LATEST MATTERS FROM THE INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)
The following is a summarised update of key matters arising from the discussions and decisions taken by the IASB at its meetings on the following dates:
- 24-26 January 2023
- 20-24 February 2023
- 20-24 March 2023
The full update, as published by the IASB, can be found here.
MAINTENANCE AND CONSISTENT APPLICATION
1. SUPPLIER FINANCE ARRANGEMENTS
The IASB tentatively decided to require an entity to apply the requirements from periods beginning on or after 1 January 2024. The IASB recognised the urgent need for additional disclosures in IAS 7 and IFRS 7 on supplier finance arrangements.
To address some earlier concerns of raised by Board members on the accelerated timetable for the publication and adoption of the amendments and to balance the need to provide information to the users of financial statements on supplier finance arrangements, the IASB tentatively decided:
a) To permit earlier application and disclose this fact
b) Comparative information will not be required to be disclosed in the reporting period that the amendments are first applied
c) In the first period the amendment is applied, entities will not be required to disclose:
i. Carrying amount of financial liabilities that are part of a supplier finance arrangement for which suppliers have already received payment from the finance providers
ii. The range of payment due dates for financial liabilities that are part of a supplier finance arrangement and comparable trade payables that are not part of a supplier finance arrangement
d) not to require the disclosures required by the amendments for any interim financial reports within the annual period in which an entity first applies the amendments.
The IASB expects to issue the amendments in the second quarter of 2023.
The IASB discussed its proposed amendments to IAS 7 Statement of Cash Flows and IFRS 7 Financial Instruments: Disclosures. The proposed amendments would add disclosure requirements about an entity’s supplier finance arrangements. The IASB tentatively decided to require an entity to apply the amendments for annual reporting periods beginning on or after 1 January 2024.
2. CLIMATE-RELATED RISKS IN THE FINANCIAL STATEMENTS
In the March 2023 meeting, the IASB agreed to start a narrow scope joint project with the ISSB on Climate-related risks in the Financial Statements. The purpose of the project is to explore whether, and if so how, financial statements can better communicate information about climate-related risk.
The initial project work will be consultation with IASB committees and external stakeholders to:
- Explore the nature of perceived shortcomings with financial statements in communicating information about climate-related risk;
- Consider whether requirements in accounting standards are sufficiently clear, and whether and how the effects of climate-related risks should be considered when preparing an entity’s financial statements;
- Identify the reasons why entities may not consider the effects of climate-related risks when applying the requirements of accounting standards; and
- Possible courses of action available to the IASB
This will consider current educational material on climate-related risks in financial statements. The intention is for this to be a narrow-scope project.
RESEARCH AND STANDARD SETTING
1. EQUITY METHOD
In the January 2023 meeting, the IASB discussed applying the equity method to determine how an investor should recognise gains and losses that arise from the sale of a subsidiary to its associate, applying the requirements of IFRS 10 and IAS 28. In a transaction where an investor sells a subsidiary to its associate:
a) Paragraph 25 and B97-B99 of IFRS 10 requires the investor to recognise the full gain or loss on the loss of control of a subsidiary, remeasuring any retained interest, if any, at fair value; whereas
b) Paragraphs 28 and 30 of IAS 28 require an investor to restrict the gain or loss recognised to the extent of the unrelated investors’ interests in its associate.
The IASB discussed papers setting out four alternative approaches to the application question and stakeholder feedback on the four approaches.
- Alternative 1 – Applying IFRS 10 to all contributions and sales. This approach would require an investor to recognise the full gain or loss on all contributions and sales of assets or businesses, regardless of whether they are housed in a subsidiary or not – under this alternative, no elimination entries’ requirements apply.
- Alternative 2 – Apply IFRS 10 and then IAS 28 to all contributions and sales. This would require an investor to recognise a partial gain or loss on all contributions and sales of assets or businesses, regardless of whether they are housed or not in a subsidiary—under this alternative, the requirements of IFRS 10 and IAS 28 are both applied to the transaction
- Alternative 3 – apply IFRS 10 depending on whether contributions and sales are an output of ordinary activities or not. This would require an investor to recognise:
- a) partial gain or loss on transactions in the scope of IFRS 15 Revenue from Contracts with Customers; and
- b) the full gain or loss on transactions outside the scope of IFRS 15.
