The operating profit ‘free-for-all’ may end with new IASB presentation standards

BVWire–UKIssue #15-1
June 2, 2020

business valuation standards & regulations
fair value accounting, international valuation standards, fair value, income approach, cash flow, discounted cash flow (DCF), accounting

Financial analysts often start DCF valuations with ‘operating profit’ as stated on the enterprise’s income statement and then adjust prior to deriving enterprise values. Many valuations have run into audit (and legal) problems because operating profit is not defined in IFRS, so many experts have failed to reconcile differences. These difficulties in comparing results finally led the IASB to issue IASB Exposure Draft: General Presentation and Disclosures on the presentation of operating profit last December. UK business valuers can now review (and submit comments on) this new statement.

As usual, one of the best places to turn for thoughtful examination of the valuation issues these proposals created is ‘The Footnotes Analyst,’ written by Steve Cooper and Dennis Jullens, both of whom spent significant time at the IASB. Both support the Exposure Draft in principle, since previously so little guidance on income statement subtotals has been available, and NOPAT or EBITDA calculations may in fact start from different places, given the preferences of the valued entity. They hope the new presentation will provide ‘consistency and comparability at last,’ since:

[I]f enacted … companies would be required to present pre-tax income and expenses in three main categories: operating, investing and financing. The operating category is further split into operating profit and income from integral associates and joint ventures.… We strongly support the introduction of a mandatory subtotal ‘operating profit.’ This should improve comparability for investors and better facilitate equity valuation.

The following sample version of the new income statement presentation is included in the IASB’s Exposure Draft.

Exposure Draft

Source: IASB Exposure Draft: General Presentation and Disclosures, December 2019

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