The International Accounting Standards Board is the independent standard
-setting body of the IFRS Foundation, a not-for-profit corporation promoting the
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Agenda ref
21B
STAFF PAPER
March 2019
IASB
®
meeting
Project
Primary Financial Statements
Paper topic
Unusual items
CONTACT(S)
Yuki Fujiwara
yfujiw[email protected]
Aida Vatrenjak
avatrenja[email protected]g
This paper has been prepared for discussion at a public meeting of the International Accounting Standards
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
application of IFRS Standards. Technical decisions are made in public and reported in IASB
®
Update.
Purpose of this paper
1. At its September 2018 meeting, the Board directed the staff to develop principle-
based guidance to help entities identify unusual or infrequent items.
2. This paper seeks the Board’s views on a proposed definition of unusual items and
guidance to accompany that definition. This paper also discusses disclosure
requirements relating to unusual items.
Summary of staff recommendations
3. The staff recommend that the Board:
(a) define unusual items as follows:
Unusual items are income or expenses with limited predictive value
because it is reasonable to expect that similar items will not arise for
several future annual reporting periods.
Similar items are income or expenses that are similar in type and
amount.
(b) provide the following additional guidance on the assessment of unusual
items:
(i) information provided about unusual items should be
neutral;
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Primary Financial Statements │Unusual items
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(ii) considering the past occurrence of similar items may help
entities assess whether it is reasonable to expect that
similar items will arise in the future; and
(iii) gains or losses arising from the remeasurement of items
required to be measured at current value (including fair
value) should not, in general, be classified as unusual
items.
(c) require all entities to attribute unusual expenses to natural expense
categories, regardless of their method of analysis of expenses in the
statement(s) of financial performance.
(d) require all entities to provide a narrative description of the transactions
or other events that gave rise to unusual items.
(e) not require entities to disclose income or expenses related to unusual
items (unless those income or expenses themselves meet the definition
of unusual items).
Structure of paper
4. This paper is structured as follows:
(a) Background (paragraphs 5–8)
(b) Definition of unusual items (paragraphs 9–26)
(c) Additional guidance (paragraphs 27–36)
(d) Should there be additional information disclosed relating to unusual
items? (paragraphs 37–46)
(e) Appendix A—Example disclosures of unusual items
Background
5. At its September 2018 meeting the Board discussed unusual or infrequent items
and tentatively decided to:
(a) require separate disclosure of information about unusual or infrequent
items of income or expense regardless of whether an entity chooses to
disclose a management performance measure;
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Primary Financial Statements │Unusual items
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(b) require separate disclosure of unusual or infrequent items in the notes to
the financial statements and require that those items be attributed to line
items in the statement(s) of financial performance; and
(c) develop principle-based guidance to help entities identify unusual or
infrequent items.
6. However, some Board members raised concerns about requiring disclosures
without defining unusual or infrequent items and commented that they would like
to see a definition before we go further.
7. Agenda paper 21C from the September 2018 Board meeting analysed the
guidance issued by some standard-setters and regulators and identified three
attributes that could be used as a basis for developing principle-based guidance:
1
(a) unusual in nature because the item is unrelated to the entity’s ordinary
business activities;
(b) infrequent (ie whether similar items will recur in or continue into the
future); and
(c) unusual in size (ie amount).
8. AP21C also provided analysis of feedback from stakeholders on this topic:
(a) feedback received on the Board’s preliminary view on unusual and
infrequent items included in the Disclosure Initiative—Principles of
Disclosure Discussion Paper published in March 2017. Most users
supported the Board developing requirements for the presentation of
unusual and infrequently occurring items. However, many of the non-
user respondents as well as a few users suggested that it would be
difficult for the Board to define unusual and infrequent items.
(b) feedback from Capital Markets Advisory Committee members and
Global Preparers Forum members at their joint meeting in June 2018.
They suggested that the Board should provide principle-based guidance
on what items are expected to be disclosed separately, and/or allow
entities to develop their own definitions of unusual or infrequent items,
1
Paragraph 58 in AP21C.