- Alternative 4 – apply IFRS 10 for contributions and sales of businesses and IAS 28 for sales of assets. This 4 would revive the 2014 Amendment and would require an investor to recognise:
- a) the full gain when a transaction involves a business; and
- b) a partial gain when a transaction involves an asset.
The Board discounted Alternative 3 and 4. The discussion focused on Alternative 1 and 2 as possible approaches to address the application question. The consensus was that Alternative 1 and Alternative 2 should be explored further with subsequent papers to the board to include examples of the accounting and disclosure under both approaches, how widely both approaches are applied in practice, consultation with investors/users on which alternative provided more useful information and how Alternative 1 and 2 applies the principals of IAS 28.
The IASB will redeliberate the two preferred Alternatives at subsequent meetings.
In March 2023, the IASB continued its discussions on the application questions within the scope of the Equity Method project.
Purchase of an additional interest in an associate while retaining significant influence
The IASB tentatively decided to propose that, when applying IAS 28 Investments in Associates and Joint Ventures, an investor purchasing an additional interest in an associate while retaining significant influence would recognise any difference between the cost of the additional interest and its additional share in the net fair value of the associate’s identifiable assets and liabilities either as goodwill, or as a gain from a bargain purchase.
Perceived conflict between IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures
The IASB tentatively decided:
a) to propose that an investor, in applying IAS 28, would recognise the full gain or loss on all transactions with its associate.
b) to propose improvements for the disclosure requirements when an investor recognises the full gain or loss on transactions with its associate.
The IASB will continue its discussions on the application questions within the scope of the project.
2. BUSINESS COMBINATIONS – DISCLOSURES, GOODWILL AND IMPAIRMENT
In January 2023, the IASB continued their discussion on the project, focusing on:
- exemptions from disclosure requirements; and
- disclosures relating to synergies expected from a business combination
The IASB discussed exemption from disclosure requirements which an entity would be allowed to use the exemption from disclosing a particular item of information if it would seriously prejudice any of the entity’s objectives for the business combination. The IASB tentatively decided:
a) to require an entity to disclose a qualitative statement of whether actual performance of a business combination in subsequent periods met the entity’s target for the business combination; and
b) to permit an entity to apply the exemption agreed in this meeting to that qualitative statement.
The IASB also decided to propose application guidance to help entities apply the exemption from disclosure requirements.
The IASB discussed expected synergies and tentatively decided:
a) to disclose quantitative information about expected synergies by category (for example, total revenue synergies, total cost synergies and the total for each other type of synergy).
b) to consider, for any case in which a disclosure of totals by category would qualify for an exemption, whether disclosure as a total for all categories could remove the reason for applying the exemption to the total by category and, if so, to disclose the total of all categories.
c) to describe the synergies by specifying each category of expected synergy.
d) to disclose when the benefits expected from the synergies are expected to start and how long they will last. This disclosure would require an entity to identify whether the synergies are expected to be finite or indefinite.
In February 2023, the IASB continued their discussion on the project, focusing on a management approach to disclosing information about the subsequent performance on a business combination. On the management approach, the IASB tentatively decided:
a) to specify a level of management within an entity to identify the information the entity is required to disclose about the subsequent performance of business combinations; and
b) to describe that level of management as the key management personnel of the reporting entity, as defined in IAS 24 Related Party Disclosures.
On other aspects of the management approach, the IASB tentatively decided:
a) to maintain its preliminary view that an entity be required to disclose information about the subsequent performance of a business combination for as long as the entity’s management continues to monitor whether the objectives of the business combination are being met (that is, the entity’s management compares actual performance with the entity’s objectives and targets for the business combination it established when entering into the business combination).
b) to maintain its preliminary view that if an entity’s management does not monitor whether its objectives for a business combination are being met, the entity should disclose that fact and the reasons why it does not do so.
c) to maintain its preliminary view that if an entity’s management stops monitoring, before the end of the second full year after the year of the business combination, whether its objectives for a business combination are being met, the entity should disclose that fact and the reasons why it has done so.
d) to propose that an entity whose management stops monitoring, before the end of the second full year after the year of the business combination, whether its objectives for a business combination are being met, be required to disclose information about actual performance. The entity will be required to disclose information using the metric set out in the year of acquisition, if (and only if) information about actual performance using that metric is being received by the entity’s management.
e) to permit an entity to disclose information about its targets for a business combination as a range or a point estimate.
f) to clarify that an entity will be required to disclose only information about its key objectives—that is, the objectives critical to the success of the business combination.
