RSM World of IFRS summarises key matters arising from recent IASB discussions and decisions, highlights RSM thought leadership from around the world, and addresses an IFRS application question each month.
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:
20-24 September 2021
25-28 October 2021
The full update, as published by the IASB, can be found here.
Research and standard setting
In November 2021, the IASB issued an Exposure Draft which proposed amendments to IAS 1, Presentation of Financial Statements to improve information that entities provide related to long-term debt with covenants.
Under IAS 1, an entity must classify a liability as non-current only if the entity has the right to defer settlement of the liability for at least 12 months after the reporting date. That right, however, is often subject to the entity complying with covenants which are tested only after the reporting date.
The proposed amendments included in the Exposure Draft would specify that such covenants would not affect the classification of a liability as current or non-current at the reporting date.
Instead, a company would:
- present non-current liabilities that are subject to such covenants on the statement of financial position separately from other non-current liabilities; and
- disclose information about the covenants in the notes to its financial statements, including their nature and whether the company would have complied with them based on its circumstances at the reporting date.
The comment letter period is open until 21 March 2022.
Financial instruments with characteristics of equity
The Board was not asked to make any decisions, but expressed its intention to develop potential clarifications related to:
- Financial instruments with contingent settlement provisions and
- The effect of laws on the contractual terms of financial instruments
Goodwill and impairment
In its September meeting, the Board discussed its plan to redeliberate the preliminary views expressed in the Discussion Paper Business Combinations—Disclosures, Goodwill and Impairment. The Board decided to priortise further work on:
- Making tentative decisions on the package of disclosure requirements about business combinations described in the Discussion Paper, and
- Analysing specific aspects of the feedback received on subsequent accounting for goodwill
Once those discussions have taken place, the Board will redeliberate its preliminary view that it should retain the impairment-only model to account for goodwill.
In its October meeting, the Board redeliberated whether to develop proposals to enhance the disclosure objective and requirements of IFRS 3 Business Combinations.
Conceptual considerations for location of disclosures
The Board tentatively decided that based on its conceptual framework, information can be required in financial statements about the benefits an entity’s management expects from a business combination, and the extent to which management’s objectives are being met.
The Board will continue its redeliberations on the preliminary views on the package of disclosure requirements.
The Board reached a tentative decision that the scope and objectives of the project should be to explore two aspects of IFRS 6 Exploration for and Evaluation of Mineral Resources. Those two aspects are:
- Developing requirements or guidance to improve disclosures about an entity’s exploration and evaluation expenditure and activities to provide more useful information
- Removing the temporary status of IFRS 6.
The Board made a series of more detailed tentative decisions to reach the decisions above:
- The Board tentatively decided to explore the development of requirements or guidance to improve disclosures about exploration and extractive expenditure and activities.
- The Board tentatively decided not to develop requirements or guidance about the unit of account to be applied to those expenditures or about capitalization of those expenditures.
- The Board tentatively decided not to develop additional requirements or guidance for the impairment of exploration and evaluation assets.
- The Board tentatively decided not to develop requirements to standardise the accounting for intangible exploration and evaluation expenditures or expenditures for research and development.
- The Board tentatively decided not to develop requirements or guidance for application of IFRS Standards other than IFRS 6 as part of the Extractive Activities research project.
- The Board tentatively decided not to develop requirements or guidance for reserve and resource information in financial statements.
Primary financial statements
In its September meeting, with respect to the definition of management performance measures, the Board tentatively decided to remove the reference to complementing totals or subtotals specified by IFRS standards and to state that totals and subtotals specified by IFRS standards are not management performance measures.
The Board also tentatively decided to:
- Separate the general requirement to provide information about classes of assets, liabilities, equity, income, expenses and cash flows from the general requirements on presentation in the primary financial statements.
- Link the general requirement to provide information about classes with the objective of financial statements.
- Remove the reference to “material” in the requirement.
- Define a class of assets, liabilities, equity, income, expenses and cash flows based on shared characteristics
- Explain that the purpose of aggregation into these classes is to make information understandable.
In connection with the above tentative decisions, the Board will consider whether “class” is the best term to use in all situations.
The Board also tentatively decided that entities would be required to explain how a disclosed class of items is included in line items in the primary financial statements.
The Board reached a tentative decision to include application guidance that will form the basis for aggregating or disaggregating items.
The Board continued redeliberations in its October meeting.
Associates and joint ventures. The Board reached tentative decisions to:
- Proceed with the proposal to require entities to classify income and expenses from associates accounted for using the equity method or joint ventures outside the operating category.
- Not proceed with the proposal to require entities to present a subtotal “operating profit or loss and income and expenses from integral associates and joint ventures.”
- Not proceed with the proposal to require entities to identify and present income and expenses from integral associates and joint ventures separately from income and expenses from non-integral associates and joint ventures.