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Primary Financial Statements │Unusual items
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requiring entities to provide sufficient disclosures to enable users to
understand the basis for classifying items as unusual or infrequent.
Definition of unusual items
9. The staff propose to define unusual items as follows:
Unusual items are income or expenses with limited predictive value because it is
reasonable to expect that similar items will not arise for several future annual
reporting periods.
Similar items are income or expenses that are similar in type and amount.
10. The proposed definition means:
(a) income or expenses can only be classified as unusual if they have
limited predictive value;
(b) income or expenses can be classified as unusual items even if it is not
certain that similar items will not arise for several future annual
reporting periods; and
(c) income or expenses cannot be classified as unusual items if, for
example:
(i) it is reasonable to expect that similar items will arise; or
(ii) an entity cannot develop any reasonable expectation
regarding whether similar items will arise (for example,
because of a high level of uncertainty associated with such
items).
11. The following paragraphs discuss:
(a) the relationship between the proposed definition and the previously
identified attributes of unusual/infrequent items (paragraphs 12–13);
(b) the focus on predictive value (paragraphs 14–18);
(c) considering the underlying transactions or other events when assessing
‘similar in type’ (paragraphs 19–21);
(d) the period over which an entity should assess whether a similar item
will arise (paragraphs 22–24); and
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Primary Financial Statements │Unusual items
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(e) use of the term ‘reasonable to expect’ (paragraphs 25–26).
The relationship between the proposed definition and the previously
identified attributes of unusual/infrequent items
12. In this paper, we use the term ‘unusual items’ for what we previously called
‘unusual or infrequent items’. This is because we have concluded that items that
occur infrequently can be described as ‘unusual’. Hence, we are proposing a
definition of unusual items that would include infrequent items.
13. The relationship between the proposed definition and the three possible attributes
of unusual items we identified in the September 2018 Board meeting (see
paragraph 7) is as follows:
(a) unusual in amount—this attribute is captured by defining ‘similar
items’ as income or expenses that are similar in type and amount. Items
that are unusual in amount (eg very large litigation costs) would be
assessed as unusual items under the proposed definition, if it is
reasonable to expect that items of a similar type and amount (eg very
large litigation costs) will not arise for several future annual reporting
periods. The fact that an entity may expect normal periodic litigation
costs (ie items of a similar type) to arise in future periods would not
prevent an entity from classifying items such as very large litigation
costs as unusual as long as those future costs are not expected to be of a
similar amount.
(b) unusual in frequency—this attribute is captured in the proposed
definition by saying that it is reasonable to expect that similar items will
not arise for several future annual reporting periods. Items that are
unusual in frequency (eg a fine from a regulator for non-compliance
with a regulation) would be assessed as unusual items under the
proposed definition, if it is reasonable to expect that such items (of any
amount) will not arise for several future annual reporting periods.
(c) unusual in nature—this attribute is indirectly captured by defining
‘similar items’ as income or expenses that are similar in type and
amount. As discussed in paragraphs 19–21, when assessing whether an
item of income or expense is similar, it may be helpful to consider the
Agenda ref 21B
Primary Financial Statements │Unusual items
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nature of the transactions or other events that gave rise to the income or
expense.
Focus on predictive value
14. Users have told us that they find information about non-recurring, unusual and/or
infrequent items useful in assessing the persistence or sustainability of an 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 attribute a lower valuation for earnings that
are not sustainable.
2
(b) whether an item can be used to predict future values of similar items.
Researchers have found that some ‘special items’ (eg restructuring
charges, merger costs, impairment and write-offs) have ‘zero’
persistence (ie they are transitory) in terms of predicting future values
of similar items.
3
15. The Conceptual Framework for Financial Reporting states:
2.6 Relevant financial information is capable of making
a difference in the decisions made by users. …
2.7 Financial information is capable of making a
difference in decisions if it has predictive value, confirmatory
value or both.
2.8 Financial information has predictive value if it can be
used as an input to processes employed by users to predict
future outcomes. … Financial information with predictive
value is employed by users in making their own predictions.
