International Financial Reporting Standards
Wei-Guo Zhang, IASB member
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. www.ifrs.org

Agenda
• Introduction
• Historical debates on earning numbers in the US
• IASB’s recent thinking in CF DP
• Research implications
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International Financial Reporting Standards
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The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

Objective of financial reporting
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To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. (OB 2)
Users need information to help them assess the prospects for future net cash inflows to the entity (OB 3)
Information about resources and claims against the entity, and changes to them (OB 4)
Not provide information about the entity’s value
Information to assess effective and efficient management of resources (OB 4)

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Elements in IASB’s Framework
• Financial position
• Assets
• Liabilities
• Equity
• Performance
• Incomes
• Revenue
• gains
• Expenses
• Expenses from ordinary activities
• losses
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Elements in FASB’s Framework
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Elements in FASB’s Framework
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Elements in FASB’s Framework
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Elements in FASB’s Framework
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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
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• Newly formed SEC (1933-34) 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
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Historical debates on earning numbers
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• 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
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Historical debates on earning numbers
• 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

Historical debates on earning numbers
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• 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”

Historical debates on earning numbers
• 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)
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Historical debates on earning numbers
• FASB continued to espouse the all inclusive notion of income except that support soon eroded:
– SFAS 12
– SFAS 52
– SFAS 115
– SFAS 133
– SFAS 158
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Historical debates on earning numbers
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• 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
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• Comprehensive income is defined in the
Conceptual Framework: by definition, it is an allinclusive 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

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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

Original project
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• 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.
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.
April 2013 Project update and the future work plan
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Where are we?
• Objective of financial reporting
• Qualitative characteristics
Completed
ED
• Reporting entity
• Everything else on financial statements
Now

Timetable
Jul 2013
Issue DP
6-month comment period
Q4 2014
Issue ED
End 2015
Final

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

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

Major questions asked
• 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?
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© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Presentation of performance
• Statement of profit or loss and other comprehensive income
• Profit or loss – widely used
• Gross profit
• EBITDA
• Statement of financial position
• Changes in financial leverage
• Statement of cash flows
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Statement of comprehensive income
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• All items of income and expense provide some information about financial performance
• Make best use of subtotals or totals so information is useful
• Present as one or two statements

Retain profit or loss as a subtotal or total
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• 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?

Distinguish using an attribute?
Profit or loss
• Realised
• Recurring (persistent)
• Operating
• Measurement certainty
• Short-term
• Under management control
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OCI
• Unrealised
• Non-recurring
• Non-operating
• Measurement uncertainty
• Long-term
• Outside management control
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Narrow use of OCI
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• 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)
All recycle
• Bridging
– IFRS 9 (ED)
– Insurance contracts
– Others?
Profit or loss (default)
All recycle
• Mismatched
– Cash flow hedging
– Foreign exchange
– Others?
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Two different measures (bridging)
Example (IFRS 9 2012 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.
Statement of profit or loss
Interest income
Impairment
Profit or loss
20X1
A
(B)
A-B
Statement of comprehensive income
20X1
Profit or loss
OCI: Fair value changes
A-B
C
Total comprehensive income A-B+C
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C = Differences between amortised cost (in profit or loss) and fair value (in balance sheet)
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

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

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
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Broad use of OCI
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All recycle
• Bridging
• Mismatched
Some recycle, if relevant
• 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

‘Transitory remeasurements’
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• 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

‘Transitory remeasurements’ (2)
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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
Relevant information about 20X2 service costs
Transitory effect of inflation is separately presented
Impact on comprehensive income
Profit or loss
OCI:
Pension liability remeasurement
Total
20X2
CU
12
2
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Impact on
Financial position
20X2 service cost
20X1 service cost
20X1 ‘catch-up’
Pension liability
20X2
CU
12
10
2
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Pensions and bridging items
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• 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?

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

Alternative approach not considered
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• No subtotal (ie profit or loss or OCI) defined in the Conceptual Framework
• No recycling
• Not well supported

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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

Research Implications?
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More information
• Conceptual Framework website: http://go.ifrs.org/Conceptual-Framework
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• Conceptual Framework (2010): http://eifrs.ifrs.org/eifrs/bnstandards/en/2013/conceptualfr amework.pdf