Some Non-GAAP Items to Become Auditable.
The upcoming IASB standard on financial performance information will subject certain types of non-GAAP measures to external auditing—a significant change from current practice, according to a February 5 board webcast. As part of guidance under International Financial Reporting Standard (IFRS) 18, Presentation and Disclosure in the Financial Statements, companies will be required to disclose information about some non-GAAP measures in a single note to the financial statements. Measures such as adjusted operating profit and adjusted profit, for example, are included within the scope. These are “called management-defined performance measures, or MPM,” and the standard will define a subset of them for disclosure, IASB staff member Nick Barlow said. “Users find information about those useful but also find that they are not always transparent and can be hard to find and can sometimes change from period to period without explanation,” he explained. “Because they will be disclosed in the financial statements, they will also be subject to audit.” Companies’ management typically use non-GAAP measures—a term used internationally even for IFRS—because they enable them to provide a more complete picture of their business operations. But investors have said that those figures are not standardized and therefore difficult to properly analyze or compare. Critics have said that non-GAAP measures enable companies to paint a rosier picture of their financial performance. IFRS 18 will be issued in April.
Tough Decision Looming on MD&A Project.
At a recent advisory meeting, views were mixed about the International Accounting Standards Board’s (IASB) project on management discussion and analysis (MD&A), known as “management commentary.” Members of the Integrated Reporting and Connectivity Council (IFCC) held views that spanned from “drop the project” to “develop an accounting standard,” according to discussions on January 30, 2024. The latter suggestion would have regulatory implications, according to IASB Chair Andreas Barckow. “The difference to the standards is that it was made a practice statement and the reason for that is not that the board didn’t trust its quality, but it thought that it would potentially run an uphill battle if it produced a standard, a mandatory standard and made that part of the compliance statement that companies must provide if they assert compliance with IFRS standards,” said Barckow. Management Commentary, or MD&A, is a general-purpose financial report that is required in many countries to be provided alongside a company’s financial statements and its sustainability-related disclosures. Management commentary or a similar report typically falls under the remit of local regulators. Decisions have not yet been made by the board on the fate of the project, but it is a key topic for businesses as it constitutes the narrative portion of financial reports.
Principle Will be Developed for Hedging Components of Commodities.
FASB has agreed to develop a principle for hedging components of commodities that companies purchase—a change that is aimed at improving certain aspects of hedge accounting rules. The guidance is being developed as one among six issues that will be proposed to clarify aspects of hedge accounting rules that have raised questions in the past. Under the current model, for a company to be able to hedge a component of what is being purchased, that component needs to be written down and agreed to, according to the discussions. But the board heard that this is hard to do in cases where commodities are being purchased in the spot market, because that written agreement that includes the commodity index may not always exist, or they exist in certain industries but not in others. As a result, the board voted to move from a model that requires that component that is being hedged to be written down in the contract to a model that follows a principle. The new approach would stipulate that the components that are being hedged need to be clearly and closely related to the purchase and thus would align with the “clearly and closely related” concept that is already in GAAP now. A commodity like copper, for example, is clearly and closely related to copper wire and therefore even if the copper component is not written down in a contract, the “clearly and closely related” concept can be used, the discussions indicated. This would provide a principle that would enable companies to easily figure out if a component is allowed to be hedged, board members said.