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:
22, 23 and 24 October 2019
19 and 20 November 2019
The full update, as published by the IASB, can be found here.
BUSINESS COMBINATIONS UNDER COMMON CONTROL
The Board discussed how a predecessor approach should be applied. The Board tentatively decided that a receiving entity should recognise and measure assets and liabilities transferred in a business combination under common control at the carrying amounts included in the financial statements of the transferred entity. The Board also tentatively decided that pre-combination information in the primary financial statements should be provided only about the receiving entity.
Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16)
The Board discussed the transition requirements and effective date for the amendments to IAS 16 Property, Plant and Equipment. The Board also discussed due process, including permission for balloting the amendments.
The amendments to IAS 16 would prohibit an entity from deducting from the cost of an item of property, plant and equipment (PPE) any proceeds from selling items produced while bringing that asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
The Board tentatively decided that the effective date of the amendments be for annual periods beginning on or after 1 January 2022, with earlier application permitted.
Onerous Contracts—Cost of Fulfilling a Contract (Amendments to IAS 37)
The Board discussed feedback on the Exposure Draft Onerous Contracts—Cost of Fulfilling a Contract which proposed a narrow-scope amendment to IAS 37 to clarify which costs an entity includes in determining the ‘cost of fulfilling’ a contract for the purpose of assessing whether that contract is onerous. The Board proposed to clarify that such costs comprise those that relate directly to the contract. It also proposed to add to IAS 37 examples of costs that do, and costs that do not, relate directly to a contract.
The Board also tentatively decided:
- not to permit the application of the amendments retrospectively applying IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors;
- to clarify within the transition requirements that an entity applies the amendments to contracts under which the entity has not yet fulfilled all its obligations at the beginning of the annual period in which the entity first applies the amendments; and
- to provide no exception or exemption for first-time adopters.
Accounting Policies and Accounting Estimates (Amendments to IAS 8)
The Board tentatively decided to revise the definition of accounting estimates to specify that:
- accounting estimates are monetary amounts in financial statements that are subject to measurement uncertainty;
- such monetary amounts are outputs of measurement techniques used in applying accounting policies; and
- an entity uses judgements and/or assumptions in developing an accounting estimate.
The Board also tentatively decided to:
- clarify that:
- the effects of a change in an input and/or in a measurement technique used to develop an accounting estimate are changes in accounting estimates if they do not result from the correction of prior period errors; and
- a change in accounting estimate that results from new information or new developments is not the correction of an error; and
- specify that estimation techniques and valuation techniques are examples of measurement techniques an entity uses to develop accounting estimates.
Primary Financial Statements
The Board met on 19 November 2019 to discuss how an entity should be required to classify, in the statement of profit or loss, income and expenses from investments in integral associates and joint ventures other than the share of profit or loss from such investments.
The Board tentatively decided to:
- require an entity to classify income and expenses from integral associates and joint ventures in the integral associates and joint ventures category of the statement of profit or loss; and
- specify that income and expenses from integral associates and joint ventures include, in addition to the share of profit or loss of integral associates and joint ventures:
- impairment losses and reversals of impairment losses on integral associates and joint ventures; and
- gains or losses on the disposal of integral associates and joint ventures.
Fees in the ‘10 per cent’ Test for Derecognition of Financial Liabilities (Amendment to IFRS 9)
The Exposure Draft proposed:
- clarifying that, in the ‘10 per cent test’ for derecognising financial liabilities in paragraph B3.3.6 of IFRS 9 Financial Instruments, ‘fees’ refers only to fees paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other’s behalf; and
- requiring an entity to apply the amendment to financial liabilities that are modified or exchanged on or after the date it first applies the amendment.
The Board tentatively decided to finalise the proposed amendment to IFRS 9 with no changes.
Lease Incentives (Amendment to Illustrative Examples accompanying IFRS 16)
The Exposure Draft proposed to amend Illustrative Example 13 accompanying IFRS 16 Leases by removing the illustration of the reimbursement of leasehold improvements.
The Board tentatively decided to finalise the proposed amendment to Illustrative Examples accompanying IFRS 16 with no changes.
Taxation in Fair Value Measurements (Amendment to IAS 41)
The Exposure Draft proposed:
- removing the requirement in paragraph 22 of IAS 41 Agriculture for entities to exclude cash flows for taxation when measuring the fair value of biological assets; and
- requiring an entity to apply the amendment to fair value measurements on or after the date it first applies the amendment.
The Board tentatively decided to finalise the proposed amendment to IAS 41 with no changes.
IFRS QUERY OF THE MONTH
The query below is similar to a fact pattern raised to the IFRIC in relation to the lease term and useful life of leasehold improvements, on a cancellable or renewable lease. The advice contained in the response is general in nature and should not be relied on for an entity’s specific circumstances.
- The lease has an initial, non-cancellable period of five years, and neither party can terminate the lease before five years
- At the end of the five years, the contract automatically renews for an additional year, until the lessee or the lessor cancels the lease. The lessee and lessor do not need permission from each other to terminate the lease
- The lessor would not suffer a significant penalty if it cancelled the lease after the initial five-year period
- The lessee has made a significant level of leasehold improvements to the leased property, and the leased property is in a prime location. Therefore, the lessee has determined it would suffer a significant penalty if it cancelled the lease before the end of seven years (five-year initial period plus two renewal periods of one year).
- The lessee does not anticipate any use from the leasehold improvements beyond the lease term.
What is the lease term and the useful life of the leasehold improvements?
IFRS 16 B34 states following:
In determining the lease term and assessing the length of the non-cancellable period of a lease, an entity shall apply the definition of a contract and determine the period for which the contract is enforceable. A lease is no longer enforceable when the lessee and the lessor each has the right to terminate the lease without permission from the other party with no more than an insignificant penalty.
A contract is an agreement between two or more parties that creates rights and obligations. The initial term of five years meets the definition of a contract, as each party has enforceable rights and obligations. The two renewal periods of one year in years 6 and 7 are also included in the lease term, since the lessee would suffer from more than an insignificant penalty if it exercised its right to terminate prior to this. After seven years, the lease is no longer enforceable, since both parties can terminate the lease without permission from the other party with no more than an insignificant penalty. Therefore, the lease term is seven years because the lessee is reasonably certain to not exercise its right to terminate until the end of seven years.
IAS 16.56 “The future economic benefits embodied in an asset are consumed by an entity principally through its use. However, other factors, such as technical or commercial obsolescence and wear and tear while an asset remains idle, often result in the diminution of the economic benefits that might have been obtained from the asset. Consequently, all the following factors are considered in determining the useful life of an asset:
- expected usage of the asset. Usage is assessed by reference to the asset's expected capacity or physical output.
- expected physical wear and tear, which depends on operational factors such as the number of shifts for which the asset is to be used and the repair and maintenance programme, and the care and maintenance of the asset while idle
- technical or commercial obsolescence arising from changes or improvements in production, or from a change in the market demand for the product or service output of the asset. Expected future reductions in the selling price of an item that was produced using an asset could indicate the expectation of technical or commercial obsolescence of the asset, which, in turn, might reflect a reduction of the future economic benefits embodied in the asset.
- legal or similar limits on the use of the asset, such as the expiry dates of related leases.
Using criteria (d), the useful life of the leasehold improvements should be seven years (which is the same as the lease term), as the leasehold improvements will not be used beyond the lease term.