16. The proposed definition defines unusual items as income or expenses with limited
predictive value. We think that defining unusual items in this way will:
2
Stephen H. Penman, ‘Sustainable Earnings and P/E Ratios with Financial Statement Analysis’, 2006.
3
D. Jones and K. Smith, ‘Comparing the Value Relevance, Predictive Value, and Persistence of Other
Comprehensive Income and Special Items’, The Accounting Review, Vol. 86, No 6, 2011, pp.2047–2073.
Agenda ref 21B
Primary Financial Statements │Unusual items
Page 7 of 17
(a) address users’ need for information regarding items that are unlikely to
persist and hence have limited predictive value (see paragraph 14); and
(b) help preparers identify unusual items by providing them with a concept
that underpins the need to identify unusual items.
17. The staff suggest using the term ‘limited predictive value’ rather than ‘no
predictive value’, because very few income or expenses recognised in the
financial statements could be said to have no predictive value.
18. The proposed definition focuses on income or expenses rather than the
transactions or other events that gave rise to those income or expenses. This is
because it is the information provided in the financial statements (income or
expenses), not the transactions or other events, that has predictive value.
However, as discussed in paragraphs 19–21, considering the underlying
transactions or other events may help preparers identify unusual items.
Considering the underlying transactions or other events when assessing
‘similar in type’
19. When assessing similar items, it may be helpful to consider the nature and
frequency of transactions or other events that gave rise to the income or expenses.
For example, an entity might assess that:
(a) it is reasonable to expect that income or expenses (eg impairment
losses) arising from transactions or other events that are unusual in
nature and/or in frequency (eg a big earthquake) will not arise for
several future annual reporting periods and should be classified as
unusual items; but
(b) it is not reasonable to expect that income or expenses (eg impairment
losses) arising from transactions or other events that are usual in nature
and/or in frequency (eg a drop in product prices) will not arise for
several future annual reporting periods and should not be classified as
unusual items.
20. However, although in many cases, unusual items result from transactions or other
events that are unusual in nature and/or in frequency, this is not always the case.
Transactions or other events that are unusual in nature and/or in frequency can
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Primary Financial Statements │Unusual items
Page 8 of 17
give rise to ‘usual’ income or expenses. For example, a large earthquake may
give rise to increased costs that are expected to arise for a number of years.
21. Consequently, the staff have not included a reference to unusual transactions or
other events in the definition of unusual items. However, the staff recommend
explaining in guidance accompanying the definition that it may be helpful to
consider the nature and frequency of the transactions or other events giving rise to
the income or expenses when assessing whether an item is unusual.
Period over which an entity should assess whether a similar item will arise
22. The proposed definition requires an entity to assess whether it is reasonable to
expect that similar items will not arise for several future annual reporting periods.
The staff proposed the term ‘several future annual reporting periods’ because:
(a) items that are reasonably expected to arise in the next few annual
reporting periods are unlikely to have limited predictive value (ie they
are unlikely to be unusual).
(b) stating that a similar item is not expected to arise in the future, without
indicating a period over which the entity should make that assessment,
could be interpreted as meaning the entity must consider all possible
future reporting periods. Considering all possible future reporting
periods would be impractical and would be likely to result in few items
being treated as unusual.
(c) specifying the period over which an entity should consider whether a
similar item will arise (for example stating that the entity should
reasonably expect that the item will not arise in the next five years)
would be arbitrary and may not lead to the identification of all items
that have limited predictive value.
23. The staff considered, but rejected, requiring entities to assess whether a similar
item will arise in the foreseeable future. Some stakeholders interpret the
foreseeable future as being virtually all possible future reporting periods. As
discussed in the previous paragraph, we do not think this interpretation would
work for the definition of unusual items. In addition, stakeholders raised concerns
about the term when the Board considered using the term ‘foreseeable future’ in
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Primary Financial Statements │Unusual items
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IFRS 9 Financial Instruments suggesting that it would be unlikely to result in
consistent application.