- Require entities to include income and expenses from associates accounted for using the equity method or joint ventures in the statement of profit or loss after operating profit and before the subtotal profit before financing and income taxes.
Operating profit or loss before depreciation and amortisation. The Board tentatively decided to:
- Specify an operating profit or loss before depreciation and amortisation subtotal that excludes impairments of assets within the scope of IAS 36, Impairment of Assets
- To amend the specified subtotal in a. above rather than adding an additional subtotal
- To label the amended specified subtotal “operating profit before depreciation, amortisation, and specified impairments”
- To not explicitly prohibit “EBITDA” as a label for a subtotal representing “operating profit or loss before depreciation, amortisation and specified impairments,” but to explain that such a label would rarely be a faithful representation of the subtotal
- To include no further specific requirements in relation to this subtotal
Pension benefits that Depend on Asset Returns
The Board decided to stop the research project and will consider any further work on pension benefits as part of the Third Agenda Consultation.
Post-implementation review of IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities
The Board concluded that the standards in this topic are working as intended, and they will consider any topics arising from the post-implementation review while developing the work plan for 2022 to 2026.
The Board reached a decision that the staff should research the differences between principles in IAS 28 Investments in Associates and Joint Ventures and those in other IFRS Standards related to business combinations and consolidation.
The Board will review the findings and discuss the differences at a future meeting. The Board will also discuss application questions.
Second Comprehensive Review of the IFRS for Small and Medium Sized Entities (SMEs)
The Board tentatively decided the following:
- To propose an amendment to remove an entity’s option to apply the recognition and measurement requirements for financial instruments in full IFRS standards.
- To not change the hedging accounting requirements in Section 12 Other Financial Instrument Issues
- To propose an amendment to align the definition of fair value and the guidance on fair value measurement in the IFRS for SMEs document with that in IFRS 13 Fair Value Measurements
- To include requirements for regulatory assets and regulatory liabilities in a future review of the IFRS for SMEs standard
- To align the standard with IFRS 15, Revenues from Contracts with Customers
Maintenance and consistent application
Initial application of IFRS 17 and IFRS 9—comparative information
Classification overlay. The Board tentatively decided that:
- An entity that first applies IFRS 17 and IFRS 9 at the same time is permitted to apply the classification overlay to any financial asset for which comparative information has not been restated for IFRS 9
- An entity that has already adopted IFRS 9 is permitted to apply the overlay to a financial asset that would have been redesignated in accordance with paragraph C29 of IFRS 17 if the asset had not been derecognised in the comparative period.
IASB consideration of IFRS Interpretations Committee matters
The Board did not object to the agenda decision on Non-refundable Value Added Tax on Lease Payments.
The Board did not object to the agenda decision on Accounting for Warrants that are Classified as Financial Liabilities on Initial Recognition.
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:
14-15 September 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.
Demand Deposits with Restrictions on Use (IAS 7—Statement of Cash Flows)
The Committee received a request asking whether an entity should include a demand deposit as a component of cash and cash equivalents when the demand deposit is subject to contractual restrictions on use agreed with a third party. In the fact pattern included in the request, the entity:
- Holds a demand deposit whose terms and conditions do not prevent the entity form accessing the amounts held in the account
- Is contractually obligated to keep a specified amount in the separate demand deposit and to use that cash only for specified purposes
Cash and cash equivalents in the statement of cash flows
The Committee concluded that restrictions on use of a demand deposit do not result in the demand deposit no longer being cash (unless those restrictions change the nature of the deposit such that it would no longer meet the definition of cash in IAS 7).
Presentation in the statement of financial position
The Committee concluded that, pursuant to paragraph 54(i) of IAS 1, the entity in the submitted fact pattern would present the demand deposit as cash and cash equivalents in the statement of financial position.
Cash Received via Electronic Transfer as Settlement for a Financial Asset (IFRS 9—Financial Instruments)
The Committee received a request about how to recognize cash received via an electronic transfer system as settlement for a financial asset. In the fact pattern described in the request:
- The electronic transfer system has an automated settlement process that takes three working days to settle a cash transfer
- An entity has a trade receivable with a customer. At the entity’s reporting date, the customer has initiated a cash transfer via the electronic transfer system to settle the trade receivable. The entity receives the cash in its bank account two days after the reporting date.
The applicable requirements in IFRS 9
Both the trade receivable and the cash received are financial assets within the scope of IFRS 9. Paragraph 3.2.3 of IFRS 9 provides guidance in determining the date on which to derecognise the trade receivable. Paragraph 3.1.1 provides guidance on determining the date on which to recognise the cash as a financial asset
The Committee concluded that application of IFRS 9 would result in:
- The entity derecognising the trade receivable on the date on which its contractual rights to the cash flows from the trade receivable expire and
- The entity recognising the cash (or other financial asset) received as settlement for that trade receivable on the same date.