The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation. © 2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. International Financial Reporting Standards Performance Reporting and Economic Consequence Wei-Guo Zhang, IASB member

Agenda 2 Introduction Historical debates on earning numbers in the US IASB’s recent thinking in CF DP Research implications

International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation Introduction 3

Objective of financial reporting 4 Not provide information about the entity’s value

Elements in IASB’s Framework 5 5 Financial position Assets Liabilities Equity Performance Incomes Revenue gains Expenses Expenses from ordinary activities losses

Elements in FASB’s Framework 6

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International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation Historical debates on earning numbers in the US 10

Newly formed SEC ( ) required an income statement to include sales and cost of sales In 1936, AAA issued “A Tentative Statement of Accounting Principles Underlying Corporate Financial Statements’ (Revised 1941, 1948,1957) Strong support for what later became the “all inclusive income” or “clean surplus” perspective SEC supported the AAA Statement’s conclusions Historical debates on earning numbers 11

Committee on Accounting Procedure generally favored the “current operating performance theory of income” (Storey & Storey, p.27) Exclude from net income extraordinary and non-recurring gains and losses “to avoid distorting the net income for the period” (Storey & Storey, p.27) Focus was on a “non-distorted” income number but the benchmark for “non-distortion” was not stated Historical debates on earning numbers 12

APB adopted the clean surplus or “all inclusive” income statement but also agreed on notions of extraordinary items Events and transactions that “will be of a character significantly different from the typical or customary business activities of the entity” (APB-9-para. 21) APB 30 (para. 20) established the Unusual Nature and Infrequency of Occurrence criteria Extraordinary items were separately displayed but included in net income 13 Historical debates on earning numbers

Ideas of reporting “non-distorted income” continued to be debated in the early years of work on the FASB Conceptual Framework Presentation of items in or out of income statement remained controversial Creation of debits and credits on the balance sheet to avoid “distortion of net income” Not recognizing assets and liabilities to avoid “distortion of net income” 14

FASB Conceptual Framework Public Hearings Q.One of your criteria for capitalization is that net income not be materially distorted. Do you have any operational guidelines to suggest regarding material distortion? A.The profession has been trying to solve that one for a great many years and has been unsuccessful. I really do not have an answer. Q.Then, is material distortion a useful criterion that we can work with? A.Yes, I believe it is. Despite the difficulty, I think it is necessary to work with that criterion. It is a matter of applying professional judgment. “Board Members were not satisfied with the kinds of answers just illustrated.” ( Storey and Storey) 15 Historical debates on earning numbers

–SFAS 12 –SFAS 52 –SFAS 115 –SFAS 133 –SFAS FASB continued to espouse the all inclusive notion of income except that support soon eroded:

Those who defended erosion of “all inclusive income” and clean surplus would: Require a statement of comprehensive income as a single statement (with subtotals???) Shift emphasis from the subtotal earnings Place selected items in other comprehensive income (OCI) However, no definition of earnings exists Historical debates on earning numbers 17

Comprehensive income is defined in the Conceptual Framework: by definition, it is an all- inclusive notion No single statement requirement for presentation of comprehensive income Basis for placing items in OCI is not determinable Basis for recycling items out of OCI is not determinable Historical debates on earning numbers 18

International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation IASB’s recent thinking in CF DP 19

Original project Was a joint project with FASB; Finalized revised chapters on objectives and qualitative characteristics; Published ED on reporting entity; Had early discussion on elements and measurement; Suspended because of the needs to focus on big 4 projects and issues emerging from recent financial crisis. 20 April 2013 Project update and the future work plan

New project Re-started in 2012 after feedback from the IASB agenda consultation in 2011; Will be IASB only project; Continues on work previously done before 2010; With the presumption that current Framework is basically OK; Scope of amendment is limited; Will not progress by phases; DP will be published this month. 21 April 2013 Project update and the future work plan

Where are we? 22

Timetable 23

Current use of OCI Recognised asset or liabilityRemeasurement gains or losses in OCI Recycle? Financial assets measured at fair value through OCI [IFRS 9 ED] Changes in discount rateYes Insurance contracts [ED]Changes in discount rateYes Financial liabilities designated at fair value through profit/loss Changes in fair value due to issuer’s own credit risk No Property, plant & equipment, intangible assets, exploration & evaluation assets Revaluation gain or reversalsNo Net investment in foreign operations (and hedges) Exchange differencesYes Pensions – net defined benefit assets or liabilities RemeasurementNo Designated investments in equity instrumentsChange in fair valueNo Cash-flow hedging instrumentsEffective portion of changes in fair value Yes © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. 24

Major concern © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK Increasing use of OCI OCI become garbage box to find answers for difficult issues No strong or consistent conceptual basis

Major questions asked © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK How financial performance should be defined? How should profit or loss and OCI be defined? What items should be in OCI? Should OCI be recycled? Should OCI be the only decision by IASB or not?