The IASB tentatively decided not to proceed with its preliminary view relating to the information that an entity would be required to disclose if it changed the metric its management uses to monitor whether the objectives for the business combination are being met.
The IASB will make tentative decisions on matters including:
a) clarifying other aspects of the disclosure requirements for business combinations;
b) reducing the cost and complexity of applying the impairment test of cash-generating units in IAS 36 Impairment of Assets; and
c) improving the effectiveness of the impairment test of cash-generating units containing goodwill.
Once the IASB has made tentative decisions on all aspects of the project, it will consider whether the package of decisions meets the project objective and whether to publish an exposure draft setting out its proposals.
In its meeting in March, the IASB continued its discussions on its project on Business Combinations—Disclosures, Goodwill and Impairment. In particular, the IASB discussed:
• some potential changes to IAS 36 Impairment of Assets to reduce the cost and complexity of the impairment test of cash-generating units containing goodwill; and
• the potential removal of some disclosure requirements from IFRS 3 Business Combinations.
Estimating value in use
On IAS 36, the IASB tentatively decided to propose:
a) to remove a constraint on cash flows used to estimate value in use. An entity would no longer be prohibited from including cash flows:
i. arising from future restructuring to which the entity is not yet committed; or
ii. from improving or enhancing an asset’s performance.
b) to retain the requirement to assess assets or cash-generating units in their current condition.
c) to add no additional constraints on the inclusion of those cash flows beyond those already in IAS 36.
The IASB also tentatively decided to propose:
a) to remove from IAS 36 the requirement to use pre-tax cash flows and pre-tax discount rates in estimating value in use;
b) to require an entity to use internally consistent assumptions for cash flows and discount rates regardless of whether value in use is estimated on a pre-tax or post-tax basis;
c) to retain the requirement to disclose the discount rates used;
d) to remove the requirement that the discount rate disclosed be a pre-tax rate; and
e) to require an entity to disclose whether a pre-tax or a post-tax discount rate was used in estimating value in use.
Other suggestions to reduce cost and complexity
The IASB tentatively decided:
a) not to add more guidance to IAS 36 about the difference between:
i. value in use; and
ii. fair value less costs of disposal; and
b) not to mandate a single method for measuring recoverable amount.
The IASB also tentatively decided:
a) not to provide additional guidance on performing the impairment test for entities in the financial services sector; and
b) not to provide additional guidance to clarify the interaction between IAS 36 and either IFRS 13 Fair Value Measurement or IAS 21 The Effects of Changes in Foreign Exchange Rates.
Deleting disclosure requirements
The IASB tentatively decided to remove from IFRS 3 requirements to disclose:
a) information about acquired receivables (paragraph B64(h));
b) in the reconciliation between opening and closing goodwill balances, adjustments resulting from the subsequent recognition of deferred tax assets (paragraph B67(d)(iii)); and
c) the amount and an explanation of any material gain or loss recognised in the current reporting period that relates to the identifiable assets acquired or liabilities assumed in a business combination that was effected in the current or previous reporting period (paragraph B67(e)).
The IASB tentatively decided to make no changes to the requirements to disclose:
a) the amount of goodwill expected to be deductible for tax purposes (paragraph B64(k) of IFRS 3);
b) information about acquisition-related costs (paragraph B64(m) of IFRS 3);
c) information about business combinations completed after the end of the reporting period (paragraph B66 of IFRS 3); and
d) in interim financial statements, information about business combinations (paragraph 16A(i) of IAS 34 Interim Financial Reporting).
The IASB will make tentative decisions on matters including:
a) reducing the cost and complexity of the impairment test in IAS 36;
b) improving the effectiveness of the impairment test of cash-generating units containing goodwill; and
c) clarifying other aspects of the package of disclosure requirements for business combinations.
Once the IASB has made tentative decisions on all aspects of the project, it will consider whether the package of decisions meets the project objective and whether it will publish an exposure draft setting out its proposals.
3. PRIMARY FINANCIAL STATEMENTS
In its January 2023 meeting, the IASB continued discussions on proposals in the exposure draft General Presentation and Disclosures published in 2019. This exposure draft seeks to improve how information is communicated in the financial statements with a focus on financial performance.
