IASB Agenda ref
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STAFF PAPER
September 2018
IASB Meeting
Project
Primary Financial Statements
Paper topic
Unusual or infrequent items
CONTACT(S)
Denise Durant
ddurant@ifrs.org
+44 0 207 246 6469
Board (Board) and does not represent the views of the Board or any individual member of the Board.
Comments on the application of IFRS
®
Standards do not purport to set out acceptable or unacceptable
®
The IASB is the independent standard
-setting body of the IFRS Foundation, a not-for-profit corporation promoting the adoption of IFRSs. For more
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Purpose of paper
1. This Agenda Paper seeks the Board’s views on staff proposals for requirements
relating to unusual or infrequent income and expenses in the statement(s) of financial
performance (hereafter, ‘unusual or infrequent items’).
Summary of staff recommendations
2. In summary, the staff recommend:
(a) requiring separate disclosure of information about unusual or infrequent
items irrespective of whether an entity chooses to disclose a management
performance measure (MPM);
(b) requiring separate disclosure of unusual or infrequent items in the notes to
the financial statements and that those items should be attributed to line
items in the statement(s) of financial performance; and
(c) developing principle-based guidance to help entities identify items that are
‘unusual or ‘infrequent’.
Structure of paper
3. This paper is structured as follows:
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(a) Background
(i) Why do users find information about unusual or infrequent
items useful? (paragraphs 4–5);
(ii) Current practice and concerns raised by users (paragraphs 6–
8);
(iii) Feedback received on the Board’s preliminary view on
unusual or infrequent items (paragraphs 9–12); and
(iv) Feedback received from CMAC and GPF members
(paragraphs 13–17).
(b) Staff analysis (paragraphs 18–60)
(i) Section 1. Should the Board develop any specific
requirements for unusual or infrequent items in addition to the
PFS proposals to date? (paragraphs 18–29);
(ii) Section 2. Approaches for providing separate information
about unusual or infrequent items (paragraphs 30–45); and
(iii) Section 3. Should the Board describe unusual or infrequent
items or allow management flexibility to identify those items?
(paragraphs 46–60).
(c) Appendices:
(i) A— Summary of the feedback on Question 8 in the Disclosure
Initiative—Principles of Disclosure Discussion Paper.
(ii) B—Illustrations of different approaches for providing
information about unusual or infrequent items.
(iii) C— Research on different descriptions of unusual, infrequent,
recurring and non–recurring items and characteristics
associated to those descriptions.
Background
Why do users find information about unusual or infrequent items useful?
4. Users have told us that they find information about non–recurring, unusual or
infrequent items particularly useful to assess the persistence or sustainability of an
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entity’s financial performance. In academic literature, ‘persistence’ or ‘sustainability’
is linked to the following notions:
(a) the extent to which reported earnings will persist or continue into the future.
Analysts are interested in the sustainable component of earnings because
investors tend to pay less for earnings that are not sustainable
1
; and
(b) whether an item can be used to predict future values of similar items.
Researchers have found that ‘special items’ (eg, restructuring charges,
merger costs, impairment write-offs) have ‘zero’ persistence (ie they are
transitory) in terms of predicting future values of similar items
2
.
5. The reasons for exclusion often relate to the ability to forecast events or the impact of
transactions. Non–persistent items do not enhance users’ ability to forecast an entity’s
future performance as those items may arise unexpectedly (such as natural disasters)
or may arise from phenomena that are difficult to forecast so users would often
exclude non–persistent items from their analysis to avoid distortions. Separate
presentation or disclosure of such items is therefore helpful
3
.
Current practice and concerns raised by users
6. During our initial research
4
we found that many entities present operating
performance measures that exclude unusual or infrequent items (although they
sometimes exclude other types of item). They do this, for example, by presenting
adjusted subtotals such as ‘normalised earnings’, ‘underlying earnings’ or ‘adjusted
operating profit’ in the statement(s) of performance. Items excluded from those
subtotals are commonly labelled as ‘non–recurring’, ‘exceptional’, ‘special’ or ‘one–
time’ items.
1
Penman Stephen H. Sustainable Earnings and P/E Ratios with Financial Statement Analysis (December 2006).
2
Jones, D and Smith, K. Accounting Review. Nov2011, Vol. 86 Issue 6, p2047-2073.
3
Barker R., Reporting Financial Performance, Accounting Horizons, vol. 8. No 2, June 2004 pp. 157-172.
4
We refer to our analysis of a sample of financial statements of 25 entities in Agenda Paper 21B of March 2017
(paragraphs 18–20). The staff also conducted further research on 85 companies across different industries to see
if we could gain any additional insights into the presentation of unusual or infrequent items. Our findings
revealed that only a few companies from a particular jurisdiction report non-recurring income and expenses on a
separate line of the statement(s) of financial performance.
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7. We have received feedback that most users of financial statements support giving
entities flexibility in presenting their own performance measures. However, users
have observed that the way entities present information about unusual or infrequent
items varies significantly and that it is often not clear how or why items have been
identified as unusual or infrequent. The concerns raised by users
5
include:
(a) there is no clear demarcation between items excluded for other reasons and
unusual/infrequent items and some entities tend to combine them into a
single line item or group of ‘other’ items without describing the nature of
the items included;
(b) unusual transactions or events are not identified with the same prominence
across all parts of the statement(s) of financial performance. For example,
the effects of unusual or infrequent items are commonly distinguished for
items of an ‘operating’ nature, but that distinction is often not made, or not
made consistently, for items of a ‘financial’ nature;
(c) some entities do not identify and disaggregate unusual or infrequent items
at all;
(d) transactions or events with a negative impact to the entity’s financial
performance (expenses/losses) are often classified as unusual or infrequent,
whereas positive transactions and events (income/gains) are rarely
classified in this way, indicating a possible lack of neutrality in approach;
and
(e) transactions or events are classified as ‘infrequent’ by some entities when in
the view of many investors they occur on a regular basis. For example,
acquisitive entities or diversified multinational corporations that experience
costs on a regular basis nevertheless identify some of those costs as one–off
or non–recurring in nature to provide an improved picture of their financial
performance.
