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:

• 28 April 2022
• 27 May 2022
• 22 June 2022

The full update, as published by the IASB, can be found here.

Primary financial statements

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.

Management performance measures

The IASB tentatively decided:

• to confirm the proposed requirement in the Exposure Draft to disclose the income tax effect and the effect on non - controlling interests of each item disclosed in the reconciliation between a management performance measure and the most directly comparable subtotal or total specified by IFRS Accounting Standards.
• to revise the requirement specifying how to calculate the income tax effect to require an entity either to calculate:
  1. the tax effects of the underlying transaction(s) at the statutory tax rate(s) applicable to the transaction(s) in the relevant jurisdictions(s); or
  2. the tax effects described in (i) and then to allocate any other income tax effects related to the underlying transaction(s) based on a reasonable pro rata allocation of current and deferred tax, or on another method that achieves a more appropriate allocation.

The IASB, noting that its tentative decision means that the approach in (b)(i) is effectively a backstop, asked the staff to consider whether it is possible to maintain this backstop while allowing entities to use a wider range of approaches that would improve the balance between costs and benefits.

Use of columns to present management performance measures, and general requirements for additional line items and subtotals

The IASB tentatively decided:

• to add a requirement for additional subtotals and line items presented in the statement(s) of financial performance to fit into the structure of the categories required in the Accounting Standard;
• to withdraw the proposal to specifically prohibit the use of columns for presenting management performance measures in the statement(s) of financial performance.

Unusual income and expenses (income and expenses with limited recurrence)

The IASB tentatively decided:

• to include income and expenses that have arisen in the past in the definition, as proposed in the Exposure Draft.
• to label the items captured by the definition as ‘income and expenses with limited recurrence’. The IASB will consider at a future meeting whether also to restrict the use of the label ‘unusual income and expenses’.
• to amend the definition proposed in the Exposure Draft to include income and expenses that are expected to recur for a few annual reporting periods.
• to proceed with a definition that reflects the tentative decisions described in above; Income and expenses have limited recurrence when it is reasonable to expect that income or expenses that are similar in type of amount will cease, and once ceased will not arise again, before the end of the assessment period.
• to explore how to define the assessment period; for example, by linking it to the period of budgets and forecasts or by specifying a minimum and/or maximum number of years.

Income and expenses with limited recurrence - Disclosure

Subject to the outcome of the analysis of the implications of this disclosure requirement in relation to forward - looking information, the IASB tentatively decided:

• to continue to include in the definition income and expenses that are dissimilar to those expected to arise in the future because they are lower in amount.
• to reconfirm the proposal to require, for such items of income and expenses, disclosure of the amount recognised in the period.

Post - implementation Review of IFRS 9—Classification and Measurement

Financial Instruments with Characteristics of Equity

The IASB tentatively decided:

• to add general requirements on reclassification to IAS 32 Financial Instruments: Presentation to prohibit reclassification other than for changes in the substance of the contractual terms arising from changes in circumstances outside the contract.
• to clarify that when the substance of the contractual terms changes because of changes in circumstances outside the contract:
  1. a financial liability reclassified from equity would be measured at fair value at the date of reclassification. Any difference between the carrying amount of the equity instrument and the fair value of the financial liability would be recognised in equity.
  2. an equity instrument reclassified from a financial liability would be measured at the carrying value of the financial liability at the date of reclassification. No gain or loss would be recognised.
  3. a reclassification would be accounted for in the reporting period in which the change in circumstances occurred.

Equity method

The IASB discussed applying the equity method to the purchase of an additional interest in an associate without a change in significant influence and tentatively decided to consult with stakeholders on measuring the cost of an investment, when an investor obtains significant influence, as the fair value of the consideration transferred, including the fair value of any previously held interest in the investee.

The IASB also asked the staff to proceed with an approach whereby an investor that has obtained significant influence would measure the investment in the associate as an accumulation of purchases (‘the preferred approach’).

The IASB tentatively decided that:

• an investor applying the preferred approach to a bargain purchase of an additional interest, while retaining significant influence, would recognise a bargain purchase gain in profit or loss.
• an investor applying the preferred approach to a partial disposal, while retaining significant influence, would measure the portion of the carrying amount of an investment in an associate to be derecognised using:
  1. a specific identification method, if the investor can identify the specific portion of the investment being disposed of and its cost; and
  2. the last - in, first - out method, if the specific portion of the investment being disposed of cannot be identified.

The IASB decided to explore practical methods of measuring the portion of the carrying amount of an investment in an associate to be derecognised when an investor applies the preferred approach to a partial disposal while retaining significant influence.

Second comprehensive review of the IFRS for SMEs standard

The IASB is currently working towards an exposure draft which will propose amendments to IFRS for SMEs accounting standard which is also seeking alignment with IFRS.

