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RSM News in Brief on IFRS summarises 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 the main discussions and decisions taken by the IASB at its meetings on the following dates:
28 August 2019
22, 24 and 25 July 2019
17, 18 and 19 June 2019
In addition to the meetings noted above, on 23 July, the IASB conducted a joint meeting with the FASB. At this joint meeting, the Boards updated each other on the projects that each Board is working on separately.
The full update, as published by the IASB, can be found here
Classification of Liabilities as Current or Non-current
At its July meeting, the Board continued its discussion of comments received on its Exposure Draft Classification of Liabilities and tentatively decided .
a. IAS 1 would be amended to clarify that only counterparty conversion options that are recognised separately from the liability as an equity component of a compound financial instrument are subject to paragraph 69(d) of IAS 1, which states that terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification as current or non-current.
b. The amendments will be required to be applied retrospectively, with early application permitted;
c. No exemption would be provided for an entity adopting IFRS Standards for the first time.
Dynamic Risk Management (DRM)
The Board tentatively decided that the application of the DRM accounting model would be optional. Additionally, the Board tentatively set, as the areas of focus for disclosures, those that assist users to:
- understand and evaluate an entity’s risk management strategy
- evaluate management’s ability to achieve that strategy
- understand the impact on current and future economic resources, and
- understand the impact on an entity’s financial statements from the application of the model
The Board will continue its discussion at future meetings.
Proposed amendments to IAS 16
In June, the Board tentatively decided on some modifications to the proposals in the Exposure Draft Property, Plant and Equipment—Proceeds before Intended Use
- IAS 16 will be amended to require application of the measurement requirements in paragraphs 9–33 of IAS 2, Inventories to identify and measure the costs of items produced before an item of property, plant and equipment is available for use
The sale of items that are not part of an entity’s ordinary activities will be subject to separate disclosure requirements
Goodwill and Impairment
In June, the Board discussed the following preliminary views to be included in the forthcoming discussion paper:
a. new disclosure objectives and requirements;
b. amortisation of goodwill will not be reintroduced;
c. the existing requirement to perform an annual quantitative impairment test would be removed when no indicator of impairment exists;
d. remove the restriction excluding cash flows that are expected to arise from a future restructuring or enhancement from the calculation of value-in-use cash flows
e. remove the requirement to use pre-tax cash flows and discount rate to calculate value-in-use (instead requiring use of internally consistent assumptions);
f. require presentation of a subtotal of total equity before goodwill.
In July, the Board discussed the type of consultation document to be published for this project and decided to publish a discussion paper.
Rate-regulated Activities
At its June meeting, the Board met for an educational session, with a goal of issuing an exposure draft in the first half of 2020.
Subsequently, in July, the Board tentatively decided to include an exception to the recognition and measurement principles of IFRS 3 such that an entity would recognize and measure regulatory assets acquired and regulatory liabilities assumed in a business combination in accordance with the recognition and measurement model being developed in this project.
An Exposure Draft is planned to be issued in the first quarter of 2020.
Disclosure Initiative—Targeted Standards-level Review of Disclosures
The Board tentatively decided to
include both (a) a high-level disclosure objective in IAS 19 Employee Benefits that would address aggregation and disaggregation of information and (b) detailed and specific disclosure objectives related to both defined benefit plans and other employee benefits.
Financial Instruments with Characteristics of Equity
The Board discussed a summary of the feedback on the Discussion Paper, Financial Instruments with Characteristics of Equity. The Board was not asked to reach any decisions.
2019 Comprehensive Review of the IFRS for SMEs Standard
In advance of the 2019 review of the IFRS for SMEs, the Board has decided that a request for information should seek views regarding alignment with full IFRS, along with amendments not currently incorporated into the IFRS for SMEs.
The Board has decided to seek views on the alignment of the IFRS for SMEs standard with:
IFRS 3, Business Combinations (July)
IFRS 9, Financial Instruments (June)
IFRS 10, Consolidated Financial Statements (July)
IFRS 11, Joint Arrangements (July)
IFRS 13, Fair Value Measurements (June)
IFRS 14, Regulatory Deferral Accounts (June)
IFRS 15, Revenue from Contracts with Customers (July)
IFRS 16, Leases (June)
Management Commentary
The Board discussed an approach to developing guidance on the qualitative characteristics of useful financial information to be included in the revised Practice Statement 1, Management Commentary as well as guidance to be included in the revised Practice Statement on making relevance and materiality judgments The Board was not asked to reach any decisions with respect to the guidance on qualitative characteristics. With respect to the relevance and materiality judgments, the Board tentatively decided to introduce guidance that would:
- Incorporate key elements of the guidance from Practice Statement 2, Making Materiality Judgments
- Provide additional guidance as needed because the nature of management commentary differs from the nature of financial statements
- Focus on the materiality process
The Board will continue discussion at a future meeting, with a goal of issuing an Exposure Draft in the second half of 2020.