5
We reported these concerns at previous Board meetings (in paragraphs 34-35 of Agenda Paper 11B
(November 2015); paragraphs 13-14 and 45 in Agenda Paper 21B (March 2017)) and in paragraph 5.13 of the
Disclosure Initiative—Principles of Disclosure Discussion Paper. We identified additional concerns in some
investment reports we consulted. For example, in S&P Ratings Direct: How Exceptional Accounting Items Can
Create Misleading Earnings Metrics (November 2013).
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8. In Sections 1 and 2 we propose different approaches for providing more consistent
presentation and/or disclosure on unusual or infrequent items. In Section 3 we
provide some initial thoughts on ways the Board could develop guidance to identify
unusual or infrequent items. Our proposals may address some of the concerns raised
by users in paragraph 7.
Feedback received on the Board’s preliminary view on unusual or infrequent
items
9. To address the concerns in paragraph 7 above, the Board, in developing the
Discussion Paper Disclosure Initiative—Principles of Disclosure, suggested making
changes to IFRS standards that would provide users with more transparent and
comparable information about unusual or infrequently occurring items. The Board’s
preliminary view was that it should develop definitions of, and requirements for, the
presentation of unusual or infrequently occurring items.
10. The Board also sought feedback on the use of the terms ‘unusual’ and ‘infrequently
occurring’ and whether the Board should prohibit use of other terms, for example
‘non-recurring’ items. The Board asked for feedback on its views as part of Question
8 of the Discussion Paper.
11. The Board suggested definitions of the terms ‘unusual’ and ‘infrequently occurring’ in
paragraph 5.24 of the Disclosure Initiative—Principles of Disclosure Discussion
Paper (which were extracted from the Financial Statements Presentation Staff Draft
6
)
and indicated that those definitions could be used as a starting point for future
definitions or requirements for unusual or infrequent items. These definitions are as
follows:
Unusual: Highly abnormal and only incidentally related to the
ordinary and typical activities of an entity, given the environment
in which an entity operates;
Infrequently occurring: Not reasonably expected to recur in the
foreseeable future given the environment in which an entity
operates
6
Refer to pages 61 and 63 in the Staff Draft.
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12. The staff presented a summary of the comments received at the February 2018 Board
meeting. This summary is reproduced in Appendix A. The main points expressed by
stakeholders regarding the potential development of definitions and requirements for
unusual and infrequently occurring items are as follows:
(a) users supported the Board developing requirements for the presentation of
unusual and infrequently occurring items to introduce more discipline into
the use of these items in financial statements and generally agreed with the
definition of ‘unusual’ and ‘infrequently occurring items’ included in the
Disclosure Initiative—Principles of Disclosure Discussion Paper. However,
a few commented that defining ‘unusual’ and ‘infrequently occurring items’
is difficult because these items are sensitive and involve significant
judgement; and
(b) a majority of the non–user respondents disagreed with the Board’s
preliminary view to develop definitions for ‘unusual’ and ‘infrequently
occurring items’ because those items vary across entities and industries and
their identification involves significant judgement. They suggested that the
Board could consider instead developing general requirements for fair
presentation and disclosure. For example, requiring such items to be
classified and presented consistently over time or labelled in a clear and
non–misleading way.
Feedback from CMAC and GPF members
13. In June 2018 we held a joint meeting with members of the Capital Markets Advisory
Committee (CMAC) and with members of the Global Preparers Forum (GPF) and
asked for their feedback on the development of requirements for the disclosure of
unusual or infrequent items
7
.
14. CMAC and GPF members were of the view that developing a definition of unusual or
infrequent items that is applicable to all entities in all industries would be difficult and
some were concerned about litigation risks that could arise from disagreements
7
A summary of their views is available in https://www.ifrs.org/news-and-events/calendar/2018/june/cmac-and-
gpf/
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between management and shareholders on what is classified as unusual or infrequent
according to an accounting standard.
15. CMAC and GPF members suggested the Board should:
(a) provide principle–based guidance on what items are expected to be
disclosed separately; and/or
(b) allow entities to develop their own definitions for unusual or infrequent
items but require entities to provide meaningful accounting policies
describing which items they consider unusual or infrequent.
16. A few suggested the development of guidance for specific items (mainly
‘restructuring expenses’), by requiring the separate presentation of this line item and
by defining the type of expenses that could be included within this line item
8
.
17. CMAC members were of the view that the Board should require entities to disclose
unusual or infrequent items in a single location in the notes, which would make it
easier for users to find such items.
Staff analysis
Section 1. Should the Board develop any specific requirements for unusual or
infrequent items in addition to the PFS proposals to date?
18. As discussed in this paper (see paragraph 4) as well as in previous meetings users find
information about unusual or infrequent items useful as it helps them identify ongoing
or sustainable results that can be used to forecast an entity’s future performance. At
previous meetings, we have also discussed the need to develop explicit requirements
for unusual or infrequent items to enhance the discipline and transparency around how
entities present and/or disclose those items
9
.
8
In this paper we are not addressing the classification and or presentation of specific items and whether they
should be considered unusual or infrequent. The staff plans to bring a paper at a future meeting to discuss the
meaning of ‘unusual’ and/or ‘infrequent’. The staff may refer to specific items as part of this discussion.
9
Refer to paragraph 9 of Agenda Paper 21B (March 2017) and paragraphs 7, 9 and 11 of Agenda Paper 21A
(December 2017).
