Effort to redesign income statement raises concerns about misleading information

The IASB has more work to do before it decides whether to allow new line items in company income statements that proponents say would lend better insight into a business’s financial health.

After more than three hours of debate on June 21, 2017, the international accounting board concluded that it needed more research on several issues before proceeding.

“As usual, we are very good at creating problems and seeing problems, and finding all sorts of obstacles, which are undoubtedly there,” IASB Chairman Hans Hoogervorst said toward the end of the discussion. “Staff has a lot to think about.”

The IASB is toying with the idea of allowing two new subtotals on income statements: earnings before finance income/expenses and tax (EBIT), which is a well-known non-GAAP measure, and a so-called “management performance measure,” a new concept that would aim to convey more information about how a business’s managers assess the financial health of their company.

Many board members expressed support for putting parameters around EBIT, although several raised questions about how to make the measure more uniform. The IASB’s research staff touted the value of a principles-based approach to defining it versus setting up strict requirements.

“I thought long and hard about it, and I just don’t know there’s any other way you can rationally do it with a reasonable chance of success,” IASB member Gary Kabureck said.

Other members said they also agreed with a principles-based approach, but they wanted to include investment income in the total. Still others wanted additional flexibility in determining the figure. IASB member Amaro Luiz de Oliveira Gomes cautioned against straying too far from the commonly understood definition of EBIT.

“We are not trying to redo anything, not trying to create anything totally new,” Gomes said.

IASB Vice Chairman Sue Lloyd agreed.

“I know we need to be thought leaders and we need to look forward, but we also, I think, started off with the idea that EBIT was something the market was already using and understood what it meant, and I wonder if we’re stretching that.”

There was even less agreement when it came to discussing the idea of a management performance measure, which IASB member Martin Edelmann said could lead to the insertion of “stupid” information that would purposely present the company in the best possible light.

Edelmann said he was concerned that a company could get away with calling income before costs a management performance measure, and that the IFRS would effectively be sanctioning the dissemination of misleading information.

“This number is totally stupid, but it’s an IFRS number,” he said. “That is my concern.”

The discussion was part of the board’s wider effort to improve how companies present their financial performance. The board also is considering changes to the cash flow statement and is studying better ways to communicate information about other comprehensive income, a measure that critics liken to a parking lot for undesirable results.

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