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Introduction to the survey

Discounting techniques are widely used in financial statements, but current requirements are incomplete and lack a robust conceptual foundation.  The FRC is therefore carrying out research that might enable more complete and satisfactory requirements to be developed. 

This survey is an important part of this work, and aims to identify the presentation and measurement in the statement of profit or loss of income and expenses relating to discounted amounts that is most useful to investors.  This will enable an accounting standard to ensure consistency and hence comparability between companies.  It seems particularly important to seek investors views as to what should be reported as ‘interest’ as it is used in the derivation of widely-used performance measures such as EBIT and EBITDA. 

The IASB has a current project on ‘Primary Financial Statements’, one of the aims of which is to prescribe the structure of the statement or profit or loss.  For the purpose of this survey, it is assumed that the statement of profit or loss will include the following components:

  1. Operating profit or loss - The results of the entity’s core operations.  Line items within this component will include revenue from customers, cost of goods sold and other operating expenses. 
  2. Non-operating income and expense - Income and expenses that are not operating in nature. 
  3. Interest income and expense
  4. Taxation

 
These assumptions are not intended to pre-judge whether ‘Interest income or expense’ should include only that which relates to financing assets and liabilities (such as debt, bonds held as investments) or also that which relates to other items, such as pension obligations or other provisions. 

We also assume that:

  • The total of these four components will equal ‘profit or loss’ or ‘earnings’. 
  • Unusual or non-recurring items will be included in one of these four components rather than in a separate component, but will be separately disclosed. 
  • The entity is a manufacturing or trading entity, and not a financial institution such as a bank or insurance company. 


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