The joint ASB/IASB project on reporting financial performance has progressed considerably in recent months, with the two boards consolidating their position on significant issues discussed to date. The ASB has been developing its thinking in this area for some time, most recently in FRED 22 ‘Revision of FRS 3 “Reporting Financial Performance”’, which was published in December 2000. This project represents a further development of the ideas contained in that document. The main focus is the development of a single statement of comprehensive income, which would report all recognised gains and losses for the period.
A paper summarising the tentative decisions reached to date has been prepared for discussion with liaison standard-setters with a view to further external consultation. The feedback received has been extremely valuable in informing the boards’ thinking. An exposure draft is scheduled for publication in the first half of 2003.
The primary objective referred to in the April 2002 issue of Inside Track has been refined to read as follows:
"The objective of the format of the statement of comprehensive income is to categorise, order and display information so as to maximise predictive value with respect to forecasts of comprehensive income and its components"1
Five working principles have been used to assist the achievement of this objective. The Boards have tentatively agreed to develop a statement format that makes two main distinctions relating to two of those principles. The proposed format would allocate items into one of four categories in a matrix format defined by these two distinctions.
The first, ‘operating/financing’, distinction is derived from Principle 1:
"A statement of comprehensive income should be able to distinguish the return on total capital employed from the return on equity."
The ‘financing’ section would report the return to providers of finance (ie interest and the unwinding of discounts); hence, the ‘operating’ section would provide a measure of financial performance that is independent of the capital structure of the entity.
The other distinction, ‘income flows/valuation adjustments’, is driven by Principle 3:
"Income and expenses resulting from the re-measurement of an asset or liability should be reported separately."
The ‘valuation adjustments’ column would report items such as fixed asset revaluations and actuarial gains and losses on defined benefit pension schemes.
Other significant issues discussed include the appropriate classification of items within the sections of the statement, exceptional items, discontinuing operations and hedge accounting.
Next steps for the project team include discussions with other standard-setters followed by informal consultation with preparers, users and others and the preparation of a draft exposure draft for discussion by the boards.
1 Predictive value is “the quality of information that helps users to increase the likelihood of correctly forecasting the outcome of past or present events.”
