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This article was first published in the January 2018 international edition of Accounting and Business magazine.

As part of its primary financial statements project, the International Accounting Standards Board (IASB) has tentatively decided on some improvements to the statements of financial performance, which are likely to result in significant changes to the way these are presented. This project began in December 2016 and is running alongside related projects such as those on principles of disclosure and materiality implementation.

The statements of financial performance work is primarily focused on the presentation of items linked to investments, the inclusion of subtotals to aid comparability, and an examination of better ways to communicate other comprehensive income (OCI).

The first of these is the inclusion of a new investing category in the statement of financial performance, called ‘income/expenses from investments’. This is to be shown separately from another new section, which is to be called ‘finance income/expenses’. 

Currently most financial statements show all investment income and finance costs in the same section, often under some form of operating profit subtotal.

The IASB found that many investors believe that more helpful information would be provided from setting out a separate section relating to an investing category. The IASB says this section will include ‘income/expenses from assets that generate a return individually and largely independently of other resources held by the entity’.

The income and expenses in this section arise from investments generating returns separately from the capital structure of the business (considered as an entity’s equity and debt financing, plus any excess cash held). Users often measure an entity’s investments separately from its operations when valuing its business, and it is hoped that providing this additional disaggregation will result in the presentation of more useful information.

So what is the distinction between the new categories of ‘income/expenses from investments’ and ‘finance income/expenses’? The IASB has not produced a prescriptive list, but the most recent staff paper does identify items that would typically be included in each.

Investment income/expenses

This category would typically include:

  • interest income on long-term debt instruments (excluding finance income from cash and cash equivalents)
  • dividends from equity investments
  • fair value changes on equity investments
  • fair value changes on investment property (if the entity does not treat such properties as a significant part of its operations)
  • rental income on investment property (if the entity does not treat such properties as a significant part of its operations)
  • disposal gains and losses associated with the sale of an investment.

Rather than these being classed as one line called ‘income/expenses from investments’, it is expected that this category will contain separate lines for each item type, as identified above.

The share of the profit or loss of associates and joint ventures could go in this section. However, there is currently some discussion within the IASB regarding situations where the activities of the associate or joint venture are similar to or are integrated within the entity’s main line of business. In this case, there could be an argument for showing the share of the profit or loss above this category, reflecting its status as integral to the overall business.

Finance income/expenses

The IASB has tentatively decided that this section should consist of:

  1. Interest income from cash and cash equivalents using the effective interest method
  2. Other income from cash, cash equivalents and financing activities
  3. Expenses from financing activities
  4. Other finance income
  5. Other finance expenses.

These headings have been introduced to identify the different elements of interest arising from different types of liability. Again, the aim is to disaggregate the information produced in the statement of financial performance to enhance its usefulness.

While interest income from cash and cash equivalents is self-explanatory and consistent with current practice and terminology, the introduction of the term ‘financing activities’ will be a key distinction within this category. The term ‘financing activities’ as used in IAS 7, Statement of Cash Flows, is currently very broad, and the IASB will be clarifying this. This will now state that a financing activity will involve:

  • the receipt or use of a resource from a provider of finance (or provision of credit)
  • the expectation that the resource will be returned to the provider
  • the expectation that the provider will be appropriately compensated through the payment of a finance charge. The finance charge is dependent on both the amount of the credit and its duration.

Using this definition, interest arising from items such as debentures, loans, bonds, leases and payables would fall under financing activities and are likely to come under 2 or 3 in the list above within the finance income/expenses section, as ‘income from financing activities’ or ‘expenses from financing activities’.

Other liabilities – such as net defined benefit liabilities, decommissioning liabilities and other long-term provisions – are much less likely to fit the criteria as a financing activity. Therefore, any income or expenses (such as the unwinding of discounts) relating to these are likely to fall under line items 4 or 5 above, being ‘other finance income’ or ‘other finance expenses’.

Communicating OCI

As part of this project, the IASB has also looked at the concept of other comprehensive income (OCI), which it acknowledges is one of the least-understood concepts within statements of financial performance.

The change proposed is more to do with terminology than with where items should be reflected within the statements of financial performance. Since June 2011, IAS 1, Presentation of Financial Statements, has required items of OCI to be grouped into:

  • items that will not be reclassified subsequently to profit or loss (not recycled)
  • those that will be reclassified subsequently to profit or loss (recycled) when specific conditions are met.

The IASB has decided that these two categories are to be renamed as ‘remeasurements reported outside profit or loss’ and ‘income and expenses to be included in profit or loss in the future’.

Whilst there will be no change to the classification of items, this will result in the removal of the term ‘other comprehensive income’, meaning that OCI will no longer be a heading in the statement of financial performance.

So what’s next? The IASB has acknowledged that the current proposals around this new category do not address whether this is relevant for financial institutions and other entities providing financial services. It aims to determine a suitable approach for a straightforward non-financial entity first, before considering more complex scenarios.

The IASB will continue to discuss the presentation of the share of profit or loss from associates and joint ventures, in addition to making a decision on whether earnings before interest and tax (EBIT) will become a subtotal within the statement of financial performance.

These changes are not likely to be applicable for some time yet, as the IASB continues its suite of projects. When they do come into effect, they are likely to mean that many statements of financial performance increase in length, as the currently used categories of ‘investment income’ and ‘finance costs’ will be significantly disaggregated. The aim is to increase the usefulness of information produced within the statement of financial performance, rather than relying on detailed analyses of the information within the notes to the financial statements.

Adam Deller is a financial reporting specialist and lecturer

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Proposed statement of profit or loss

Revenue X
Cost of sales (X)
Gross profit X
Administrative expenses (X)
Distribution costs (X)
Profit before investments, financing and income tax X
Income/expenses from investments (new section):  
Dividends from equity investments X
Rental income from investment property X
Share of profit of associate X
Earnings before interest and tax  
Interest income from cash and cash equivalents calculated using the effective interest method X
Other income from cash and cash equivalents and financing activities X
Expenses from financing activities (X)
Other finance income X
Other finance expense (X)
Profit before tax X
Income tax expense (X)
Profit for the year X