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19. Adding requirements for unusual or infrequent items could also help address the
concerns raised by users described in paragraphs 7(a)–(d) of this paper (ie about this
information not being clearly identified, not being prominent enough in the financial
statements or being used by management as a mechanism to ‘boost’ its financial
performance).
20. We acknowledge that providing guidance on how to identify unusual or infrequent
items on a consistent and comparable basis might be challenging (in Section 3 of the
paper we discuss different approaches for identifying unusual or infrequent items).
However, based on our discussion above we think that the Board should consider
adding explicit requirements for unusual or infrequent items.
21. We have identified the following possible approaches for providing information about
unusual or infrequent items:
(a) Approach A: Build on the Board’s proposals on the MPM and require
entities that disclose an MPM to separately identify items that are included
in the reconciliation to the most directly comparable subtotal or total
required by paragraph 81A of IAS 1 that are unusual or infrequent items;
or,
(b) Approach B: Develop proposals to require separate information about
unusual or infrequent items.
22. We discuss below some advantages and disadvantages of both approaches. We
provide illustrations of both approaches in Appendix B.
Approach A: Build on the Board’s MPM proposals
23. Description: Approach A would require entities that choose to disclose an MPM to
categorise the items in the MPM reconciliation into:
(a) unusual or infrequent income and expenses; and
(b) other items of income or expense excluded from the MPM.
24. Advantages: The main advantages of this approach are that:
(a) the proposed categorisation of the items included in the MPM reconciliation
would provide useful information for users about some unusual or
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infrequent items (ie those that management exclude from their management
performance measure) and
(b) it would not represent much of an additional burden for preparers as many
entities already identify and exclude unusual or infrequent items from their
key performance measures.
25. Disadvantages: The main disadvantages of this approach are that:
(a) the disclosure of unusual or infrequent items would depend on whether the
entity provides an MPM. Entities that chose not to provide an MPM would
not be required to disclose unusual or infrequent items elsewhere in the
financial statements. Without a specific requirement to disclose unusual or
infrequent items elsewhere (for example in a separate note), users may be
unable to obtain information about unusual or infrequent items; and
(b) although many entities adjust for unusual or infrequent items, entities may
(and do) choose to provide MPMs that do not exclude (all) unusual or
infrequent items; they may instead focus on different adjustments for their
MPM.
Approach B: require separate information about unusual or infrequent items
26. Description: Approach B would require separate information about unusual or
infrequent items. This requirement would apply irrespective of management’s
decision to disclose an MPM and irrespective of management’s decision to include or
exclude unusual or infrequent items from their MPM. If management provides an
MPM, this approach would require an entity to provide a ‘cross–reference’ or ‘link’
between any unusual or infrequent items included in the MPM reconciliation with the
separate information about unusual or infrequent income and expenses.
27. Advantages: The main advantages of this approach are:
(a) even if preparers opt not to present an MPM measure they would still be
required to provide information about unusual or infrequent items, which
would provide useful information to users; and
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(b) it would also be more comprehensive (subject to the approach taken to
identifying unusual or infrequent items – see Section 3 below).
28. Disadvantages: The main disadvantage of this approach is that it may be more
burdensome for preparers as identifying all infrequent or unusual items may be
difficult and time consuming.
Staff recommendation
29. We support Approach B because we think this approach would better respond to
users’ needs for information about unusual or infrequent items. The following section
in paragraphs 30–45 discusses different approaches to providing separate information
about unusual or infrequent items.
Section 1. Question for the Board
1. Does the Board agree with our recommendation in paragraph 29 to require
separate information about unusual or infrequent items irrespective of whether an
entity chooses to disclose an MPM?
Section 2. Approaches for providing separate information about unusual or
infrequent items
30. The staff has identified the following approaches for how information about unusual
or infrequent items could be provided:
(a) Approach B1: in the statement(s) of financial performance. We have
identified two variants of this approach as follows:
(i) Approach B1(a): present information about unusual or
infrequent items within each proposed category in the
statement(s) of financial performance (ie business, investing
and financing); or
(ii) Approach B1(b): present information about unusual or
infrequent items in a separate column.
(b) Approach B2: in a separate note accompanying the statement(s) of financial
performance.
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31. The staff envisages that under all of the approaches identified above we would require
appropriate disaggregation and labelling to clearly communicate the nature and
meaning of unusual or infrequent items. For example, items should not be aggregated
under one heading of ‘one–off’ or ‘unusual items’ and instead each material unusual
or infrequent item would have to be separately presented or disclosed.
32. The staff have considered the advantages and disadvantages of Approaches B1(a)–(b)
and Approach B2 below. Illustrations of these approaches are provided in Appendix
B.
Approach B1(a): within each proposed category in the statement(s) of financial
performance
33. Description: Approach B1(a) would require an entity to present unusual or infrequent
items separately within each one of the categories in the statement(s) of financial
performance proposed by the Board as part of its work on the Primary Financial
Statements project (ie investing, financing and a business category).
34. Advantages: The main advantages of this approach are that:
(a) information about unusual or infrequent items would be easier to identify in
the statement(s) of financial performance than if the information were
disclosed in the notes; and
(b) users would be able to better understand the nature of those items as they
would be required to be separately presented within each proposed category
in the statement(s) of financial performance.
35. Disadvantages: The main disadvantages of this approach are:
(a) stakeholders may have concerns about ‘elevating’ unusual or infrequent
item by presenting them as prominently as Board–defined measures.
(b) even though unusual or infrequent items would be associated with some of
the relevant line items within the statement(s) of financial performance this
association will not be as clear as in Approach B1(b) proposes (ie by
separating those items in a column).
