IASB Chair discusses the future of financial reporting

On November 5, 2019, IASB Chair Hans Hoogervorst attended the Eumedion Annual Symposium in Netherlands and made a speech titled The IASB——from financial to integrated standard-setter，discussing the Board’s projects on primary financial statements (PFS), management commentary and sustainability reporting. IASB looks beyond the financial statements alone and incorporates broader financial information as part of its mission.

Primary Financial Statements

The purpose of the PFS project is to improve the structure and content of the financial statements. The IFRS income statement is currently relatively form-free. We define revenue, we define profit or loss, but not so much in between. This is one of the reasons why non-GAAP has become so popular.
What IASB proposed to do is as follows:

New subtotals
First, we will define a number of subtotals in IFRS Standards, so that the comparability of these types of figures is improved. For example, we have developed a definition for the most commonly used subtotal: ‘Operating Profit’. We will define this operating measure as profit before income and expenses from financing, taxes and investments. Many investors regard this figure as a reasonable reflection of the main business activities of a company.

Another important subtotal that we want to define is what we call ‘Profit before Financing and Tax’. This subtotal excludes income and expenses from financing and taxes to make it easier to compare the financial performance of companies, regardless of the extent to which they depend on debt financing. Companies with different capital structures thus become more comparable.

Non-GAAP
The PFS project will also ensure greater transparency and discipline in the use of non-GAAP measures. We want to compel companies to include their most important non-GAAP measures in a single note in the financial statements to make such information easier for investors to find.

At the same time, the disclosure of the non-GAAP measures in this note will be subject to discipline. For example, a reconciliation must be provided between the non-GAAP figure and the closest IFRS subtotal. By including non-GAAP measures in the notes to the financial statements, they also come into the scope of audit, which will further strengthen the discipline.

The impact of our PFS proposals on the income statement will be quite large. They will create more structure in the income statement and improve comparability, making it easier for users to find the components they need for their analysis. The improved structure will also facilitate the digital consumption of financial information.

Management Commentary and Sustainability Reporting

Management Commentary Practice Statement
In practice statement, IASB asks companies to identify the intangibles that are important to their earnings model. They will also have to address the major environmental risks for those intangible assets and explain their strategy for dealing with those challenges.

Sustainability Standards
Two main streams can be distinguished in the world of sustainability standards. These standards have a multi-stakeholder perspective; they do not primarily focus on investors. The second main stream is more focused on the company and its investors. They are particularly relevant for the update of our Management Commentary Practice Statement. They focus primarily on the (potential) financial effects of sustainability issues for the company itself. These standards—with a clear financial materiality threshold—also fit well within the mission of the IFRS Foundation to provide financially relevant information to investors.