4
24. We acknowledge that ‘several future annual reporting periods’ is imprecise and
will require entities to exercise judgement when deciding the period over which to
assess whether a similar item will arise. However, we think this phrase should
help preparers appropriately identify items that have limited predictive value.
Use of the term ‘reasonable to expect’
25. The proposed definition requires entities to assess if it is reasonable to expect that
similar items will not arise for several future annual reporting periods. Some
Standards use the term ‘reasonably be expected’ or ‘reasonable expectation’. For
example the term is used:
(a) in the definition of material (paragraph 7 of IAS 1 Presentation of
Financial Statements as amended in October 2018);
(b) in deciding whether a write-off of a financial asset should occur
(paragraph 5.4.4 of IFRS 9); and
(c) in guidance to help entities determine the measurement of a provision
(paragraph 49 of IAS 37 Provisions, Contingent Liabilities and
Contingent Assets).
26. These Standards do not provide guidance on what is meant by ‘reasonably be
expected’ or ‘reasonable expectation’. Consequently, the staff do not think it is
necessary to develop guidance on the term ‘reasonable to expect’.
Question 1
Does the Board agree with the staff recommendation that the Board define
unusual items as follows?
Unusual items are income or expenses with limited predictive value because it
is reasonable to expect that similar items will not arise for several future
annual reporting periods.
4
See paragraphs BC5.100 and BC5.208–BC5.209 in the Basis for Conclusions on IFRS 9.
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Primary Financial Statements │Unusual items
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Similar items are income or expenses that are similar in type and amount.
Additional guidance
Neutrality
27. The proposed definition of unusual items states that unusual items are income or
expenses with limited predictive value. In other words, unusual items could be
items with a positive effect on the entity’s financial performance (income) or a
negative effect (expenses). However, some research shows that it is more
common for entities to identify expenses as unusual than it is for them to identify
income as unusual. For example, Standard & Poor’s has found that entities
generally identify adjusting items that boost their measures of performance more
often than items that decrease them.
5
Research by Curtis et al. finds that
approximately one-half of firms with one-time gains do not exclude the gains from
their adjusted performance measures.
6
28. Users have expressed concerns about perceived bias in identifying unusual items.
For example, a CFA member survey found that investors are concerned that
entities cherry-pick the items they adjust for in the calculation of their adjusted
performance measures
.
7
29. Consequently, the staff recommend the Board specify that information provided
about unusual items should be neutral.
Past occurrence
30. The proposed definition of unusual items requires an entity to assess if similar
items will arise in future reporting periods. The proposed definition does not refer
to the past occurrence of such items. We did not propose referring to the past
occurrence of similar items in the definition because we think that classifying as
5
Standard and Poor’s, ‘Why inconsistent reporting of exceptional items can cloud underlying profitability
at non-financial FTSE100 companies’, 2014, www.standardandpoors.com/ratingsdirect
.
6
A. Curtis, S. McVay, and B. Whipple, ‘The Disclosure of Non-GAAP Earnings Information In The
Presence of Transitory Gains’, The Accounting Review, Vol. 89, No. 3, 2014, pp. 933–958.
7
CFA Institute, ‘Uses, Expectations and Concerns on Non-GAAP Financial Measures’, 2016,
https://www.cfainstitute.org/-/media/documents/support/advocacy/investor-uses-expectations-concerns-on-
non-gaap.ashx
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unusual an item that is similar to an item reported in previous reporting period(s)
may in some cases provide useful information. For example, an entity may incur
an impairment loss resulting from a fire at one of its factories in one period. At
the end of that period the entity classifies the impairment as an unusual item
because it has a reasonable expectation that it will not suffer an impairment loss
for several future annual reporting periods. In the next period, the entity once
again incurs an impairment loss resulting from a fire at one of its factories. If the
two fires in close succession are not indicative of a developing pattern of fires and
impairments (ie the entity has just been very unlucky), it may be possible for the
entity to have a reasonable expectation at the end of the second reporting period
that similar items will not arise for several annual reporting periods. If this is the
case, classifying the second impairment as unusual may provide useful
information to the users of the entity’s financial statements.