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Approach B1(b): Presentation using a columnar approach in the statement(s)
of financial performance
36. Description: Similar to Approach B1(a), Approach B1(b) would require the
presentation of information about unusual or infrequent items in the statement(s) of
financial performance. However, unlike Approach B1(a), Approach B1(b) would
require that this information be presented in a separate column of the statement(s) of
financial performance and attributed to the relevant line item within each component
of financial performance. So, if an entity presents an analysis of income and expenses
by function (in accordance with paragraph 99 of IAS 1), the entity would be required
to attribute the unusual or infrequent item to a functional line and present the unusual
or infrequent item separately in a column.
37. For example, if restructuring expenses are identified as unusual expenses and these
expenses are related to the functional line item of selling, general or administrative
expenses (SG&A) an entity would present restructuring expenses in a separate column
next to SG&A expenses in the statement(s) of financial performance.
38. Advantages: The main advantages of this approach are that:
(a) similar to Alternative B1(a), information about unusual or infrequent items
would be easy to identify in the statement(s) of financial performance and
be attributed to the categories in the statement(s) of financial performance;
and
(b) unlike Approach B1(a), Approach B1(b) would provide a better
understanding of the line items in the statement(s) of financial performance
that are affected by unusual or infrequent items.
39. Disadvantages. The main disadvantages of this approach are that:
(a) similar to Approach B1(a), stakeholders may have concerns about
‘elevating’ unusual or infrequent item by presenting then as prominently as
Board–defined measures.
(b) whilst columnar presentation is already used in some jurisdictions, it does
not appear to be used in many others. Consequently, it would be a
significant change in some jurisdictions and may meet resistance.
Furthermore, the regulators in some jurisdictions prohibit columnar
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presentation (although presumably these restrictions would be removed if
IFRS Standards specifically permitted or required a columnar approach).
(c) columns would add complexity to the statement(s) of financial performance
and may detract from the ability of the statement(s) to provide a clear
overview of an entity’s income/expenses which allows for quick
comparisons between entities. The presentation of comparative information
for the preceding period for each column would further add to the
complexity.
Approach B2: Unusual or infrequent items disclosed in a separate note
40. Description: Approach B2 would require the disclosure of unusual or infrequent items
in a separate note. In this note an entity would be required to attribute information
about unusual or infrequent items to the line items in the statement(s) of financial
performance.
41. Advantages: The main advantages of this approach are that:
(a) unlike Approach B1(a) and Approach B1(b), it may avoid concerns about
giving more prominence to information about unusual or infrequent items
than to another information in the statement(s) of financial performance.
(b) a comprehensive disclosure of infrequent items is easiest in the notes as it
allows more flexibility in how the information is provided and explained.
42. Disadvantages: The main disadvantage of this approach is that information on unusual
or infrequent items could be more difficult to find in the notes.
Staff recommendation
43. We do not support Approach B1(a) as it would not provide sufficient information
about the derivation of the unusual/infrequent items in terms of line items as
Approach B1(b) proposes.
44. We could, in principle, support adding a column to the statement(s) of financial
performance (as Approach B1(b) proposes) for the advantages noted. However, we
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think that this approach may add complexity to the statement(s) of financial
performance and represent a radical change in practice for some entities.
45. We support Approach B2 (disclosure in the notes), in spite of the disadvantage noted,
because as long as the information presented in the notes is comprehensive,
appropriately labelled and presented fairly users would obtain the information they
need. Disclosing the information in a note would also mean that users can have easy
access in a single location to the information about the items and how they relate to
the complete income statement/line items within the statement of financial
performance.
Section 2. Question for the Board
1. Does the Board agree with our recommendation in paragraph 45 that the Board
should require separate disclosure of unusual or infrequent items in the notes to
the financial statements and that those items should be attributed to line items in
the statement(s) of financial performance (Approach B2)?
Section 3: Should the Board describe unusual or infrequent items or allow
management flexibility to identify those items?
46. As mentioned in paragraph 11 of this paper, the Board suggested definitions of the
terms ‘unusual’ and ‘infrequently occurring’ in the Disclosure Initiative—Principles
of Disclosure Discussion Paper where it indicated that those definitions could be used
as a starting point of future definitions or requirements for unusual or infrequent
items.
47. The feedback received on the Discussion Paper reflected two main views:
(a) Approach A (‘management’s view’): allowing management to define and
identify its own unusual or infrequent items.
(b) Approach B (‘principle–based approach’): developing principles about
what constitutes unusual or infrequent items. Management will follow these
principles in identifying those items.
48. We have not considered as an additional approach developing strict definitions of
unusual or infrequent items because:
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(a) during our outreach activities users and preparers told us that they were
generally not supportive of developing strict definitions of ‘unusual’ or
‘infrequently occurring’ items, as some thought it would be difficult to
develop definitions that would be satisfactory or meaningful for most
entities
10
;
(b) previous standard setting attempts that tried to define unusual and
infrequent items in a prescriptive way have not been successful. For
example, some respondents to the joint IASB-FASB Discussion Paper
Preliminary Views on Financial Statement Presentation (published in
October 2008) found the exposed definitions of ‘unusual’ and ‘infrequently
occurring’, ‘too restrictive’, ‘too strict’ or ‘too prescriptive’
11
; and
(c) jurisdictions where definitions have already been developed for unusual or
infrequent items
12
have had difficulties implementing those definitions. For
example, at our joint meeting with FASB in April 2017, FASB staff
provided an analysis about why their definitions of ‘unusual nature’ and
‘infrequency of occurrence’ in USGAAP are difficult to implement
13
.
Approach A: ‘Management’s view’
49. Description: This approach would allow management flexibility to identify unusual or
infrequent items.
