Coronavirus announcements by the IASB
The IASB have made a number of announcements and issued guidance on the application of IFRS 9 and IFRS 16. The full guidance, as published by the IASB, can be found here.
Additionally, the IASB held a supplementary meeting on 17 April 2020 at which it was tentatively decided to:
- provide lessees with an optional exemption from assessing whether a covid-19-related rent concession is a lease modification;
- require lessees that apply the exemption to account for covid-19-related rent concessions as if such concessions were not lease modifications;
- require lessees that apply the exemption to disclose that fact;
- require lessees to apply the exemption retrospectively, recognising the cumulative effect of initially applying the amendment as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the beginning of the reporting period in which a lessee first applies the amendment;
- make the exemption immediately effective on issue of the final amendment; and
- allow 14 days for comment on an exposure draft of the proposed amendment to IFRS 16, subject to approval from the Trustees of the IFRS Foundation.
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, 29 and 30 January 2020
- 25, 26 and 27 February 2020
- 17, 18 and 19 March 2020
The full update, as published by the IASB, can be found here.
BUSINESS COMBINATIONS UNDER COMMON CONTROL
The Board tentatively decided that when the predecessor approach is applied to a business combination under common control, the receiving entity is required:
- to measure consideration paid in assets, at the carrying amount of those assets at the date of the combination;
- to measure consideration in the forms of liabilities incurred or assumed, at the carrying amount of those liabilities on initial recognition at the date of the combination;
- to recognise transaction costs in the statement of profit or loss in the period they were incurred
- to recognise finance costs related to the issue of debt or equity, in accordance with IAS32;
- to recognise any difference between the consideration paid and the carrying amount of assets and liabilities received as a change in equity;
- to make disclosure of such difference between the consideration paid and the carrying amount of assets and liabilities; and
- to apply the disclosure requirements of IFRS 3.
Whether, and if so how, the predecessor approach would be applied to entities with equity instruments traded on a public market, was discussed by the Board, however, they were not asked to make any decisions at this stage.
Amendments to IFRS 3 Business Combinations
The Board tentatively decided that the amendments to IFRS 3 would apply to business combinations in periods beginning on or after 1 January 2022, with earlier adoption permitted if the entity also adopts the Amendments to References to the Conceptual Framework in IFRS.
Disclosures initiative – expected future cashflows for defined benefit plans
The Board tentatively decided to require an entity to explain the methods used to provide information on the expected effect of a defined benefit obligation on an entity’s future cashflow.
In addition, the Board also identified information an entity may choose to disclose, including the following:
- descriptions of funding agreements or policies that affect any expected future contributions that meet the defined benefit obligation at the end of the reporting period. Such agreements could include those reached with plan trustees or managers;
- quantitative information about any expected future contributions that meet the defined benefit obligation at the end of the reporting period;
- descriptions of regulatory or other agreements that affect any expected future contributions, including any known minimum funding requirements; and
- information about the expected pattern or rate of future contributions. For example, information about whether future contributions are expected to be greater than, similar to or less than those made in the current reporting period and why.
It was tentatively decided that application guidance would be included in IAS 19 to assist entities in establishing the relevance of the above information in its own circumstances.
The board also tentatively decided to:
- require an entity to disclose a tabular reconciliation of the main drivers of change in the net defined benefit liability or asset;
- include drivers of change relating to any reimbursement rights; and
- add three examples of drivers of change—interest income or expense, changes in the effect of limiting a net defined benefit asset to the asset ceiling and gains and losses from settlement.
IBOR reform and its effect on financial reporting
The Board discussed a number of issues that could result from the IBOR reform, particularly in relation to financial instrument accounting.
The Board tentatively decided to:
- amend IAS 39, only for the purpose of assessing retrospective effectiveness, to require entities to reset to zero the cumulative fair value changes of the hedging instrument and the hedged item at the date the exception to the retrospective assessment in paragraph 102G of IAS 39 ceases to apply.
- amend IFRS 16 Leases to require a lessee to apply paragraphs 42(b) and 43 of IFRS 16 to account for lease modifications to the interest rate benchmark on which lease payments are based that are required as a direct consequence of IBOR reform and done on an economically equivalent basis.
