Corporate accounting standards are headed for more changes after the International Accounting Standards Board (IASB) proposed changes to how businesses report operating profit, the Financial Times said on Tuesday (Dec. 17).
According to reports, the IASB is seeking revisions in accounting standards to clarify performance comparisons for investors. The proposal suggests a more rigid definition of operating profit, which has traditionally not had a standardized method of measurement. Today, the publication noted, there is no international agreement over how to measure it.
The IASB said it had identified at least nine different methods of defining operating profit in a sample of 100 companies, and warned that these discrepancies could make investors' and financial analysts' comparisons more difficult.
The proposed standardization would require the addition of two new metrics, including operating profit as well as income and expenses from joint ventures and integral associates. The IASB is also proposing that corporates report on profit before financing and income tax, as well as clearer explanations on financial reports over how performance measures are defined.
"These requirements would add much-needed transparency and make it easier for investors to find the information they need to make their own analysis," said IASB member and former portfolio manager Nick Anderson in an interview with the FT.
According to reports, the IASB has heard concerns among investors about a lack of transparency when corporates categorize some large expenses as "other" without an explanation, leading the IASB to also suggest greater detail in operating expense reporting.
"These proposals together represent a game-changer in the comparability and usefulness of financial statements," added IASB Chair Hans Hoogervorst.
Corporate accounting standards have been in flux this year, leading to some controversy over how changes to those standards could disrupt company operations.
The changes, enacted by the U.S. Financial Accounting Standards Board – which pertain to reporting on lease costs, revenue recognition, credit losses, financial assets and liabilities, derivatives and hedging – will take effect for public firms in 2021. Other changes came into effect this week for private firms and nonprofits.