Non-IFRS measures – Re-shaping financial statement presentation

The topic of non-IFRS measures regularly appears in the financial press. This is not surprising given the importance of these measures for directors and management in explaining performance to investors, providing useful insights and telling a story that is unique to their entity. Given the impact COVID-19 is having on global economies, entities have been drawing on these measures more than ever before, and this has not escaped our regulator’s attention.

The importance of non-IFRS performance measures to a user of the financial report is further highlighted in the proposed new IFRS^® Standard that will replace IAS 1/AASB 101 Presentation of Financial Statements. The General Presentation and Disclosures Exposure Draft (the ED) seeks to mandate disclosure of non-IFRS performance measures in the notes to the financial statements along with supporting disclosures. The ED extends beyond non-IFRS performance measures and looks to re-shape the structure of the primary statements.

With this evolving landscape, KPMG undertook a review of 72 ASX200 entities’ annual reports for the 2019 reporting period with a focus on the use of non-IFRS measures along with some of the more significant aspects of the ED. We considered what is happening in practice now and how this may change under the ED proposals. We supplemented this with an additional 35 ASX200 annual reports for the 2020 reporting period to better understand how these disclosures have been impacted by COVID-19.

• 97 percent of entities reported at least one non-IFRS measure in the OFR.
• Underlying profit was the most common non-IFRS measure in the OFR.
• Impairment of non-financial assets, acquisition related adjustments and restructuring and/or redundancy costs were the most common reconciling items.
• Only 75 percent of entities disclosed a non-IFRS measure as their segment measure of performance.
• A 21 percent increase in use of non-IFRS segment measures for FY20 over FY19 due to COVID-19 environment.
• 88 percent of entities used non-IFRS measures to determine performance incentives awarded to key management personnel.

• The ED looks to mandate disclosing specific non-IFRS measures (referred to as Management Performance Measures) in the notes to the financial statements along with supporting disclosures.
• The ED proposes defining unusual items and requiring entities to make specific disclosures in notes to the financial statements. Under the proposals, some of the more commonly disclosed significant or unusual items such, as impairment and restructuring costs, may no longer qualify as unusual.

Our review showed that there is a lack of consistency and comparability in the structure of the income statement presented by entities.

The intention of the ED is to reduce the diversity in practice and enhance transparency. The key proposals related to income statement presentation are:

• classifying income and expenses into four defined categories
• mandating three new subtotals
• distinguishing between integral and non-integral investment in associates and joint ventures with separate presentation of the share of profits for each
• presenting expenses on the face of the income statement either by nature or by function, with a mixed presentation being prohibited.

Our review showed there is diversity in classifying interest and dividends in the statement of cash flows, which is not surprising given the accounting policy choice in AASB 107 Statement of Cash Flows.

To improve comparability between entities, the ED proposes eliminating the options for classifying interest and dividend cash flows. These proposals will likely result in significant changes for non-financial entities compared to existing practice.