50. Whilst this approach would not imply adding specific guidance for identifying
unusual or infrequent items, entities would be required to provide meaningful
accounting policies describing what items they consider unusual or infrequent and
why. In addition, the existing general requirements for the presentation and
10
As mentioned in paragraphs 9(a) and 11 in this paper.
11
For example, we looked at comment letters 9A, 88, 172 and 186. The definitions of ‘unusual’ and
‘infrequently occurring’ were included in paragraph 4.51 of the Discussion Paper Preliminary Views on
Financial Statement Presentation and were based on APB Opinion No. 30 Reporting the Results of
Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions.
12
For example, USGAAP provides prescriptive definitions of ‘unusual nature’ and ‘infrequence of occurrence’,
Included as part of our analysis in Appendix C.
13
Refer to paragraphs 36-39 of Agenda Paper 28B of April 2017 and the USGAAP definitions in Appendix C.
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disclosure of information in IAS 1 will apply. For example, the requirement that
information must present fairly the financial performance of an entity or the
requirement for consistency of information over time, as well as any future guidance
developed by the Board in this respect (ie principles on aggregation or disaggregation
in the financial statements).
14
51. Advantages: The main advantages of this approach are that:
(a) it is consistent with the approach taken by the Board for an MPM where an
entity is allowed flexibility to identify which items should be treated as
being part of this measure or outside this measure; and
(b) it would allow management to identify items as infrequent or unusual
according to their business or industry, which would address concerns that
the nature of unusual or infrequent items varies across entities and
industries and their identification involves significant judgement.
52. Disadvantages: The main disadvantages of this approach are that:
(a) allowing flexibility may result in inconsistent and non–comparable
information across entities (and even within the same industry); and
(b) it also risks failing to address users’ concerns that unusual or infrequent
items are sometimes identified inappropriately and with bias (for example,
income is rarely identified as infrequent or unusual).
Approach B: Principle-based approach
53. Approach B would develop principle-based guidance to help entities identify items
that are ‘unusual or ‘infrequent’. Potential guidance in this respect could also require
an entity to explain the reasons why unusual or infrequent items have been treated as
such by the entity. This explanation should enable users to determine whether the
identified unusual or infrequent item is relevant and faithfully represents the entity’s
financial performance. The objective of this guidance would be to introduce some
consistency in the identification of unusual or infrequent items and provide users with
14
We are referring to paragraphs 15 and 45-46 of IAS 1. The Board discussed staff proposals on principles of
aggregation and disaggregation at the March 2017 (Agenda Paper 21C) and May 2018 (Agenda Paper 21A
)
meetings.
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a better understanding about how unusual or infrequent items are identified by an
entity.
54. The staff has not developed formal proposals for principle-based guidance on unusual
or infrequent items. However, the staff has performed a preliminary analysis of the
guidance issued by some standard-setters and regulators on the identification of
‘unusual’ or ‘infrequent’ items and has found some examples of principle-based
guidance in UKGAAP and in the former IASC’s IAS 8 Net profit or Loss for the
Period, Fundamental Errors and Changes in Accounting Policies (ie the predecessor
of IAS 1). These examples are shown in Appendix C
15
.
55. Advantages: Some advantages of a principle-based approach are that:
(a) it would encourage preparers to take a more neutral approach to unusual or
infrequent items, for example requiring income/gains to be identifies as
infrequent/unusual rather than just expenses/losses;
(b) the resulting information could potentially be more comparable between
entities, which may help users in their analysis; and
(c) it would provide further understanding of the requirements of IAS 1 to
identify (separate) components of financial performance on the basis of
their ‘frequency’ and how unusual or infrequent items are different from
extraordinary items, the latter being a specific request from respondents to
the Disclosure Initiative—Principles of Disclosure Discussion Paper
16
.
56. In spite of the advantages mentioned, developing principle-based guidance may pose
some challenges as we explain below.
57. Providing principle-based guidance may meet resistance from preparers as it could
potentially reduce the flexibility that management currently has in identifying unusual
or infrequent items.
15
Refer to notions listed as #3 and #4.
16
Refer to paragraph A15 in Appendix A.
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58. Identifying the main attributes of unusual or infrequent items also poses challenges.
However, our analysis in Appendix C shows that standard-setters and regulators
commonly use three main attributes to identify unusual or infrequent items:
(a) unusual in nature because the item is unrelated to the entity’s ordinary
business activities;
(b) infrequent (ie whether similar items will recur or continue into the future);
and
(c) unusual in size.
59. We think that these three attributes could be used as a basis for developing principle-
based guidance on the identification of unusual or infrequent items. The staff could
bring a paper that discusses these attributes to a future meeting if the Board agrees to
pursue Approach B. Questions that could be considered as part of this discussion are:
(a) should the Board specify how frequently ‘infrequent’ items are expected to
occur?
(b) should a threshold be developed to help determine the size of an unusual
item? or
(c) should factors or indicators be developed to help an entity identify the
unusual nature of item?
Staff recommendation
60. In spite of the challenges identified for Approach B, we support this approach because
it would provide more discipline on how entities currently identify unusual or
infrequent items. This is unlike Approach A, where we think there is a risk that the
items identified as unusual or infrequent may not be comparable amongst entities
because entities may classify items differently even in the same industry and this
information would not be useful for users.
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Section 3. Question for the Board
1. Does the Board agree with our recommendation in paragraph 60 that the Board
should develop principle–based guidance to help entities identify items that are
‘unusual or ‘infrequent’ (ie Approach B)?
