New profit reporting proposals by the IASB

New profit reporting proposals by the IASB

"New profit reporting proposals by the IASB that aim to make the accounting reportsmore comprehensive, accurate and easier for investors to interpret."

Recently the IASB (International Accounting Standards Board) put forward a number of proposals with the aim of improving the way that businesses can report their financial performance. Below we will both define the new proposals and look into how they could help businesses report finances.

The proposals and how they will affect companies

The first proposal that the IASB have put forward would force companies to standardise their definitions of terms such as operating profit in their financial statements. The IASB is doing this in the hopes that in the long run it will help investors compare and contrast the financial position of different companies. They are also proposing measures that would add further regulations on how companies explain performance related measures that would be stricter and more comprehensive than the normal non-GAAP (generally Accepted Accounting Practises) measures.

The IASB recently conducted a survey in which they canvased 100 companies, the survey found that 63 businesses were using at least nine different definitions of what exactly “operating profit” is. This would obviously have a negative impact on trading since it’s intrusive for investors who regularly use operating profits to compare the financial performance of different businesses by assessing the different margins companies have and predicted cash flow analysis. The Chair of the IASB, Hans Hoogervorst mentioned in a video briefing on the topic that he believed that the proposals would be a “game changer in financial reporting” and expressed that they would provide superior quality information to help facilitate individuals who were interested in investing in businesses in IASB countries. He would further elaborated on the topic going into depth about how investors have longed for these changes for a long time. Mentioning how investors want to use a company’s financial reports and/or financial information to assess whether or not the investment was worthwhile. These kinds of financial reports/information include profit and loss accounts, operating profit and sustainability of earnings. As previously mentioned this will potentially make it easy for investors to compare a company’s financial performance against others.

IASB also put forward a proposal to alter the required presentation of income statements, the issues in the current rules relates to the fact that there is no requirement for companies to provide subtotals in-between sections in their income statements, adding complications for investors. This is because the current International Reporting standards system doesn’t’ define operating profit or have a requirement for subtotals of income and expenses. Hoogervorst is quoted as saying on the topic “We define revenue at the top and we define profit or loss at the bottom,” this quote helps further validate the claims that the current system fails investors. This is because it’s crucial for investors to have said subtotals to properly evaluate the performance of a company.The new proposals will add new requirements for companies to have subtotals in their financial records these include operating profit, profit before financing and income tax. While also requiring businesses to include operating profits, income and expenses from integral associates and joint ventures in their financial reporting.

The changes in these proposals have also outlined new requirements on how certain management performance measures, supplementary explanations on why these performance measures provide useful information, how they were calculated and how they relate to comparable sub profits used by existing standards.

Measures in management performance are vital for investors trying to evaluate their financial results though there are concerns/criticisms about the quality of the current disclosures. Hoogervorst went into further depth on this subject as well mentioning that if companies won’t use GAAP measures the IASB will call them, that they will require that these measures will be included in a single note in the financial statements, therefore making it easier to find for investors. These new rules will mean that businesses that don’t follow GAAP measure will be required to put management performance measures in a report’s notes. This will in turn make them subject to an audit therefore helping to provide more transparency and discipline for reporting.

Finally, the IASB want to also implement a proposal that will require businesses to add additional notes for income/expenses that would be considered unusual/not common. This is because they have limited predicted value in the foreseeable future. An example of this could include when companies use a line called “other income/expenses” to group together a vast number of income or expenses. Under the new guidance they will have to provide notes on what these expenses are, to help investors assess the company. Hoogervorst also claimed that IASB will provide guidance to prepare of documents to help make the process of properly recording accounts in accordance with the new rules easier, in a way that’s helpful to investors while still being practical.