31. However, we think that considering whether similar items of income or expense
arose in the past may help an entity assess whether it is reasonable to expect that
similar items will recur. For example, if similar income or expenses have arisen
regularly in the past, it may indicate that it is reasonable to expect that similar
items will arise in future reporting periods. Hence the entity would not classify
those items as unusual.
32. The staff therefore recommend that the guidance on unusual items states that
considering the past occurrence of similar items may help entities assess whether
it is reasonable to expect that similar items will arise in the future.
How to apply the proposed definition of unusual items to current value
gains/losses
33. The staff acknowledge that some users are of the view that gains or losses arising
from changes in current value (including fair value) measurements have limited
predictive value. This is because they typically assign a value of zero to their
expectations of the current value change in any single period.
34. However, the staff do not think that gains or losses arising from the
remeasurement of items required to be measured at current value (including fair
value) should, in general, be treated as unusual items:
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Primary Financial Statements │Unusual items
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(a) current values are likely to change each reporting period and therefore
gains or losses from remeasurement are expected to arise in each
reporting period. Thus, we think such gains or losses are likely to be
similar in type to gains or losses expected in future reporting periods.
(b) although gains or losses from remeasurement will vary from period to
period, these variations in amount are expected for such items.
Classifying these items as ‘unusual’ would be misleading.
35. Consequently, the staff recommend clarifying that gains or losses arising from the
remeasurement of items required to be measured at current value (including fair
value) should not, in general, be classified as unusual items.
36. The staff acknowledge there may be situations where a change in a current value
measurement is an unusual item because it represents a particularly large change
in value. However, we think such situations would not be common.
Question 2
Does the Board agree with the staff recommendation to provide the following
additional guidance on the assessment of unusual items:
(a) information provided about unusual items should be neutral;
(b) considering the past occurrence of similar items may help entities
assess whether it is reasonable to expect that similar items will arise
in the future; and
(c) gains or losses arising from the remeasurement of items required to
be measured at current value (including fair value) should not, in
general, be classified as unusual items?
Should there be additional information disclosed relating to unusual items?
37. As discussed in paragraph 5, the Board’s discussion in September 2018 focussed
on whether to require disclosure of unusual items and where in the financial
statements such information would be included. In this section, we discuss
whether the Board should require entities to:
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Primary Financial Statements │Unusual items
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(a) attribute unusual expenses to natural expense categories (paragraphs
38–41);
(b) provide information about the transactions or other events that gave rise
to the unusual items (paragraphs 42–43); and
(c) provide information about income and expenses related to unusual
items (paragraphs 44–46).
Attributing unusual expenses to natural expense categories
38. The Board has tentatively decided to require separate disclosure of unusual items
in the notes and require those items be attributed to line items in the statement(s)
of financial performance. Applying the Board’s tentative decisions, entities will
be required to analyse operating expenses in the statement(s) of financial
performance either by function or by nature, depending on which method provides
more useful information. In addition, entities will be required to provide
additional information about the nature of their expenses when they provide an
analysis of expenses by function in the statement(s) of financial performance.
39. In practice, many entities analyse expenses by function—in our analysis of a
sample of financial statements for 85 entities, we found that 61 entities provide
functional expense line items in the statement(s) of financial performance.
40. The staff expect that some unusual items will be identified by reference to their
nature (eg impairment losses) and some will not (eg restructuring costs which
could include several different natural expense items). In the cases when unusual
items are not described by reference to their nature, users may want information
about how unusual expenses affect the natural expense categories. Applying the
Board’s tentative decisions, this information would not be required from entities
that provide an analysis of expenses by function in the statement(s) of financial
performance.
41. Therefore, the staff recommend requiring all entities to attribute unusual expenses
to natural expense categories, regardless of their method of analysis of expenses in
the statement(s) of financial performance.
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Primary Financial Statements │Unusual items
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Information about transactions or other events that gave rise to unusual
items
42. As discussed in paragraphs 19–21, it may be helpful to consider the nature and
frequency of transactions or other events that gave rise to the income or expense
when assessing whether those income or expenses are unusual. We think users
would find information about the underlying transactions or other events that gave
rise to unusual items useful because such information would enable users to:
(a) understand the context in which an unusual item arose; and
(b) form a judgement on the entities’ classification of an item as unusual,
allowing them to adjust their analysis accordingly.