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Appendix A—Summary of the feedback on Question 8 in the Disclosure
Initiative—Principles of Disclosure Discussion Paper
A1. This appendix contains a summary of the responses received to question 8 in the
Disclosure Initiative—Principles of Disclosure Discussion Paper. It reproduces:
(a) paragraphs 57–63 of Agenda Paper 11B of February 2018 (paragraphs
B1(b)–A8 below); and
(b) paragraphs 20–28 of Agenda Paper 11I of February 2018 (paragraphs
B1(a)0–B1(a)8 below)
Question 8 as extracted from the Discussion Paper
The Board’s preliminary views are that it should:
…
• develop definitions of, and requirements for, the presentation of unusual or
infrequently occurring items in the statement(s) of financial performance, as
described in paragraphs 5.26–5.28.
(a) Do you agree with the Board’s preliminary views? Why or why not? If you do not
agree, what alternative action do you suggest, and why?
(b) Should the Board prohibit the use of other terms to describe unusual and
infrequently occurring items, for example, those discussed in paragraph 5.27?
(c) Are there any other issues or requirements that the Board should consider in addition to
those stated in paragraph 5.28 when developing requirements for the presentation of unusual
or infrequently occurring items in the statement(s) of financial performance?
The feedback on Question 8 will be considered as part of the Board’s Primary Financial
Statements project.
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Views from users
A2. Most users supported the Board developing definitions of, and requirements for the
presentation of, unusual or infrequently occurring items. These users commented
that when entities use their own definitions of these terms they can sometimes be
misleading, or be used inconsistently either across entities or across different
reporting periods.
A3. Many generally agreed with the definition of unusual or infrequently occurring items
as described in the Discussion Paper. Some users thought that the Board could be
more specific in defining unusual or infrequently occurring items – for example by
defining how often an event must occur to be considered infrequent, and how far
into the past and future an entity should consider the occurrence of another similar
event.
A4. A few users commented that defining unusual or infrequently occurring items is
difficult because these items are sensitive and involve significant judgement.
Nevertheless, some of these users still supported the Board developing requirements
for the presentation of these items because they thought this would introduce more
discipline to the use of these items in financial statements.
A5. Most users said that clear explanations of unusual or infrequently occurring items
are essential. Some added that they want to see as much disaggregated information
as possible about items that are unusual or infrequently occurring. Users also
thought that the Board should require an entity to disclose their policy for
distinguishing between frequently and infrequently occurring items.
A6. A few users suggested ways in which the Board could isolate particular items for
entities to disaggregate in the financial statements. These suggestions included
making distinctions between ‘core’ and ‘non–core’ items, ‘recurring’ and ‘non–
recurring’ items and ‘operating’ and ‘non–operating’ items.
A7. A few users thought the Board should supplement any guidance relating to unusual
or infrequently occurring items with the idea that these include items that have both
positive and negative effects on entity results. These users were concerned about
entities only identifying unusual or infrequently occurring costs.
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A8. A few users thought the Board should consider developing sector–specific guidance
about what items are unusual or infrequently occurring. For example, entities might
consider inventory write–downs unusual in some industries but not others.
Depiction of unusual or infrequently occurring items in the statement(s) of
financial performance
Definitions and requirements
A9. The Board’s preliminary view was that it should develop definitions of, and
requirements for, the presentation of unusual or infrequently occurring items.
Respondents expressed mixed views: some agreed with the Board’s preliminary
view (including most users—see Agenda Paper 11B of February 2018) and some
disagreed.
A10. A few of the respondents that agreed with the Board’s preliminary view did so
because they said:
(a) the separate presentation or disclosure of unusual or infrequently occurring
items is important to help users in making forecasts about future cash flows;
and
(b) definitions and requirements developed by the Board could make such
items more transparent and comparable across entities and could reduce
opportunistic adjustments.
A11. A few of the respondents that agreed with the Board’s preliminary view said that the
definitions for unusual or infrequently occurring items should be principle–based,
allowing entities some flexibility in determining what they consider to be ‘unusual’
or ‘infrequently occurring’.
A12. Those respondents that did not agree with the Board developing definitions of
unusual or infrequently occurring items provided the following views:
(a) many said that developing such definitions would be difficult for the Board.
Many of these respondents thought that assessing whether items are unusual
or infrequently occurring requires significant judgement and depends on
entity–specific circumstances. Consequently, they thought it would be
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difficult to develop a definition that is applicable to all entities, in all
industries. A few respondents referred to failed past attempts by the Board
and other standard–setters to develop such definitions.
(b) a few said any definition of ‘unusual’ or ‘infrequently occurring’ would be
difficult to audit. However, the International Auditing and Assurance
Standards Board said that the Board developing definitions and
requirements for the presentation of unusual or infrequently occurring items
would provide further clarity and enhance the auditability of such items.
A13. Some respondents suggested that the Board should consider developing more
general requirements for the fair presentation and disclosure of unusual, infrequently
occurring or similar items than those described in paragraphs 5.26–5.28 of the
Discussion Paper. These respondents suggested requirements that were similar to the
proposed requirements for fair presentation of all performance measures in the
financial statements in paragraph 5.34 of the Discussion Paper. For example,
respondents suggested requiring such items to be:
(a) classified and presented consistently over time; and
(b) labelled in a clear and non–misleading way.
A14. Some respondents asked the Board to clarify:
(a) how the separate presentation of unusual or infrequently occurring items is
different in principle from the presentation of extraordinary items, which is
prohibited by paragraph 87 of IAS 1.
(b) how the separate presentation of unusual or infrequently occurring items
would interact with the requirement in IAS 1, paragraph 99 to present
expenses either by nature or by function. Some of these respondents
referred to the Board’s view expressed in IAS 1, paragraph BC63 that:
The nature or function of a transaction or other event, rather
than its frequency, should determine its presentation within the
income statement.
