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 remote meetings on the following dates:
15-19 November 2021
25-28 December 2021
The full update, as published by the IASB, can be found here.
POST-IMPLIMENTATION REVIEW “PIR”
The IASB decided that in the second half of 2022 it will:
- Begin the PIRs of IFRS 15 and the impairment requirements in IFRS 9; and
- Consider when to begin the PIRs of IFRS 16 and the hedge accounting requirements in IFRS 9.
RESEARCH AND STANDARD SETTING
Dynamic Risk Management
The IASB discussed the refinements to the Dynamic Risk Management model (DRM model) to address challenges identified during meetings with preparers.
To enable an entity to better reflect its risk management strategy in the DRM model, the IASB tentatively decided:
- to revise the definition of the target profile as the range (risk limits) within which the current net open risk position can vary while still being consistent with an entity’s risk management strategy;
- to introduce to the DRM model a ‘risk mitigation intention’ element, representing the extent of risk an entity intends to mitigate using derivatives;
- to revise the requirements for construction of benchmark derivatives so that the benchmark derivatives represent the risk mitigation intention; and
- to introduce prospective assessments to ensure that an entity uses the DRM model to mitigate repricing risk due to changes in interest rates and achieve its target profile, as well as similar retrospective assessments to reflect misalignment arising from unexpected changes in the DRM model.
Goodwill and Impairment
The IASB met to redeliberate aspects of the IASB’s preliminary views on improving the disclosure requirements in IFRS 3 Business Combinations. (The Discussion Paper Business Combinations—Disclosures, Goodwill and Impairment sets out the IASB’s preliminary views on this matter.)
Expected synergies arising from a business combination
The IASB discussed aspects of the feedback on its preliminary view of requiring an entity to disclose (a) the estimated amount or range of amounts of the synergies, and (b) when the synergies are expected to be realised.
To understand better the practical concerns raised by respondents the IASB is testing examples with stakeholders. For the purpose of testing those examples the IASB decided that the examples should illustrate disclosure of information about:
- total expected synergies disaggregated by nature; for example, total revenue, total cost and totals for other types of synergies; and
- when the benefits expected from the synergies are expected to start and how long they will last (which would require an entity to identify whether those synergies are expected to be one-off or recurring).
The IASB also tentatively decided:
- not to define ‘synergies’.
- not to make changes to its preliminary view as a result of feedback on other specific aspects of its preliminary view.
Contribution of the acquired business
The IASB tentatively decided:
- to retain the requirement in paragraph B64(q) of IFRS 3.
- to explain the objective of the requirement in paragraph B64(q)(ii) of IFRS 3 but not to provide guidance on how the information required by paragraph B64(q)(ii) should be prepared.
- to specify in paragraph B64(q)(ii) of IFRS 3 that the basis that an entity applies in preparing the information required by that paragraph is an accounting policy.
- to replace the term ‘profit or loss’ in paragraph B64(q) of IFRS 3 with ‘operating profit or loss’. ‘Operating profit or loss’ will be as defined in the IASB’s Primary Financial Statements project.
- not to add a requirement to disclose information about cash flows arising from operating activities.
Liabilities arising from financing activities and defined benefit pension liabilities
The IASB discussed feedback on its preliminary view on developing proposals to specify that liabilities arising from financing activities and defined benefit pension liabilities are major classes of liabilities. The IASB tentatively decided to achieve the objective of its preliminary view by not specifying that these liabilities are major classes of liabilities but instead by proposing to amend:
- paragraph B64(i) of IFRS 3 to remove the term ‘major’; and
- paragraph IE72 of the Illustrative Examples accompanying IFRS 3 to illustrate liabilities arising from financing activities and defined benefit pension liabilities as classes of liabilities assumed.
Primary Financial Statements
Management performance measures—management’s view of an aspect of performance
The IASB tentatively decided:
- to retain ‘providing management’s view of an aspect of an entity’s financial performance’ as the objective of management performance measures.
- to also retain ‘communicate to users of financial statements management’s view of an aspect of an entity’s financial performance’ in the definition of management performance measures.
- to establish a rebuttable presumption that a subtotal of income and expenses included in public communications outside financial statements represents management’s view of an aspect of the entity’s financial performance.
- to allow an entity to rebut the presumption in paragraph (c) only when the entity has reasonable and supportable information demonstrating that a subtotal of income and expenses does not represent management’s view of an aspect of performance.
- to provide high-level application guidance on how to assess whether the entity has reasonable and supportable information to support the rebuttal. The guidance would include an explanation that the assessment of whether a subtotal of income and expenses is a management performance measure is made for the subtotal as a whole.
Management performance measures and the scope of public communications
The IASB tentatively decided to narrow the scope of public communications considered for the purposes of applying the definition of management performance measures, by excluding oral communications, transcripts and social media posts.