The IASB tentatively decided:

• to propose amendments to 16 sections of the current Standard based on the application of the principles it had agreed in March 2022 for updating disclosure requirements in the IFRS for SMEs Accounting Standard.
• to include the definitions of an ‘asset’ and of a ‘liability’, as they are defined in the framework for the Preparation and Presentation of Financial Statements issued in 1989, in section 21 Provisions and Contingencies and section 18 Intangible Assets other than Goodwill respectively.
• to propose amendments to Section 19 Business Combinations and Goodwill of the Standard:
  1. to align it with Reference to the Conceptual Framework issued in May 2020.
  2. To align it with the requirement in IFRS 3 Business Combinations that an acquirer cannot recognise a contingency that is not a liability.
• to propose amendments to:
  1. Section 10 Accounting Policies, Estimates and Errors of the Standard to align it with the definition of ‘accounting estimates’ as set out in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
  2. Section 11 Financial Instruments of the Standard to reflect the amendments to IFRS 9, Prepayment Features with Negative Compensation issued in 2017, to enable SMEs to measure, at amortised cost, debt instruments that have prepayment features with negative compensation.
  3. Section 14 Investments in Associates of the Standard to reflect the 2017 amendments to IAS 28 Long - term Interests in Associates and Joint Ventures and to clarify how to treat financial instruments that form part of an entity’s net investment in an associate or jointly controlled entity.
  4. Align Section 23 Revenue with IFRS 15 Revenue from Contracts with Customers, with simplifications for customer options for additional goods or services, principal - versus - agent considerations, warranties, licensing, allocating discounts and variable consideration, allocating variable consideration.
  5. Align Section 23 of the IFRS for SMEs Accounting Standard with the requirement in IFRS 15 without any simplification, to require, rather than permit, an SME to account for a promise to transfer a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer as a separate performance obligation.
  6. Section 23 of the IFRS for SMEs Accounting Standard on disclosure items.
  7. Section 33 Related Party Disclosures of the Standard to align it with IAS 24 Related Party Disclosures, with simplifications.
• to propose simplified transition requirements relating to the following six sections of the IFRS for SMEs Accounting Standard, for entities applying new requirements that the IASB has tentatively decided to propose:
  1. Section 9 Consolidated and Separate Financial Statements;
  2. Section 11 Basic Financial Instruments;
  3. a new section on Fair Value Measurement;
  4. Section 15 Investments in Joint Ventures;
  5. Section 19 Business Combinations and Goodwill; and
  6. Section 23 Revenue.
• to propose transition requirements for:
  1. the amendments to the IFRS for SMEs Accounting Standard that would align the Standard with IFRIC Interpretations and amendments to full IFRS Accounting Standards, with two exceptions.
  2. guidance for first - time adopters of the IFRS for SMEs Accounting Standard.
• to propose that the effective date be a minimum of two years from the date when the third edition of the Standard is issued, with early application permitted.
• to set a comment period of 180 days for the exposure draft being developed for the project.

The exposure draft is expected soon with no IASB member intending to dissent from the proposals in the exposure draft.

Non - current Liabilities with Covenants (Exposure draft)

After the comment period ended, the IASB discussed how to proceed with the project.

Classification as current or non - current

The IASB tentatively decided:

• to finalise the proposed amendments, that is to confirm that only covenants with which an entity must comply on or before the reporting date would affect a liability’s classification as current or non - current.
• to provide no further clarification or application guidance on determining whether a right to defer settlement has substance; or applying paragraphs 74–75 of IAS 1.
• not to finalise the proposed clarification in paragraph 72C about situations in which an entity would have no right to defer settlement but, instead, to specify that the proposed requirements in paragraph 72B apply only to liabilities arising from loan arrangements.

Separate presentation and disclosure

The IASB tentatively decided:

• not to finalise the proposal to require an entity to present separately non - current liabilities with covenants but, instead, to require an entity to disclose the carrying amount of such liabilities in the notes.
• to finalise the proposal to require an entity to disclose information about non - current liabilities with covenants, with some modifications. Specifically to require that, when an entity classifies liabilities arising from loan arrangements as non - current and those liabilities are subject to covenants, it discloses information that enables investors to assess the risk that the liabilities could become repayable within 12 months including information about the covenants with which the entity is required to comply and facts and circumstances that indicate the entity may have difficulty complying with covenants when it is required to do so.

Transition and effective date deferral

The IASB tentatively decided:

• to require an entity to apply the proposed amendments retrospectively.
• to allow an entity to adopt early the proposed amendments or the amendments in Classification of Liabilities as Current or Non - current (2020 amendments), but only if the entity adopts the proposed amendments and the 2020 amendments at the same time.
• to defer the effective date of the 2020 amendments to align it with the effective date of the proposed amendments. The effective date will be decided at a future meeting, but it will be no earlier than annual reporting periods beginning on or after 1 January 2024.

Third agenda consultations

Among the shortlisted projects, the IASB decided:

• to add to its work plan a maintenance and consistent application project on climate - related risks.
• to add to the research pipeline projects on intangible assets and the statement of cash flows and related matters.
• to create a reserve list of projects that could be added to the work plan only if additional capacity becomes available.
• to add to the reserve list projects on operating segments and pollutant - pricing mechanisms.
• not to add to its work plan projects on cryptocurrencies and related transactions or going concern disclosures.

