the objective of reducing the level of judgement involved; and

• requires the presentation of the results of all associates and joint venture​s below the subtotal 'operating profit or loss', as a separate line item within the subtotal 'operating profit or loss and income and expenses from associates and joint ventures'. In addition, EFRAG suggests that the IASB requires the split between 'integral' and 'non-integral' in the notes to the financial statements. EFRAG notes that in accordance with paragraph 66 of the ED, entities can always make the split (within the subtotal that includes all associates and joint ventures) on the face of the financial statements if such split is considered useful.

EFRAG supports the IASB's proposal to continue requiring entities to present an analysis of expenses using either by-function or by-nature method, based on whichever method provides the most useful information to the users of financial statements. EFRAG recommends the IASB to further investigate the cost/benefit profile of its requirement to disclose on a by-nature basis in the notes when presenting by-function on the face of the financial statements, and, if appropriate, consider focusing on information that is most needed by users.

EFRAG welcomes the IASB's efforts to define unusual income and expenses and to require entities to disclose such items in the notes, however the definition of unusual items seems to be rather narrow, as it focuses on whether expenses/income will occur in the future.

EFRAG welcomes the IASB's efforts to provide guidance on Management Performance Measures ('MPMs'). Nonetheless, EFRAG considers that not only subtotals on the face of the statement of profit or loss but also other measures, such as indicators of financial position or ratios, should be included in the scope of this requirement. In addition, EFRAG invites the IASB to consider:

• making the definition of public communication narrower, limiting the scope to the MPMs presented in public communications released jointly with the annual or interim reports;

• excluding from the scope the performance measures required by regulators; and

• extending the scope to cover possible MPMs presented in the financial statements but not in other public communications.

EFRAG questions also the cost/benefit profile of the requirement to present the split of tax and non-controlling interest components for all the items when a performance measure is adjusted.

Finally, EFRAG considers that the IASB has not sufficiently articulated the link between MPMs and IFRS 8 Operating Segments and suggests the the IASB requires an explanation of how MPMs interact with performance measures already presented under IFRS 8.