ED 93 Statement of Financial Performance and Ancillary Amendments

2 November 1998

The Executive Director
Australian Accounting Research Foundation
211 Hawthorn Road
CAULFIELD VIC 3162

Dear Sir

ED 93 Statement of Financial Performance and Ancillary Amendments

With the exception of the issues noted, the Group of 100 supports the proposals.

However, the issues raised are important because the Statement of Financial Performance is the primary financial statement which shows the profit or loss of the entity and is the prime focus of users. We note that ED 93 is endeavouring to harmonise with the requirements of International Accounting Standards IAS 1 and IAS 8. However, we believe that the Board should clarify the relationship between the proposals in ED 93 which refers to a Statement of Financial Performance and those in ED 91 "Financial Report Disclosures" which refers to a Profit and Loss Account.

Specific Matters for Comment

Definitions
We agree with the definitions of "extraordinary items", "ordinary activities" and "fundamental errors".
Changes in Accounting Estimates
We agree that a change in accounting estimates should be disclosed in the notes to the accounts.
IAS 8 Allowed Alternative Treatment of "fundamental errors"
Paragraph 8.1 requires a "fundamental error" to be disclosed as a separate line item on the face of the Statement of Financial Performance and that comparatives on the face of the financial statements not be restated. Appendix 1 includes a line item "Correction of fundamental error (Note X)" on the face of the Statement of Financial Performance.

The Group of 100 supports the inclusion of the amount of a fundamental error within the reported profit or loss which is consistent with the all-inclusive concept required by AASB 1018 "Profit and Loss Accounts". IAS 8 Allowed Alternative Treatment does not require the fundamental error to be included as a separate line on the face of the Statement of Financial Performance.

We believe the IAS 8 Allowed Alternative Treatment which requires the disclosure of the nature of the fundamental error and the amount of the correction recognised in net profit or loss, is more appropriate than the benchmark approach of ED 93.

For a company to describe an item on the face of its Statement of Financial Performance as a "fundamental error" is "emotive" terminology. Such a description could bring into question not only the credibility of the company but the continued credibility of its financial reports. As such we believe that there would be significant resistance from directors to the inclusion of this description for a line item in the Statement of Financial Performance.
If the AASB is strongly of the view that a "fundamental error" must be a separate line item in the profit and loss, the Group of 100 recommends that the item should be described according to its substance eg "Restatement of Prior Period Inventories" rather than as "Correction of Fundamental Error". The nature of the fundamental error should then be described and explained in the notes.
Removal of Abnormal Items
The Group of 100 supports the proposals in paragraph 6.1. However, removal of the term ‘abnormal item’ from the Standard will not necessarily result in the removal of that description from financial reports unless a substitute term is provided.

Recommendation
The Group of 100 recommends that the Board develop a generic descriptive title for these items. In the absence of an appropriate description diversity in terminology is likely to result.
Disclosure of Non-Owner Changes in Equity which are taken Directly to Equity on Face of Statement of Financial Performance eg Asset revaluation
The Group of 100 supports this alternative treatment, but notes that IAS 1 includes a fourth primary financial statement being a statement showing either:
- all changes in equity; or
- changes in equity other than those arising from capital transactions with owners and distributions to owners.

Although US GAAP currently requires such a statement and several Australian companies already publish a Statement of Changes in Shareholders’ Equity we do not believe that the pros and cons of development of such a separate statement are properly discussed within ED 93.

We note that paragraph 9.2 of ED 93 requires that:
"Once recognised as non-owner changes in equity, revenues, expenses and valuation adjustments must not be reversed out of that component of the statement of financial performance and recognised as revenues or expenses within the net profit or loss or result, except for the treatment of the balance in the foreign currency translation reserve on disposal of a foreign operation required by Accounting Standard AASB 1012 and Australian Accounting Standard AAS 20 "Foreign Currency Translation".

While the drafting of paragraph 9.2 copes with the requirements of the current accounting standards and the proposals in ED 86 "Foreign Currency Translation", the drafting lacks flexibility given the probable accounting treatments that will emerge in respect of financial instruments where revaluations will move from equity to profit and loss upon realisation.
The Group of 100 recommends that the exception noted within paragraph 9.2 be extended to read: "except as otherwise specified in another Accounting Standard".
Changes in Accounting Policies Relating to the Adoption of a New Accounting Standard
The Group of 100 agrees with the proposal.
IAS 8 Allowed Alternative Treatment of Other Changes in Accounting Policies
Paragraph 10.3 requires that the cumulative effect up to the end of the preceding reporting period of any adjustment must be recognised as a revenue or an expense in the reporting period in which the change is made. Comparatives on the face of the financial statements must not be restated for the change in accounting policy.
Where there are changes of balance sheet items (eg a new class of asset) or revenue and expense classification (eg netting) we believe that at times it may be misleading not to restate comparative data for a change in policy. For example, a cost to income ratio of a financial institution calculated on non-adjusted comparatives would be misleading to users.

The Group of 100 does not support the adoption of IAS 8 Allowed Alternative Treatment. The Group of 100 recommends that the Benchmark Treatment per paragraph 49 of IAS 8 which requires any resulting adjustment to be reported as an adjustment to the opening balance of retained earnings with comparative information restated unless it is impractical to do so. This treatment is also consistent with the approach required on the adoption of a new accounting standard.

Yours sincerely,

Bryce JH Denison
National President