As a result of outreach feedback, the IASB has added four topics to its redeliberation plan:
a) whether it should reconfirm its decision on classification of income and expense from associates and joint ventures accounted for using the equity method;
b) whether it should develop application guidance for classifying income and expense from off-balance-sheet items;
c) whether it should develop guidance for including interest expense on lease liabilities in operating profit if subleasing is a main business activity; and
d) whether it should develop further application guidance for the proposed rebuttable presumption in the definition of management performance measures.
General disaggregation requirements
On disaggregation of material information, the IASB tentatively decided to add an exemption to the general requirement to disaggregate material information. The exemption would apply to information about the nature of operating expenses included in a function line item in the statement of profit or loss.
On the general disaggregation requirements, the IASB tentatively decided:
a) to clarify that an entity is required to:
i. describe disaggregated amounts in a clear and understandable way that would not mislead users of financial statements; and
ii. be transparent about the meaning of the terms it has used and the methods it has applied to the disaggregation
b) to add a requirement that any line items an entity presents in its statement(s) of financial performance and statement of financial position are recognised and measured in accordance with IFRS Accounting Standards.
c) not to prohibit an entity from disaggregating income and expenses in the notes to the financial statements into components not recognised or measured in accordance with IFRS Accounting Standards.
d) to extend the proposals in the Exposure Draft relating to the label ‘other’ to require an entity to use this label only if it is unable to find a more informative label. If an entity is unable to find a more informative label:
i. for an aggregation of varied material items—the IASB would require it to use a label that is as precise as possible about the type of item the ‘other’ amount is, for example, ‘other operating expenses’ or ‘other finance expenses’.
ii. for an aggregation of varied immaterial items—the IASB would require an entity to consider whether the aggregated amount is large enough that users of financial statements might question what it includes. If so, further information about that amount is material and accordingly would be provided by the entity.
e) to include as examples of material information about the amount described in (d)(ii):
i. an explanation that no material items are included in the amount.
ii. an explanation that the amount consists of several unrelated immaterial items with an indication of the nature and amount of the largest item.
Other comprehensive income
The IASB tentatively decided to withdraw the proposal to relabel the two categories of other comprehensive income as:
a) remeasurements permanently reported outside profit or loss; and
b) income and expenses to be included in profit or loss in the future when specific conditions are met.
Statement of cash flows – interest received and classification for entities with specified main business activities
The IASB tentatively decided:
a) to confirm the proposal in the Exposure Draft to require an entity without a specified main business activity to classify in the statement of cash flows interest received as ‘cash flows arising from investing activities’.
b) to confirm the proposals in the Exposure Draft to require an entity with a specified main business activity to classify some cash flows within a single category of the statement of cash flows (that is, as cash flows from either operating, investing or financing activities). These cash flows are:
i. dividends received (other than dividends received from associates and joint ventures accounted for using the equity method);
ii. interest paid; and
iii. interest received.
In the March 2023 meeting, the IASB continued to redeliberate the proposals in its Exposure Draft General Presentation and Disclosures relating to:
• disclosure of operating expenses by nature;
• management performance measures;
• categories in the statement of profit or loss; and
• entities with specified main business activities.
Disclosure of operating expenses by nature in the notes (Agenda Paper 21A)
The IASB tentatively decided:
a) to change the specific disclosure requirement for operating expenses by nature proposed in the Exposure Draft to require an entity to disclose the amounts of depreciation, amortisation, employee benefits, impairments and write-downs of inventory included in each function line item in the statement of profit or loss.
b) to confirm the proposal in the Exposure Draft that an entity would disclose the information described in (a) in a single note.
c) to provide application guidance clarifying that the amounts described in (a) are not required to be expense amounts.
d) to require an entity to provide a qualitative explanation if part of the amount disclosed has been included in the carrying amount of assets. The explanation would include identifying in which assets the amounts have been included.
e) to expand the scope of the proposed exemption from the general requirement to disaggregate material information that the IASB tentatively decided on in January 2023. As a result, an entity would be exempt from disclosing:
i. in relation to function line items in the statement of profit or loss, the amounts of nature expenses included therein (beyond those specifically required); and
ii. in relation to nature expenses that are required to be disclosed by an IFRS Accounting Standard, the amounts included in each function line item in the statement of profit or loss.
Management performance measures—rebuttable presumption
The IASB previously tentatively decided to introduce a rebuttable presumption that a subtotal of income and expenses included in an entity’s public communications outside the financial statements represents management’s view of an aspect of the entity’s financial performance. The IASB also previously tentatively decided to add application guidance about what reasonable and supportable information the entity would need to rebut the presumption.