Management performance measures—faithful representation
The IASB tentatively decided:
- to add application guidance on how an entity could apply the requirement to describe a management performance measure in a clear and understandable manner that would not mislead users. The guidance would address the need for an entity to be transparent about the meaning of the terms used and the methods applied, in particular when they differ from those used when applying IFRS Accounting Standards.
- given the general requirement for information in financial statements to give a faithful representation, there is no need to repeat that requirement in the specific requirements for management performance measures.
Unusual income and expenses
The IASB tentatively decided:
- to explore how to proceed with a definition of ‘unusual income and expenses’.
- to remove the reference to ‘limited predictive value’ from the definition of ‘unusual income and expenses’, and clarify in the Standard that it is a necessary characteristic of unusual income and expenses, not the sole characteristic.
- to develop the application guidance accompanying the definition of ‘unusual income and expenses’:
- to clarify that the definition means that ‘unusual income and expenses’ can be dissimilar in type or amount from income and expenses expected in the future;
- to help an entity to assess whether similar income or expenses will arise in the future, based on guidance on the assessment of future transactions and other events in other IFRS Accounting Standards; and
- to explain that in considering whether income or expenses are similar to expected future income or expenses, an entity would consider characteristics of the income and expenses, including the underlying event or transaction that gives rise to income or expenses.
Income and expenses classified in the investing category
The IASB tentatively decided:
- to retain the proposal for entities to classify in the investing category income and expenses from assets that generate returns individually and largely independently of other resources held by an entity.
- to retain the proposed application guidance in the Exposure Draft.
- to add further application guidance stating that:
- income and expenses arising from individual assets and disposal groups classified as held for sale would not be classified in the investing category.
- income and expenses arising from business combinations would not be classified in the investing category because they do not arise from assets that generate returns individually or largely independently of other resources held by an entity.
- negative returns, such as those arising from unfavourable exchange rates or negative interest rates, are classified in the same category as positive returns arising from the asset. Similarly, negative interest expense on liabilities is classified in the same category as positive interest expense.
- to classify income and expenses from associates and joint ventures in the investing category.
- to remove the discussion of the objective from the requirements in the Standard and explain in the Basis for Conclusions the reasons for including specific items in the investing category, without referring to that explanation as being an ‘objective’.
- to retain the label ‘investing category’ for that category.
- not to proceed with the proposed use of the defined term ‘income and expenses from investments’.
Second Comprehensive Review of the IFRS for SMEs Standard
The IASB tentatively decided:
- to retain Section 20 Leases of the IFRS for SMEs Standard unchanged; and
- to consider amending the IFRS for SMEs Standard to align with IFRS 16 Leases in a future review of the Standard.
- not to pursue improving disclosure requirements for operating leases without changing the recognition and measurement requirements in Section 20 Leases of the IFRS for SMEs Standard.
- to propose amendments to the IFRS for SMEs Standard to align the recognition requirements for termination benefits in Section 28 of the IFRS for SMEs Standard with the 2011 amendments to IAS 19 Employee Benefits.
- to retain the accounting policy option in paragraph 28.24 of the IFRS for SMEs Standard.
- to propose removing the simplifications permitted by paragraph 28.19 of the IFRS for SMEs Standard
- to include in the Invitation to Comment an alternative proposal clarifying how to apply paragraph 28.19 of the IFRS for SMEs Standard, if stakeholders do not agree to remove paragraph 28.19.
The IASB tentatively decided to propose amendments to Section 19 Business Combinations and Goodwill of the IFRS for SMEs Standard.
The proposals would align the definition of a business in the IFRS for SMEs Standard with the amended definition of a business issued in the amendments to IFRS 3 Business Combinations in October 2018 by reproducing, in a new appendix to Section 19, application guidance that includes:
- the optional concentration test set out in paragraphs B7A–B7B of IFRS 3;
- a decision tree to assess whether an acquired process is substantive; and
- the application guidance for the assessment set out in paragraphs B8–B12D of IFRS 3, alongside some illustrative examples.
The proposals would also partially align Section 19 with the requirements for acquisition-related costs and contingent consideration, as set out in IFRS 3, requiring an entity:
- to recognise acquisition-related costs as an expense at the time of the acquisition.
- to recognise contingent consideration at fair value and subsequently measure it at fair value at each reporting date, with changes in fair value recognised in profit or loss (except for the subsequent measurement of any contingent consideration that meets the definition of an equity instrument). If measuring contingent consideration at fair value would involve undue cost or effort, an entity would be required to measure the contingent consideration using a ‘best estimate’ (the most likely outcome)—with changes in the subsequent measurement being recognised in profit or loss—and provide the related disclosures.
The proposals would also add the requirements set out in IFRS 3 on accounting for an acquisition achieved in stages (step acquisitions). The IASB also tentatively decided to ask for further views on these requirements in the invitation to comment.