- amend IFRS 4 Insurance Contracts to require insurers that apply the temporary exemption from IFRS 9 to apply the amendments resulting from the Board’s tentative decisions in Phase 2 of the project in accounting for modifications directly required by IBOR reform.
- amend IFRS 7 Financial Instruments: Disclosures to require an entity to provide disclosures that enable users of financial statements to understand:
- the nature and extent of risks arising from IBOR reform to which the entity is exposed, and how it manages those risks; and
- the entity’s progress in completing the transition from interest rate benchmarks to alternative benchmark rates, and how the entity is managing the transition.
- provide temporary relief for hedging relationships amended to reflect modifications that are required as a direct consequence of IBOR reform.
The Board have tentatively decided that the amendments will be mandatory for periods commencing on or after 1 January 2021, with earlier application permitted. The proposed amendments should be applied retrospectively, which would include a reassessment of arrangement discontinued before initial application.
The Board plans to issue the exposure draft in April 2020.
Latest matterS from the IFRS Interpretations Committee
The following is a summarised update of key matters arising from the discussions and decisions taken by the IFRIC at its meetings on 21 January 2020.
Definition of a Lease – Decision Making Rights
In the fact pattern submitted, there is a five-year contract is in place with respect of a ship. The customer has the right to obtain substantially all of the economic benefits from the ship for the five-year term, however the supplier operates and maintains the ship throughout the contract. Many decisions to be made about the use of the ship is predetermined in the contract, with the customer making the remaining decisions. The request asks whether the customer has the right to direct the use of the ship for the contract period.
It was determined that paragraph B24(b) of IFRS 16 would not apply in this situation as not all decisions regarding use were predetermined – B24 (a) therefore applies. Decision-making rights that affect the economic benefits derived from use, should then be considered to identify which party has the right to direct the use. This does not include any decisions predetermined prior to the period of use. Therefore, in this scenario, the customer has the right to make the decisions and therefore the customer has the right to direct the use, and although the operation and maintenance of the ship are essential to efficient use, this does not give the supplier right to direct how and for what purpose the ship is used. Consequently, the contract contains a lease.
RSM INSIGHTS FROM AROUND THE WORLD
The following RSM Insights have been published on our website:
IFRS QUERY OF THE MONTH
I have a client who is going through the listing process. They are at trading entity, TradeCo, and in order to list, they have created a shell company, ShellCo, which they have inserted above my trading entity. ShellCo now owns 100% of TradeCo, and the former shareholders in TradeCo swapped their shares for shares in ShellCo. ShellCo is a new holding company and will be the entity to be listed on the Stock Exchange. How should I account for this restructure?
This is a common organisational restructure, and one which often causes confusion, and that is because the answer is simply that in effect, nothing really happens for accounting purposes.
IFRS 3 Business Combinations requires that combining entities be businesses in order to be captured within its scope. Businesses are defined as inputs and processes applied to those inputs, to generate outputs. Accounting for a business combination involves the identification of the accounting acquirer and the accounting acquiree, the valuation of net assets acquired to their fair value, and the recognition of goodwill.
IFRS 3 paragraph B18 notes that “a new entity formed to issue equity interests to effect a business combination, one of the combining entities that existed before the business combination shall be identified as the acquirer”, and paragraph B19 specifies that “the accounting acquiree [i.e. the new shell entity] must meet the definition of a business for the transaction to be accounted for as a reverse acquisition [where the entity being acquired in legal terms will ultimately be the controlling party in accounting terms]. Therefore, it is not the case that the restructure transaction should be considered a reverse acquisition.
On this basis, the insertion of a top hat shell above a trading company is outside the scope of IFRS 3 Business Combinations.
The common practice is to treat ShellCo as a continuation of the business of TradeCo, following an approach of predecessor accounting. The consolidated financial statements of ShellCo will simply show a continuation of the activities of TradeCo, and this is disclosed in the notes to the financial statements. The comparatives will be taken from the previous TradeCo financial statements.
Other restructures may be more complex, however, particularly where there are multiple combining entities. This approach may not be appropriate depending on the specific facts and circumstances of the restructure your client is considering, so if you are unsure, please consult with your local RSM adviser.