The IASB tentatively decided to develop further the application guidance to explain that reasonable and supportable information for rebutting the presumption would include management communicating or using a subtotal in a way that is consistent with the assertion that the subtotal does not communicate management’s view. The IASB also tentatively decided to include some examples of when this could be the case.
Management performance measures—Relationship with the requirements of other IFRS Accounting Standards
In relation to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the IASB tentatively decided:
a) to confirm the proposal that if an entity changes the calculation of its management performance measures, introduces a new management performance measure or removes a previously disclosed management performance measure from its financial statements, it would be required:
i. to disclose sufficient explanation for users of financial statements to understand the change, addition or removal and its effects; and
ii. to disclose the reasons for the change, addition or removal (see paragraphs 108(a) and 108(b) of the Exposure Draft).
b) to amend the proposed disclosure requirement in paragraph 108(c) of the Exposure Draft to say that an entity need not provide comparative information when the entity changes a management performance measure or introduces a new one, if it is impracticable to do so.
c) to add a requirement that if an entity does not provide comparative information about a new or changed management performance measure because it is impracticable to do so, the entity shall disclose that fact.
d) to clarify that the choice of a management performance measure, including how the measure is calculated, is not an accounting policy as defined in IAS 8.
In relation to IAS 34 Interim Financial Reporting, the IASB tentatively decided:
a) to confirm the proposal to amend IAS 34 to require the disclosure in interim financial reports of the management performance measures set out in paragraph 106 of the Exposure Draft.
b) to expand the proposed amendment to IAS 34 to include the requirements that apply to changes in an entity’s management performance measures (see paragraph 108 of the Exposure Draft) in the list of ‘other disclosures’ required by paragraph 16A of IAS 34.
Management performance measures—tax disclosure
The IASB continued a discussion begun at its May 2022 meeting on the requirement to disclose the tax effect of reconciling items, and tentatively decided:
a) to retain the option of calculating the tax effects of the reconciling items at the statutory tax rate(s) applicable to the underlying transaction(s) in the relevant jurisdiction(s);
b) to replace the alternative option of adding an allocation of other income tax effects to the tax effects described in (a), with options:
i. to calculate the tax effects of the reconciling items on the basis of a reasonable pro rata allocation of the current and deferred tax of the entity in the tax jurisdiction(s) concerned; or
ii. to calculate the tax effects of the reconciling items by another method that achieves a more appropriate allocation in the circumstances;
c) to confirm the requirement in paragraph 106(d) of the Exposure Draft for an entity to disclose how it has determined the income tax effects for items reconciling a management performance measure to the most directly comparable subtotal or total specified by IFRS Accounting Standards;
d) to provide application guidance requiring the disclosure in (c) for each reconciling item if more than one method is used to calculate the tax effect; and
e) to revise the requirements in paragraph 108 of the Exposure Draft for disclosures relating to changes in management performance measures so that they apply to changes to the calculation of the tax effects of reconciling items.
Issues for categories in the statement of profit or loss
The IASB tentatively decided:
a) to require an entity to use its judgement to determine in which category in the statement of profit or loss to classify foreign exchange differences on a liability that arises from a transaction that involves operating activities in addition to the raising of finance.
b) to require an entity to classify in the financing category of the statement of profit or loss all income and expenses arising after initial recognition from hybrid contracts:
i. with host liabilities that arise from transactions that do not involve only the raising of finance; and
ii. that are measured at amortised cost in their entirety.
Issues related to the proposals for entities with specified main business activities
The IASB tentatively decided:
a) to confirm the accounting policy choice proposed in paragraph 51 of the Exposure Draft for the classification of income and expenses arising from cash and cash equivalents for entities that provide financing to customers as a main business activity; and
b) to clarify that the requirement in paragraph 52(a) of the Exposure Draft applying to an entity that invests in financial assets as a main business activity would apply regardless of whether the entity has any other specified main business activity.
The IASB will continue to redeliberate the project proposals.
4. DISCLOSURE INITIATIVE – SUBSIDIARIES WITHOUT PUBLIC ACCOUNTABILITY
The IASB continued to redeliberate the proposals in its Exposure Draft Subsidiaries without Public Accountability: Disclosures to develop a new IFRS Accounting Standard (new Standard).
Transition – Interaction between IFRS 1 and new Standard
The IASB tentatively decided to include in the new Standard:
a) reduced disclosure requirements for IFRS 1 First-time Adoption of International Financial Reporting Standards; and
b) an explanation of the relationship between IFRS 1 and the new Standard.