43. Therefore, the staff recommended the Board require entities to provide a narrative
description of the transactions or other events that gave rise to unusual items.
Information about income and expenses related to unusual items
44. In some cases, transactions or other events that give rise to usual items may also
give rise to other items of income or expense that do not meet the proposed
definition of unusual items. For example, a sale may give rise to an unusual
revenue item. In earning that revenue, an entity may incur several related costs,
including staff costs, inventory cost and taxes, which do not meet the definition of
unusual items. Users may find information about these related items useful even
though they do not meet the definition of unusual items.
45. The staff however do not recommend requiring entities to disclose information
about income or expenses related to unusual items (unless those income or
expenses themselves meet the definition of unusual items). This is because we do
not think the benefits of such disclosure would exceed the costs. This is mainly
because we think that:
(a) it may be difficult for preparers to identify which items are related to
unusual items;
(b) difficulties in identifying related items may lead to inconsistent
application of the requirement making the resulting information less
useful to users of financial statements; and
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Primary Financial Statements │Unusual items
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(c) it may be costly for preparers to require them to identify income and
expenses related unusual items, as identification may require system
and process changes to track such items.
46. Appendix A illustrates the proposed required disclosures for unusual items.
Question 3
Does the Board agree with the staff recommendation to:
(a) require all entities to attribute unusual expenses to natural expense
categories, regardless of their method of analysis of expenses in the
statement(s) of financial performance;
(b) require all entities to provide a narrative description of the
transactions or other events that gave rise to unusual items; and
(c) not require entities to disclose income or expenses related to unusual
items (unless those income or expenses themselves meet the
definition of unusual items)?
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Primary Financial Statements │Unusual items
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Appendix A—Example disclosures of unusual items
An entity that analyses expenses by nature
Unusual Items included in the line item
Line items in statement
of financial
performance that
include unusual items
Total
amount
presented
for the line
item
Restructuring
of subsidiary A
Litigation
costs
arising
from
Case X
Bargain
purchase
of entity
Y
Total unusual
items
included in
the line item
Employee benefits
expense (4,000) (300)
(300)
Impairment of non-
financial assets (500) (150)
(150)
Litigation expenses
(300) (50) (50)
Other income
500 450 450
Expenses from
financing activities (200) (50) (50)
Notes:
Restructuring of subsidiary A relates to head office move in response to uncertainty caused by
Brexit. Restructuring costs incurred include redundancy payment to 578 staff in London and
impairment of right to use an office building in London.
Litigation costs arose from Court Case X in which we paid damages to a customer due to
consequences of incomplete labelling of one of our products. We have since taken measures to
remedy labelling procedures.
Bargain purchase gain arose from acquisition of entity Y in country Z.
Agenda ref 21B
Primary Financial Statements │Unusual items
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An entity that analyses expenses by function
Unusual Items included in the line item
Line items in
statement of financial
performance that
include unusual items
Total amount
presented for
the line item
Restructuring
of subsidiary
A
Litigation
costs
arising
from
Case X
Bargain
purchase
of entity
Y
Total unusual
items
included in
the line item
Cost of goods sold
(3,000) (100)
(100)
SG&A
(1,500) (350) (50)
(400)
Other income
500 450 450
Expenses from
financing activities (200) (50) (50)
Notes:
Restructuring of subsidiary A relates to head office move in response to uncertainty caused by
Brexit. Restructuring costs incurred include redundancy payment to 578 staff in London (CU300
included in employee benefits expenses) and impairment of right to use office building in
London (CU150 included in impairment of non-financial assets).
Litigation costs arose from Court Case X in which we paid damages to a customer due to
incomplete labelling of our products. We have since taken measures to remedy labelling
procedures. These costs were included in litigation expenses.
Bargain purchase gain arose from acquisition of entity Y in country Z.