Interest Rate Benchmark Reform
The Board met to discuss feedback received in response to the Exposure Draft Interest Rate Benchmark Reform. The Board tentatively decided:
a. to amend IAS 39 so as to provide an exception permitting retrospective assessment such that, during the period of uncertainty arising from the reform of the interest rate benchmarks, hedge accounting would be continued when hedge effectiveness is outside the 80-125% range
b. with respect to macro hedges designated under IFRS 9 or IAS 39, an entity should assess whether a non-contractually specified risk component is separately identifiable only at the time the hedged item is initially designated in the “macro hedge.” Once a hedged item is designated within a macro hedge, the entity should not reassess the separately identifiable requirement upon subsequent redesignations;
c. The final amendments to IFRS 9 and IAS 39 should clarify that once an entity has designated a group of items as the hedged item, the end-of-application requirement in
the Exposure Draft should apply to each individual item within the group;
d. to clarify that the scope of the proposed exceptions in the Exposure Draft should apply only to those hedging relationships that are directly affected by uncertainties about the timing and/or the amount of interest-rate benchmark-based cash flows of the hedged item or the hedging instrument that arise from the reform;
e. certain disclosures would be required
Primary Financial Statements
At its June meeting, the Board tentatively decided the following:
a. exchange differences and gains and losses on derivatives should be classified in the same section in the statement of financial performance as the income and expense arising from the items that gave rise to the exchange differences. Special guidance will be proposed for derivatives.
b. incremental expenses related to investments should be classified in the investing section of the statement of financial performance;
c. The income tax effect of management performance measure adjustments should be based on a reasonable pro-rata allocation of the current and deferred tax of the entity in the tax jurisdiction (unless another method achieves a more appropriate allocation);
d. entities will not be required to disclose how and why the management performance measure differs from the total of the measure of profit or loss from reportable segments;
e. the standard would be applied retrospectively and an extended period would be provided for implementation (18-24 months from the date of issuance of the standard)
Subsequently, in July, the Board tentatively decided:
To amend IAS 34, Interim Financial Statements, to require entities to apply the requirements for management performance measures in their condensed interim financial statements
To provide a non-exhaustive list of examples of subtotals that are and are not similar to gross profit
To amend IAS 33, Earnings per Share, to restrict the numerator in an adjusted EPS calculation to amounts based on defined subtotals or management performance measures
To reaffirm its tentative decisions regarding the classification of interest and dividends in the statement of cash flows.
The Board authorized the staff to begin preparing the Exposure Draft.
IFRS INTERPRETATIONS COMMITTEE (IC) LATEST DECISIONS SUMMARY
The following is a summarised update of the main discussions held by the IC at its meeting on 11 and 12 June 2019. The full update, as published by the IASB, can be found here.
The Committee tentatively decided not to add the following matters to its standard-setting agenda because the principles and requirements in IFRS already provide an adequate basis.
IFRS INTERPRETATIONS COMMITTEE (IC) LATEST DECISIONS SUMMARY
The IC last met on 11 and 12 June 2019. The full update, as published by the IASB, can be found here.
Our summary of the meeting can be found in our previous issue of News in Brief, found here.
RSM INSIGHTS from around the world
Recent articles from RSM firms around the world addressing complexities within accounting standards can be found on our website.
RSM France has issued an English version of “The Effective Tax Rate in Consolidated Interim Financial Statements”, found here.
IFRS QUERY OF THE MONTH
Each month, we will share an IFRS query 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.
QUESTION
Lessor R and Lessee E enter into a non-cancellable tenancy agreement with the following terms:
- Thirty-six- month term
- Monthly rentals of 10,000 per month
- First two months are rent-free
- Last three months will be rent free if no default of payment occurs during the lease term, the contract is not breached and is not terminated early
ANSWER:
Under IAS 17, Leases, the lessee would account for the lease as an operating lease and expense the lease payments on a straight- line basis over the 36-month lease term. Therefore, the monthly rental expense would be 8,611 (310,000 total payments/36 months).
Under IFRS 16, the lessee will capitalise the lease at the present value of the lease payments of 310,000 and record a corresponding right-of-use asset.
The last three months of the lease are rent-free provided that the lessee has not defaulted on payment during the lease term, or the contract has not been breached nor terminated early. The payments related to the last three months would represent variable lease payments. Because these particular variable lease payments do not depend on an index or rate, they are excluded from the initial measurement of the lease liability. Instead, they are recognised as an expense in the period in which the event or condition triggering payment occurs.