Transition – changes in accounting policies
The IASB tentatively decided that a subsidiary that elects to apply the new Standard, revokes an election to apply the new Standard or is no longer eligible to apply the new Standard:
a) does not apply the requirements in IAS 8 on changes in accounting policies; and
b) is not required to present a third statement of financial position at the beginning of the earliest period presented.
In the March IASB meeting, the IASB discussed the interaction between the Reduced Disclosures Standard (ED on Subsidiaries without Public Accountability: Disclosures) and the IFRS for SMEs Standard. Feedback on the interaction between the Reduced Disclosures Standard and IFRS for SME’s included:
• whether entities applying IFRS for SMEs need to participate in the due process for amendments to the Reduced Disclosures Standard; and
• whether there are mixed signals on the interaction between the Reduced Disclosure Standard and the IFRS for SMEs
The IASB discussed the ongoing relationship between the Reduced Disclosure Standard and the IFRS for SMEs Standard:
New or Amended IFRS Accounting Standard
Reduced Disclosure Standard IFRS for SMEs Standard
Next IFRS for SMEs comprehensive review
Propose consequential amendments to the Reduced Disclosure Standard applying the Principles for reducing the disclosure requirements and cost-benefit analysis for subsidiaries If the IFRS for SMEs is updated for the new or amended IFRS Accounting Standard, start with the disclosure requirements in the Reduced Disclosure Standard and tailor for recognition and measurement differences and cost-benefit for SMEs
Obtain feedback and issue consequential amendment to the Reduced Disclosure Standard Obtain feedback and issue updated IFRS for SMEs Standard
IASB to consider if feedback from comprehensive review of IFRS for SMEs affects the Reduced Disclosure Standard
There will be separate consultation for updating the Reduced Disclosure Standard and the IFRS for SMEs. These two standards are likely to have different disclosure requirements due to the differences in recognition and measurement, and differences in the cost-benefit analysis.
5. FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF EQUITY
The IASB met on 22 February 2023 to discuss:
• sweep issues on classification and presentation topics in the project plan; and
• the potential development of specific presentation requirements for equity instruments that are within the scope of IAS 32 Financial Instruments: Presentation.
Classification and presentation—Sweep issues
The IASB discussed how an entity would apply the fixed-for-fixed condition in classifying convertible bonds if the holder had a choice between two fixed conversion ratios with different types of own shares.
The IASB tentatively decided to amend the foundation principle, tentatively agreed in April 2020, which clarifies when the fixed-for-fixed condition is met. The foundation principle, as amended, states the condition is met if the entity knows how many functional currency units it will exchange per type of own share if the option is exercised.
The IASB discussed the need for consistency in the use of the term ‘reclassification’ in IAS 32. The IASB also discussed when an entity applying the proposed general requirements tentatively agreed in June 2022 would account for a reclassification between financial liabilities and equity instruments. The IASB tentatively decided:
a) to replace ‘reclassified’ and ‘reclassification’ with alternative wording in paragraph 23 of IAS 32.
b) to require an entity to make a reclassification at the date of the change in circumstances that necessitated the reclassification. However, the IASB will ask a question in the forthcoming exposure draft to assess the practical considerations of this requirement.
The effects of laws on the contractual terms
The IASB discussed stakeholder feedback on the proposed principles (tentatively agreed in December 2021) that an entity would be required to apply in determining whether rights and obligations arising from a legal requirement are considered in classifying a financial instrument as a financial liability or equity instrument.
The IASB tentatively decided to simplify the proposed principles by requiring an entity to consider, in classifying a financial instrument, only enforceable contractual terms that give rise to rights and obligations in addition to, or more specific than, those established by applicable law.
Obligations to redeem own equity instruments
The IASB discussed whether to amend IAS 32:
a) to clarify further the requirements on accounting for financial instruments containing obligations for an entity to redeem its own equity instruments, including written put options on non-controlling interests; and
b) to ensure consistency between these requirements and the requirements on accounting for financial instruments containing contingent settlement provisions in paragraph 25 of IAS 32.