IFRS INTERPRETATIONS COMITTEE (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:

• 20 April 2022
• 15 June 2022

The full updates, as published by the IASB, can be found here.

Principal versus Agent: Software Reseller (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:

1. The reseller has a distribution agreement with a software manufacturer that (i) gives the reseller the right to grant (sell) the manufacturer’s standard software licences to customers (ii) 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 (iii) provides the reseller with discretion in pricing the software licences for sale to customers.
    
2. If the customer decides (i) to buy no software licences it pays nothing. The reseller and the customer do not enter into an agreement (ii) to buy 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.
    
3. The software manufacturer provides the customer with the software licences ordered – issued in the customer’s name – via a software portal and with a key necessary for activation. The software manufacturer and the customer enter into an agreement specifying the customers right to use the software, a warranty covering the functionality of the software and the term of the licence.
    
4. 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.

When another party is involved in providing goods or services to a customer, an entity to determine whether the nature of its promise is a performance obligation to provide the specified goods or services itself (the entity is a principal) or to arrange for those goods or services to be provided by another party (the entity is an agent).  Determining the nature of its promise requires an entity to (i) identify the specified goods or services to be provided to the customer and (ii) assess whether it controls each specified good or service before that good or service is transferred to the customer.

The Committee observed that the reseller’s contract with the customer includes an explicit promise to provide a specified type and number of standard software licences to the customer, whereas the pre - sales advice the reseller provides is not an implicit promise in the contract with the customer. At the time of entering into the contract with the customer the reseller has already provided the advice. Consequently, at the time of entering the contract with the customer, there is no valid expectation of the customer that the reseller will transfer a good or service to the customer other than the standard software licences. Accordingly, the Committee concluded that, in the fact pattern described in the request, the promised goods in the reseller’s contract with the customer are the standard software licences.

As for assessing whether the reseller is a principal or an agent in the transaction, that is whether it controls the standard software licences before they are transferred to the customer, the Committee only observed that the conclusion depends on the specific facts and circumstances, including the terms and conditions of the relevant contracts and that the reseller would apply judgement in making its overall assessment within the context of the framework and requirements set out in paragraphs B34–B38 of IFRS 15.

Though the Committee did not state whether the reseller was a principal or an agent in the fact pattern described, it concluded that the principles and requirements in IFRS Accounting Standards provide an adequate basis for such a determination and decided not to add a standard - setting project to the work plan.

Consolidation of a Non-hyperinflationary Subsidiary by a Hyperinflationary Parent (IAS 21 Effects of Changes in Foreign Exchange Rates and IAS 29 Financial Reporting in Hyperinflationary Economies)

The Committee discussed a request about the accounting applied by a parent, whose functional currency is the currency of a hyperinflationary economy, when it consolidates a subsidiary, whose functional currency is the currency of a non - hyperinflationary economy.

The Committee concluded that the parent could restate or not the subsidiary’s results and financial position in terms of the measuring unit current at the end of the reporting period.

It will decide at a future meeting whether to add a standard - setting project on that matter.

IFRS QUERIES

With every release, we will share one or more IFRS queries from matters raised with RSM member firms around the world. The advice contained in the response is general in nature and should not be relied on for an entity’s specific circumstances.

Query #1

An entity, which manages amusement parks, sells different sorts of tickets to access the parks:

• Tickets that can be used only on a specified date.
• Tickets that can be used only once within a specified period.
• Tickets for which use is unlimited within a specified period.

The question arises as to how to determine when the entity shall account for revenue linked with the sale of tickets.

Following the five - step analysis of IFRS 15, Revenue from Contracts with Customers:

• Identifying the contract: the contract consists of the ticket sold and general sale conditions associated with it.
• Identifying performance obligation: the service promised by the entity is to access the park for amusement purposes, not merely possessing a ticket.
• Determine the transaction price and allocate to the performance obligations: as there is only one service provided, the price of that service equals the selling price of the ticket.
• Recognise revenue upon transfer of control: the answer depends on whether the ticket can be used once or several times.
  1. If the ticket can be used once, the customer does not receive any good or service before accessing the park. Therefore, revenue can only be recognised, when the customer accesses the park and not when the ticket is sold or paid.
  2. If there is no limit of use within a specified period, the customer receives the service continuously, as it can access the park anytime during the period. Revenue is then recognised over time during the specified period.

Query #2

What if the entity does not manage amusement parks, but video games accessible on digital device (Web, cloud, metaverse…)? Instead of selling tickets, it sells digital coins usable only to access the video games, with the same characteristics:

• Coins that can be used only on a specified date when a video game event is scheduled.
• Coins that can be used only once within a specified period to access a video game.
• Coins that can be used for unlimited access to a video game within a specified period.

The question again arises as to how to determine when the entity shall account for revenue linked with the sale of digital coins.

The answer would be the same as for query #1, no matter the digital nature of the coins sold:

• If the coins can be used once, the customer does not receive any good or service before accessing the video game. Therefore, revenue can only be recognised, when the customer accesses the game and not when the coin is sold or paid.

If there is no limit of use within a specified period, the customer receives the service continuously, as it can access the games any time during the period. Revenue is then recognised over time during the specified period.