Presentation of performance 27

Statement of comprehensive income 28

Retain profit or loss as a subtotal or total Items in profit or loss communicate the primary picture of the return an entity has made on its resources –A common starting point for analysis What distinguishes profit or loss items from OCI items? –Describe OCI (profit or loss is the default) –Changes in some current measures (remeasurements) –Decision for IASB, not preparers –IASB would not have to use OCI for all items that qualify Recycling – all or some? 29

Distinguish using an attribute? © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK IASB’s view: No one way to distinguish profit or loss and OCI

Narrow use of OCI 31 OCI contains only some re-measurements in two categories: –‘Bridging items’: arises where same asset/liability is represented in balance sheet and profit or loss using two different measurements (see next slides) –‘Mismatched remeasurements’: arises when offsetting impact of linked transactions or other events is not yet recognised eg cash flow hedging and foreign exchange translation OCI always recycled

Narrow use of OCI (2) Bridging –IFRS 9 (ED) –Insurance contracts –Others? Mismatched –Cash flow hedging –Foreign exchange –Others? 32 Profit or loss (default) OCI All recycle

Two different measures (bridging) 20X1 Interest incomeA Impairment(B) Profit or lossA-B Statement of comprehensive income 33 Statement of profit or loss 20X1 Profit or lossA-B OCI: Fair value changesC Total comprehensive incomeA-B+C Example (IFRS ED): In 20X1, financial assets are measured at amortised cost in the statement of profit or loss and fair value in the balance sheet. In 20X4, the financial assets are sold. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. C = Differences between amortised cost (in profit or loss) and fair value (in balance sheet)

Two different measures (bridging) (2) 20X4 Interest incomeA Impairment(B) Gain on sale (reclassification adjustment) D Profit or lossA-B+D Statement of comprehensive income 34 Statement of profit or loss 20X4 Profit or lossA-B+D Fair value changes during the year C Reclassification adjustment to profit or loss(D) Total comprehensive incomeA-B+C © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. D = cumulative change in fair value until date of sale = sales proceeds less amortised cost (carrying value)

Broad use of OCI OCI contains only some current remeasurements in three categories: –‘Bridging items’ –‘Mismatched remeasurements’ –‘Transitory remeasurements’ (see next slide) Recycling –All bridging items and mismatched remeasurements –Some transitory remeasurements –if results in relevant information 35

Broad use of OCI Bridging Mismatched Transitory remeasurements –Long-term –remeasurement expected to reverse or change significantly –remeasurement enhances profit or loss as the primary indicator of the return the entity has made on its economic resources –Eg pensions remeasurement 36 Profit or loss OCI All recycle Some recycle, if relevant

‘Transitory remeasurements’ Generally disaggregation (separate presentation) of components of an item income or expense Must meet all conditions: Asset realised/liability settled over the long term Current period remeasurement is expected to reverse fully, or change significantly, over the holding period of the asset or liability Current period remeasurement enhances the relevance of profit and loss 37

‘Transitory remeasurements’ (2) Impact on Financial position 20X2 CU 20X2 service cost12 20X1 service cost10 20X1 ‘catch-up’2 Pension liability24 38 Impact on comprehensive income 20X2 CU Profit or loss12 OCI: Pension liability remeasurement 2 Total14 Example – Pensions 20X1: Estimate of employee service cost is CU10 per year 20X2: Revised estimate of employee service cost is CU12 per year - revision due to change in inflation forecast Transitory effect of inflation is separately presented Relevant information about 20X2 service costs

Pensions and bridging items Remeasurements of net pension liabilities (assets) do not qualify as ‘bridging items’: –Difficult to determine basis to recycle –Cumulative amounts recognised in profit or loss do not reflect an alternative ‘measure’ of the liability –Measure should be meaningful, understandable, describable For example – using the previous slide: –Remeasured pension liability = CU24 –Accumulated profit or loss: CU10 (20X1) + CU12 (20X2) = CU22 –How do we describe the measurement of the pension liability reflected in accumulated profit or loss? 39

Summary Narrow ApproachBroad Approach When can OCI be used? Use of OCI is only where permitted or required by IFRS Items eligible? Mismatched remeasurements Bridging items Mismatched remeasurements Bridging items Transitory remeasurements Recycling Always Driven by the category and the reason why the item went into OCI Sometimes Bridging and mismatched always Transitory remeasurements – only if it provides relevant information ResultLimited items in OCI Less discretion for the IASB More items in OCI (in line with current use) More discretion for the IASB 40

Alternative approach not considered 41

International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation Research implications 42

Research Implications? 43

More information Conceptual Framework website: Conceptual Framework (2010): amework.pdf 44