IAC to Offer Input on Segments, Disclosures
FASB will hear input from its Investor Advisory Committee (IAC) on two early-stage projects that could usher in major changes to GAAP. The IAC plans to discuss FASB’s examination of segment reporting and its project to more clearly distinguish between liabilities and equity. Investors and securities analysts view segment reporting as vital to their ability to value a company’s financial health but most find the information reported using Accounting Standards Codification (ASC) Topic 280, “Segment Reporting,” as lacking. Major multinational companies often report only one or two business segments when other evidence indicates they should report more; critics complain that the standard gives businesses too much leeway to determine when it is appropriate to aggregate information, and that it requires scant disclosures. Businesses, on the other hand, are wary about offering information that could give competitors too much insight into their operations. FASB’s project on distinguishing between liabilities and equity is also a significant undertaking; while the difference between liabilities and equity may seem straightforward at first, difficulties crop up when the terms of securities and financial contracts like redeemable equity instruments, equity-linked or indexed instruments, and convertible instruments contain features of both. Critics say the guidance in ASC Topic 480, “Distinguishing Liabilities From Equity,” is confusing, conflicting, and easily structured to get desired results
Board Says No to Requiring Use of Common Non-GAAP Measure
Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) is one of the most common nonstandardized financial measures, but the IASB will not require companies to use it. After months of researching the issue, the board decided on November 14 that companies will not have to report EBITDA in either their statements of financial performance or in their financial statement footnotes. “EBITDA sort of has been the work of the devil by certain stakeholders,” said IASB member Nick Anderson, referring to the subtotal sometimes being dubbed “earnings before bad stuff.” “We should not require it as a subtotal,” Anderson said. Thirteen of the board’s 14 members agreed; member Chungwoo Suh was absent. Companies use EBITDA, or a version of it, to capture their performance apart from some of their financial and tax obligations. The board had been mulling whether to standardize the oft-used metric and included the idea in the initial stages of its wide-ranging performance reporting project. Not all companies use EBITDA, however, and critics worried about the idea of elevating the prominence of the metric when it does not help investors and securities analysts assess a company’s debt service capabilities because it does not take into account the cash needed for capital expenditures. It also is not a good proxy for operating cash flows, according to IASB research. “I don’t think all entities would be interested in doing an EBITDA subtotal,” IASB member Ann Tarca said.
Divided Board Declines to Set Standard on Cryptocurrencies
The IASB has decided to forgo a formal account project to streamline how companies account for holdings of digital currencies such as Bitcoin. Instead, the board voted 8-7 in favor of asking the IFRS Interpretations Committee (IFRIC) to publish a nonauthoritative discussion summary highlighting the application of existing IFRS standards to holdings of cryptocurrencies. While cryptocurrencies are an increasingly popular topic, the board says they are not prevalent enough among companies reporting under IFRS to warrant action from standards setters. IASB staff research found 37 companies filing English-language IFRS financial statements with holdings of cryptocurrencies; the majority—25 in total—were in Canada. “I kind of want to do something because everybody’s talking about it, but the evidence shows us [cryptocurrencies are] not big enough to divert resources from other things we should be doing,” IASB member Mary Tokar said.