The IASB tentatively decided:
a) to clarify in paragraph 23 of IAS 32 that, when remeasuring the financial liability, an entity is required to recognise gains or losses in profit or loss;
b) to clarify that an entity is required to use the same approach for initial and subsequent measurement of financial liabilities within the scope of paragraph 23 of IAS 32—that is, the entity would ignore the probability and estimated timing of the holder exercising the written put option in initial and subsequent measurement;
c) to clarify that an entity is required to use the same approach for initial and subsequent measurement of financial liabilities within the scope of paragraph 25 of IAS 32—that is, the entity would ignore the probability and estimated timing of the contingent event in initial and subsequent measurement; and
d) to remove from paragraph 23 of IAS 32 the reference to IFRS 9 Financial Instruments about subsequent measurement.
Presentation of financial liabilities containing contractual obligations to pay amounts based on an entity’s performance or changes in the entity’s net assets
The IASB discussed how the proposed disclosure requirement tentatively agreed in December 2022 relates to the presentation requirement in paragraph 41 of IAS 32. The IASB tentatively decided to delete the second sentence of paragraph 41 of IAS 32.
The IASB also discussed how to articulate the proposed factors an entity considers in assessing whether a shareholder decision is treated as an entity decision. This assessment is necessary to determine whether the entity has an unconditional right to avoid delivering cash (or settling a financial instrument in such a way that it would be a financial liability). The IASB had tentatively agreed to the proposed factors in February 2022; therefore, it was not asked to make any further decisions.
Presentation of equity instruments
The IASB discussed potential presentation requirements to meet the needs of users of financial statements (particularly investors in ordinary shares), which include:
a) transparency about whether an entity has issued other instruments classified as equity; and
b) clear distinction of the returns to ordinary shareholders.
The IASB tentatively decided to amend the requirements in IAS 1 to ensure amounts attributable to ordinary shareholders are clearly visible on an entity’s statement of financial position, statement(s) of financial performance and statement of changes in equity. These amendments would require an entity to present:
a) line items on issued capital and reserves attributable to ordinary shareholders of the parent separately from issued capital and reserves attributable to other owners of the parent in the statement of financial position (paragraph 54(r) of IAS 1);
b) each class of ordinary share capital separately from each class of other contributed equity in the statement of changes in equity (paragraph 108 of IAS 1);
c) profit or loss and comprehensive income for the period attributable to ordinary shareholders of the parent separately from the respective amounts attributable to other owners of the parent in the statement(s) of financial performance (paragraph 81B of IAS 1); and
d) the amount of dividends recognised as distributions to ordinary shareholders separately from dividends recognised as distributions to other owners during the period, and also present the related amount of dividends per share, either in the statement of changes in equity or in the notes (paragraph 107 of IAS 1).
The IASB will discuss the remaining topics set out in the project plan.
6. POST-IMPLEMENTATION REVIEW OF IFRS 9 – IMPAIRMENT
The IASB discussed the feedback from stakeholders on the first phase of the PIR of impairment requirements in IFRS 9 Financial Instruments and credit risk disclosure in IFRS 7 Financial Instruments Disclosures. The key messages from academic research on the impairment requirements included:
- that application of ECL model resulted in more allowances for credit losses on transition to IFRS 9;
- applying the ECL model resulted in more timely recognition of loss allowances for credit losses; and
- mixed evidence on whether application of judgement in the ECL model led to increased earnings management following implementation of IFRS 9.
Outreach feedback on 3 key areas of ECL:
- applying the general approach
- determining significant increases in credit risk; and
- measurement of ECL
Overall, the research confirmed that the ECL requirements have resolved the problems that they were designed to address, with earlier recognition of credit losses. Applying the requirements in periods of economic stress (COVID pandemic) has confirmed that the principals of the model are adequate and provide reasonable outcomes.
The RFI will include post ECL model adjustments to research and outreach to obtain an understanding of post model adjustments and whether additional disclosures are required to explain post model adjustments.
On the simplified approach, the IASB decided it was important to understand how forward-looking information was incorporated into models.