A15. A few respondents said that, in addition to providing guidance for the presentation of
unusual or infrequently occurring items in the statement(s) of financial performance,
the Board should also consider:
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(a) developing guidance for other types of adjustments that entities make to
performance measures, such as constant–currency adjustments; and
(b) the presentation of unusual or infrequently occurring items in the other
primary financial statements—specifically the statement of cash flows and
statement of financial position—and segment reporting.
Prohibiting the use of other terms to describe unusual and infrequently
occurring items
A16. The Discussion Paper asked respondents whether the Board should prohibit the use
of other terms to describe unusual and infrequently occurring items. Many
respondents—including most accountancy bodies and most preparers—disagreed
with prohibiting the use of other terms. This was because, in their view:
(a) entities should have flexibility in selecting the terms they use to describe
such items.
(b) entities would bypass such a prohibition by using other terms. Respondents
said this is what happened when the Board prohibited the presentation of
extraordinary items.
(c) such a prohibition would not be in line with the principle–based nature of
the Standards.
(d) such a prohibition would be difficult to implement from a translations
perspective.
A17. Some respondents—including most regulators—held the opposite view and
supported prohibiting the use of other terms such as ‘non–recurring’ to describe
unusual and infrequently occurring items. A few of these respondents said that a
variety of different terms may confuse users.
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Appendix B– Illustrations of different approaches for providing information
about unusual or infrequent items
B1. Appendix B illustrates the approaches identified in paragraphs 21 and 30 of this paper,
as follows:
(a) Approach A: Build on the Board’s proposals on the MPM and require
entities that disclose an MPM to separately identify items that are included
in the reconciliation to the most directly comparable subtotal or total
required by paragraph 81A of IAS 1 that are unusual or infrequent items;
and
(b) Approach B: Develop proposals to require separate information about
unusual or infrequent items, as follows:
(i) Approach B1: in the statement(s) of financial performance.
• Approach B1(a): present information about unusual or
infrequent items within each proposed category in the
statement(s) of financial performance (ie business,
investing and financing); or
• Approach B1(b): present information about unusual or
infrequent items in a separate column.
(ii) Approach B2: in a separate note accompanying the
statement(s) of financial performance.
B2. In the illustrations for Approach A we assume that the entity:
(a) has identified 3 main unusual/infrequent items (‘restructuring expenses’,
‘litigation costs’ and ‘loss on disposal of an investment in another
company’). ‘Restructuring expenses’ include an inventory obsolescence
write-down, rebranding costs, redundancy payments, and IT costs;
(b) presents its analysis of income and expenses by function; and
(c) chooses to present its own MPM and presents an MPM reconciliation in the
notes; all unusual or infrequent items are adjusted for in the MPM.
B3. In the illustrations for Approach B, we make the same assumptions as in (a) – (b)
from Approach A, but for simplicity purposes we assume that the entity does not
choose to present an MPM.
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Approach A—unusual or infrequent items provided as part of the MPM
reconciliation
Statement(s) of financial performance (by function)
Revenue 10,000
Cost of goods sold (4,000)
Gross profit 6,000
SG&A (3,000)
Profit before investing, financing and income tax 3,000
Share of profit of non–integral associate 500
Other investing expense (200)
Profit before financing and income tax (or EBIT) 3,300
Interest income from cash and cash equivalents calculated using
effective interest method
80
Other income from cash and cash equivalents and financing activities 20
Expenses from financing activities (1,000)
Other finance income 50
Other finance expense (350)
Net finance income (expense) (1,200)
Profit before tax 2,100
Income tax expense (600)
Profit or loss 1,500
Management performance measure reconciliation
Profit before financing and tax 3,300
Unusual or infrequent items
Restructuring expenses (CU 25 is part of cost of sales and CU 725 is
part of SG&A)
750
Litigation costs (part of SG&A) 40
Losses on disposal of an investment in another company (part of other
investing expense)
50
Other adjusted items
Share of profit of non–integral associate (500)
Net interest income on net defined benefit asset (part of other finance
income)
35
Management performance measure 3,675
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Approach B1(a)— unusual or infrequent items provided within each category
in the statement(s) of financial performance
Statement(s) of financial performance (by function)
Revenue 10,000
Cost of goods sold (excluding unusual or infrequent items) (3,975)
Restructuring expenses (inventory write-down) (25)
4,000
Gross profit 6,000
SG&A (excluding unusual or infrequent items) (2,235)
Restructuring expenses (rebranding, redundancy
payments, IT costs)
(725)
Litigation costs (40)
(3,000)
Profit before investments, financing and income tax 3,000
Share of profit of non-integral associate 500
Other investing expense (excluding unusual or infrequent
items)
(150)
Losses on disposal of an investment in another company (50)
(200)
Profit before financing and income tax (or EBIT) 3,300
Interest income from cash and cash equivalents calculated
using effective interest method
80
Other income from cash and cash equivalents and financing
activities
20
Expenses from financing activities (1,000)
Other finance income 50
Other finance expense (350)
Net finance income (expense) (1,200)
Profit before tax 2,100
Income tax expense (600)
Profit or loss 1,500
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Approach B1(b)— unusual or infrequent items provided in a separate column
Statement(s) of financial performance (by function)
Before
unusual
or
infrequent
items
Restructuring
expenses
Litigation
costs
Disposals of
investments
Total
Revenue 10,000 10,000
Cost of goods sold (3,975) (25) (4,000)
Gross profit 6,000 6,000
SG&A (2,235) (725) (40) (3,000)
Profit before investing,
financing and income tax
3,765 3,000
Share of profit of
non–integral associate
500 500
Other investing
expense
(150) (50) (200)
Profit before financing and
income tax (or EBIT)
4,115
3,300
Interest income from
cash and cash
equivalents calculated
using effective
interest method
80
80
Other income from
cash and cash
equivalents and
financing activities
20
20
Expenses from
financing activities
(1,000) (1,000)
Other finance income 50 50
Other finance expense (350)
(350)
Net finance income (expense) (1,200) (1,200)
Profit before tax 2,915 2,100
Income tax expense (600) (600)
Profit or loss 2,315 1,500
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Approach B2— unusual or infrequent items provided in the notes
Before
unusual or
infrequent
items
Restructuring
expenses
Litigation
costs
Disposals
of
investments
Total
Cost of goods sold
(3,975) (25)
(4,000)
SG&A (2,235) (725) (40) (3,000)
Other investing
expense
(150)
(50)
(200)
Note: This is a minimum possible presentation. Alternatively, preparers could produce a more
comprehensive note which could reproduce the statement(s) of financial performance in full
(as in Approach B1(a)).
