Performance reporting will be a key focus for standard setters over the next year as part of efforts to improve the quality of communication between listed companies and investors, set out by the IFRS Foundation in its recent three-year plan.

Speaking at the annual IFRS Foundation Conference in Amsterdam, Hans Hoogervorst, chairman of the International Accounting Standards Board (IASB), said: ‘The central part of the [IASB’s] Better Communication theme will be to take a fresh look at the primary financial statements - what we call performance reporting.

'We will have to provide more and better structure to the income statement and the cashflow statement. We will look at the need for new line-items and possibly at subtotals.

‘Currently, investors tend to analyse the financial statements along two main axes. The first axis roughly distinguishes between operating income and finance activities. This is the main reason the non-GAAP measure Earnings before Interest and Tax (EBIT) is currently very commonly used.

‘The second main axis serves to measure the degree of earnings persistence, which is important for estimating future cashflows. This is the main reason why non-GAAP measures that adjust for infrequent income components are widely used.

‘Our Board is currently investigating whether it is possible to find principle-based definitions for these commonly used subtotals.

‘It is an incredibly complicated challenge for which precise solutions are not available. But if we can succeed in developing more discipline and guidance around such subtotals, we believe it would help the investor community.

‘The end result should be better formatted primary financial statements, which increases comparability and makes it easier for regulators to enforce discipline around the presentation of non-GAAP measures.’

IFRS standards due 2018 onwards

With four major new IFRS accounting standards due to come into force over the next few years – IFRS 9 Financial Instruments, IFRS 15 Revenue Recognition, IFRS 16 Leases and IFRS 17 Insurance Contracts, Hoogervoorst was also keen to stress the importance of global accounting standards in the context of financial stability.

He said: ‘The International Accounting Standards Board (Board) refers explicitly to financial stability in its mission statement.

‘Our primary goal is to develop IFRS standards that bring transparency, accountability and efficiency to financial markets around the world. Yet we believe that in doing so, we foster not only trust and growth, but also support the long-term financial stability of the global economy.

‘Some have raised eyebrows at this part of our mission statement.

‘I understand that, because fostering financial stability is obviously not the primary goal of accounting standards. It is primarily the remit of prudential regulators, whose task it is to safeguard the solvency of the financial system.

‘Still, we are convinced that the transparency delivered by accounting standards is a crucial ingredient for achieving financial stability. Proper accounting shines light on risks that might otherwise go unnoticed - both by companies themselves and by investors.’

He also referred to the changes to pension liability reporting, an area which arguably has not always worked. ‘Companies were much better able to manage their pension commitments when IFRS standards brought pension liabilities to the balance sheet,’ Hoogervorst argued. ‘High-quality accounting gives timely information on onerous contracts, loan losses and the true extent of leverage on the balance sheet.’

The upcoming IFRS 16 standard on lease reporting will have a significant impact on balance sheets and will affect most facets of business, with companies already warning in annual reports and accounts of the potential impact and cost burden.

The IFRS Foundation speech by Hans Hoogervorst is available  hans_hoogervorst_-_amsterdam_2017.pdf