The IASB decided that the following questions will be in the RFI:
a) the general approach to recognising expected credit losses (ECL), specifically:
i. the effects of the approach on the usefulness of information about changes in credit risk to the users of the financial statements; and
ii. the costs and benefits of applying the approach to particular transactions, such as inter-company loans;
b) significant increases in credit risk, specifically:
i. the use of judgement in determining significant increases in credit risk; and
ii. the evidence about the causes of and the extent of diversity in how entities assess significant increases in credit risk;
c) the measurement of ECL, specifically:
i. using multiple forward-looking scenarios; and
ii. measuring ECL in periods of enhanced economic uncertainty, including the use of post-model management adjustments or overlays;
d) the prevalence of questions from entities on how to apply the ECL requirements for purchased or originated credit-impaired financial assets;
e) the simplified approach to recognising ECL for trade receivables, contract assets and lease receivables, specifically:
i. the effects of the relief provided by the IASB through this approach; and
ii. the inclusion of forward-looking information when applying this approach;
f) the accounting for loan commitments, collateral and other credit enhancements held and financial guarantee contracts issued that are within the scope of IFRS 9;
g) the application of the ECL requirements in combination with other requirements in IFRS 9 or in other IFRS Accounting Standards;
h) the effects of transition reliefs provided by the IASB and the balance between reducing costs for preparers of financial statements and providing useful information to users of financial statements; and
i) the credit risk disclosure requirements in IFRS 7, specifically:
i. whether the combination of disclosure principles and minimum disclosure requirements achieves an appropriate balance between comparable information and relevant information for users of financial statements about the effect of credit risk on the amount, timing and uncertainty of future cash flows; and
ii. the compatibility of the requirements with digital reporting.
7. POST IMPLEMENTATION REVIEW OF IFRS 15
The IASB met on 22 March 2023 to discuss findings from Phase 1 of the Post-implementation Review of IFRS 15 Revenue from Contracts with Customers, feedback from stakeholders and a review of academic literature.
The IASB discussed which matters to ask stakeholders about in the request for information it plans to publish to inform the next phase of the Post-implementation Review.
IFRS 15 as a whole and convergence with the US Financial Accounting Standards Board’s Topic 606
The IASB tentatively decided to ask stakeholders about their views on IFRS 15 as a whole, including:
a) whether IFRS 15 meets its overall objective;
b) the clarity and suitability of the core principle of the Standard and the five-step revenue recognition model for making revenue accounting decisions;
c) their suggestions for specific narrow-scope improvements for the IASB to consider that could improve the understandability of IFRS 15 without causing substantial cost and disruption to entities already applying the Standard;
d) their feedback from the implementation of IFRS 15 for the IASB to consider in improving the understandability and accessibility of future Standards; and
e) the ongoing costs and benefits of applying the requirements in IFRS 15.
The IASB also tentatively decided to ask stakeholders about the importance of retaining convergence between IFRS 15 and the Financial Accounting Standards Board’s Topic 606 Revenue from Contracts with Customers.
The five steps of revenue recognition and related areas
The IASB tentatively decided to ask stakeholders for any fact patterns in relation to which:
a) guidance on identifying performance obligations in a contract:
i. is applied inconsistently;
ii. leads to outcomes that do not reflect the underlying economic substance; or
iii. leads to significant ongoing costs;
b) guidance on determining the timing of revenue recognition is unclear or may be applied inconsistently—particularly with respect to the criteria for recognising revenue over time;
c) guidance on determining whether an entity is a principal or an agent is unclear or may be applied inconsistently; or
d) guidance on accounting for licensing is unclear or may be applied inconsistently.
The IASB tentatively decided to ask stakeholders about:
a) evidence of diversity in practice in determining the transaction price in a contract, specifically in relation to consideration payable to customers;
b) disclosure requirements, including the costs of meeting those requirements and the benefits of the resulting information to users of financial statements; and
c) transition requirements—specifically:
i. whether the option to use the modified retrospective method and the practical transition reliefs offered by IFRS 15 were used by preparers of financial statements; and
ii. whether they achieved an appropriate balance between reducing the cost and burden for preparers of financial statements and providing useful information to users of financial statements.
The IASB tentatively decided against asking stakeholders about evidence of diversity in practice in determining the transaction price in a contract in relation to sales-based taxes.
Interaction with other IFRS Accounting Standards
The IASB tentatively decided to ask stakeholders about the application of IFRS 15 alongside other IFRS Accounting Standards, focusing on IFRS 3 Business Combinations, IFRS 9 Financial Instruments and IFRS 16 Leases.
Twelve of 13 IASB members agreed with the decisions in relation to IFRS 9 and IFRS 16.
Nine of 13 IASB members agreed with the decision in relation to IFRS 3.
The IASB tentatively decided against asking stakeholders about the application of IFRS 15 alongside IFRS 10 Consolidated Financial Statements but directed the staff to include an explanation of this decision in the request for information.
The IASB plans to approve the publication of the request for information and set a comment period.