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Appendix C – Research on different descriptions of unusual, infrequent, recurring and non–recurring
items and characteristics associated to those descriptions
Notion
References
Extracts of paragraph references (emphasis added)
Unusual in nature
(unrelated to the
ordinary
business
activities)
Infrequent: not
expected to recur
in the future based
on past occurrence
Unusual in size
Standard–setters
1
Unusual nature
FASB Accounting
Standards
Codification® Master
Glossary and Topic
225 Income
Statement 225–20–
45–16
“The underlying event or transaction should possess a high
degree of abnormality and be of a type clearly unrelated to,
or only incidentally related to, the ordinary and typical
activities of the entity, taking into account the environment
in which the entity operates”.
“..The environment in which an entity operates is a primary
consideration in determining whether an underlying event or
transaction is abnormal and significantly different from the
ordinary activities of the entity”…
X
2
Infrequency of
occurrence
FASB Accounting
Standards
Codification® Master
Glossary and Topic
225 Income
Statement 225–20–
55–2
The underlying event or transaction should be of a type that
would not reasonably be expected to recur in the
foreseeable future, taking into account the environment in
which the entity operates’.
…’ Determining the probability of recurrence of a particular
event or transaction in the foreseeable future should take into
account the environment in which an entity operates.
Accordingly, a specific transaction of one entity might meet
that criterion and a similar transaction of another entity
might not because of different probabilities of recurrence.
The past occurrence of an event or transaction for a
particular entity provides evidence to assess the
X
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Notion
References
Extracts of paragraph references (emphasis added)
Unusual in nature
(unrelated to the
ordinary
business
activities)
Infrequent: not
expected to recur
in the future based
on past occurrence
Unusual in size
probability of recurrence of that type of event or
transaction in the foreseeable future
3
Exceptional items
UK FRS 3 Reporting
Financial Performance
(October 1992) (par.
5)
Material items which derive from events or transactions that fall
within the ordinary activities of the reporting entity and
which individually or, if of a similar type, in aggregate, need to
be disclosed by virtue of their size and incidence if the
financial statements are to give a true and fair view.
X
X
4
Separate disclosure of
items and income and
expense
IASC’s IAS 8 Net
profit or Loss for the
Period, Fundamental
Errors and Changes in
Accounting Policies
(revised 1993)
When items of income and expense within profit or loss from
ordinary activities are of such size, nature or incidence that
their disclosure is relevant to explain the performance of the
enterprise for the period, the nature and amount of such items
should be disclosed separately.
X
X
5
Other operating income
and expenses
French ANC’s
Recommandation n°
2013–03 du 7
novembre 2013
[Free translation] ‘Other operating income and expenses’ – This
line item is only used for major events occurring during the
reporting period which are likely to distort interpretation of the
entity’s operating performance. It therefore includes a very
limited number of unusual, abnormal or infrequent items of
income or expense that are highly material, which the entity
discloses separately to facilitate understanding of its
sustainable operating performance and to give users of the
financial statements relevant information for predicting future
performance, in accordance with the principles set out in the
[IASB’s] Conceptual Framework.
X
X
Regulators
6
Unusual, infrequent or
non recurring items
U.S. SEC Regulation
G
A registrant must not
a
djust a non–GAAP performance
measure to eliminate or smooth items identified as non–
recurring, infrequent or unusual, when the nature of the
charge or gain is such that it is reasonably likely to recur
X
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Notion
References
Extracts of paragraph references (emphasis added)
Unusual in nature
(unrelated to the
ordinary
business
activities)
Infrequent: not
expected to recur
in the future based
on past occurrence
Unusual in size
within two years or there was a similar charge or gain
within the prior two years.
7
Nonrecurring, infrequent
or unusual items
ESMA Guidelines on
Alternative
Performance
Measures (par 25.)
‘Issuers or persons responsible for the prospectus should not
mislabel items as nonrecurring, infrequent or unusual. For
example, items that affected past periods and will affect
future periods will rarely be considered as non–recurring,
infrequent or unusual (such as restructuring costs or
impairment losses)
X
8
Recurring items
IOSCO’s Statement
On NON–GAAP
Financial Measures
(par. 11)
In presenting non–GAAP financial measures, issuers
sometimes seek to adjust for items that are reasonably
likely to recur in the foreseeable future or are activities that
affected the entity in the recent past. In IOSCO’s experience
there are rarely circumstances where a sufficient explanation
could be provided that results in restructuring costs or
impairment losses being described as nonrecurring. Such
items should not be described as non–recurring, infrequent or
unusual without sufficient explanation.
X
9
Non–recurring items
Disclosing non–IFRS
financial information
(Regulatory Guide
230) Australian
Securities and
Investments
Commission (ASIC)
‘Items that have occurred in the past or are likely to occur in a
future period should not be described as ‘one–off’ or ‘non–
recurring’
’Non–recurring’ items—describing items such as impairment
losses and restructuring costs as ‘non–recurring’ when they are
generally of a recurring nature in many businesses (albeit they
may only arise in some years)’
X