The proposals would as well introduce guidance (in the new appendix to Section 19) for a new entity formed in a business combination, as set out in paragraph B18 of IFRS 3 and the application guidance set out in paragraphs B13–B17 of IFRS 3.
Finally, the IASB tentatively decided to retain unchanged the requirement in Section 19 that an entity measure any non-controlling interest in the acquiree at the non-controlling interest’s proportionate share of the recognised amounts of the acquiree’s identifiable net assets.
The IASB tentatively decided to propose amendments to Section 9 Consolidated and Separate Financial Statements of the IFRS for SMEs Standard to align partially with IFRS 10 Consolidated Financial Statements, by:
- aligning the definition of control in Section 9 with that in IFRS 10;
- retaining and updating the rebuttable presumption in paragraph 9.5 of the IFRS for SMEs Standard relating to the assessment of control; and
- not introducing in the IFRS for SMEs Standard the requirement that an investment entity measures its investments in subsidiaries at fair value through profit and loss.
The IASB tentatively decided to propose amendments to Section 15 Investments in Joint Ventures of the IFRS for SMEs Standard to align partially with IFRS 11 Joint Arrangements, by:
- aligning the definition of joint control in Section 15 with that in IFRS 11.
- retaining the classifications of joint arrangements: ‘jointly controlled operations’, ‘jointly controlled assets’ and ‘jointly controlled entities’.
- retaining the accounting requirements of Section 15, including the accounting policy election for jointly controlled entities.
The IASB tentatively decided to propose amendments to Section 11 Basic Financial Instruments of the IFRS for SMEs Standard by adding the definition of a ‘financial guarantee contract’ from IFRS 9.
The IASB tentatively decided:
- to propose amendments to the IFRS for SMEs Standard to align it with:
- Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41), with an exemption so that if, at initial recognition, separation of the bearer plants from the produce growing on bearer plants would involve undue cost or effort, an entity would not be required to separate bearer plants from the produce growing on bearer plants.
- a package of amendments to IAS 1:
- Definition of Material (Amendments to IAS 1 and IAS 8);
- Disclosure Initiative (Amendments to IAS 1); and
- Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2).
- the amendments discussed in Agenda Paper 30I and listed as items 2–7, 9–12 in the table in Appendix A to Agenda Paper 30F.
- to retain the IFRS for SMEs Standard unchanged for the amendments discussed in Agenda Paper 30J and listed as items 15–30 in the table in Appendix A to Agenda Paper 30F.
The IASB tentatively decided:
- to retain paragraph 22.7(a) of the IFRS for SMEs Standard unchanged.
- to propose amendments to Section 26 Share-based Payment of the IFRS for SMEs Standard to include scope exclusions similar to those in paragraph 5 of IFRS 2 Share-based Payment.
- to retain the requirements in Section 26 on share-based payments with settlement options unchanged.
Financial Instruments with Characteristics of Equity
Financial instruments with contingent settlement provisions
The IASB tentatively decided to propose amendments to IAS 32 Financial Instruments: Presentation:
- to clarify that financial instruments with contingent settlement provisions may be compound instruments;
- to clarify that the liability component of a compound financial instrument with contingent settlement provisions, which could require immediate settlement if a contingent event occurs, is measured at the full amount of the conditional obligation;
- to clarify that payments at the discretion of the issuer are recognised in equity, even if all the proceeds are initially allocated to the liability component of a compound financial instrument;
- to specify that the term ‘liquidation’ in paragraph 25(b) of IAS 32 refers to when an entity is in the process of permanently ceasing operations; and
- to specify that an assessment of whether a contract term is ‘not genuine’ under paragraph 25(a) of IAS 32 is not made by considering only the probability of the contingent event occurring.
The effects of applicable laws on contractual terms of financial instruments
The IASB tentatively decided to propose amendments to IAS 32 to require an entity to classify financial instruments as financial liabilities or equity by considering:
- terms explicitly stated in the contract that give rise to rights and obligations that are in addition to, or more specific than, those established by applicable law; and
- applicable laws that prevent the enforceability of a contractual right or a contractual obligation.
MAINTENANCE AND CONSISTENT APPLICATION
Lease Liability in a Sale and Leaseback (IFRS 16): Project direction
In November 2020 the IASB published the Exposure Draft Lease Liability in a Sale and Leaseback, which proposed to amend IFRS 16 Leases. The comment period ended on 29 March 2021. At its May 2021 meeting, the IASB discussed a summary of feedback on the Exposure Draft.
At its December 2021 meeting the IASB discussed how the project should proceed. In particular, the IASB tentatively decided to confirm its proposals in the Exposure Draft:
- to clarify that the liability arising from a leaseback is a liability to which the sale and leaseback requirements in IFRS 16 apply;
- not to change the initial measurement requirements in paragraph 100(a) of IFRS 16 for the right-of-use asset and the gain or loss arising from a sale and leaseback transaction;
- to clarify that a seller-lessee subsequently measures the right-of-use asset arising from a leaseback by applying paragraphs 29–35 of IFRS 16; and
- to include an illustrative example of a sale and leaseback transaction with variable payments.
The IASB also tentatively decided to change the amendments from those proposed in the Exposure Draft by:
- not prescribing how, at the commencement date, a seller-lessee determines the proportion of the previous carrying amount of the asset that relates to the right of use the seller-lessee retains;
- requiring a seller-lessee to subsequently measure the liability arising from the leaseback by applying paragraphs 36–46 of IFRS 16; and
- for the purposes of applying paragraphs 36–46 of IFRS 16, requiring the seller-lessee to apply the term ‘lease payments’ or ‘revised lease payments’ in such a manner that it does not recognise any amount of the gain or loss that relates to the right of use retained.
IFRS INTERPRETATIONS COMMITTEE (IC) LATEST DECISIONS SUMMARY
The following is a summarised update of key matters arising from the discussions and decisions taken by the IFRIC at its meetings on the following dates:
30 November–1 December 2021,
The full updates, as published by the IASB, can be found here.
TENTATIVE AGENDA DECISIONS
The Committee decided not to add the following matters to its standard-setting agenda because the principles and requirements in IFRS already provide an adequate basis for determining the appropriate accounting treatment.
Principal versus Agent: Software Resellers (IFRS 15 Revenue from Contracts with Customers)
The Committee received a request asking whether, in applying IFRS 15, a reseller of software licences is a principal or agent. In the fact pattern described in the request:
- the reseller has a distribution agreement with a software manufacturer that:
- gives the reseller the right to grant (sell) the manufacturer’s standard software licences to customers;
- requires the reseller to provide pre-sales advice to each customer—before the sale of the software licences—to identify the type and number of software licences that would meet the customer’s needs; and
- provides the reseller with discretion in pricing the software licences for sale to customers.
- the nature of the pre-sales advice varies depending on the customer’s needs. If the customer decides:
- not to purchase software licences, it pays nothing. The reseller and the customer do not enter into an agreement.
- to purchase a specified type and number of software licences, the reseller negotiates the selling price with the customer, places an order with the software manufacturer on behalf of the customer (and pays the manufacturer), and invoices the customer for the agreed price.
- the software manufacturer provides the customer with the software licences ordered—issued in the customer’s name—via a software portal and with the key necessary for activation. The software manufacturer and the customer enter into an agreement specifying the customer’s right to use the software, a warranty covering the software’s functionality and the term of the licence.
- if the reseller advises the customer to order an incorrect type or number of software licences (that fails to meet the customer’s needs), the customer may not accept the licences. The reseller is unable to return unaccepted licences to the software manufacturer or sell them to another customer.
The Committee concluded that the only specified goods to be provided to the customer are the software licences. The pre-sales advice is not considered an implicit promise in a contract with the customer as at the time of entering into the contract with the customer the reseller has already provided the advice.
The Committee observed that:
- the software licences provided to the customer exist only after the reseller places an order with the software manufacturer and the software manufacturer issues the software licences in the customer’s name. The software manufacturer is responsible for the software’s functionality as well as issuing and activating the licences. The software manufacturer is therefore responsible in those respects for fulfilling the promise to provide the licences to the customer.
- the reseller is the party that engages with the customer both before and after the software licences are transferred to the customer, taking responsibility for unaccepted licences. The reseller is therefore responsible in those respects for fulfilling the promise to provide the licences to the customer.
- the reseller does not control a pool of standard software licences before entering into the contract with the customer and cannot, for example, direct the software licences to another customer. The reseller therefore has no inventory risk before the licences are transferred to the customer but, in the event of non-acceptance by the customer, the reseller has inventory risk after the transfer.
- the reseller has discretion in establishing the price for the software licences. Pricing discretion may be less relevant to the assessment of control if, for example, the market for the software licences is such that the reseller, in effect, has limited flexibility in establishing the price.
The Committee noted that the conclusion as to whether the reseller is a principal or agent depends on the specific facts and circumstances, including the terms and conditions of the relevant contracts. The reseller would apply judgement in making its overall assessment of whether it is a principal or agent—including considering the relevance of the indicators to the assessment of control and the degree to which they provide evidence of control of the standard software licences before they are transferred to the customer. The reseller would disclose material accounting policy information in accordance with IAS 1 and information required by IFRS 15 including information about its performance obligations and the judgements made in applying the standard that significantly affect the determination of the amount and timing of revenue from customers.
The Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for a reseller to determine whether—in the fact pattern described in the request—it is a principal or agent for the standard software licences provided to a customer. Consequently, the Committee [decided] not to add a standard-setting project to the work plan.