PUBLICATIONS AND ANNOUNCEMENTS
The IFRS Foundation have published the IFRS Taxonomy 2019. It includes changes resulting from a common practice update and a general improvement update to the IFRS Taxonomy 2018. For more detail see: https://www.ifrs.org/news-and-events/2019/03/ifrs-foundation-publishes-ifrs-taxonomy-2019/
IFRS INTERPRETATIONS COMMITTEE (IC) LATEST DECISIONS SUMMARY
The following is a summarised update on the main discussions held by the IC at its meeting on 5 March 2019.
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.
- Holdings of Cryptocurrencies
The Committee listed the characteristics of cryptocurrencies and discussed which IFRS standards should apply to holdings of cryptocurrencies. The Committee concluded that IAS 2 ‘Inventories’ applies to cryptocurrencies when they are held for sale in the ordinary course of business. If IAS 2 is not applicable, an entity applies IAS 38 ‘Intangible Assets’.
- Costs to Fulfil a Contract (IFRS 15 Revenue from Contracts with Customers)
The Committee received a request about the recognition of costs incurred to fulfil a contract when the entity satisfies a performance obligation over time. Paragraph 98(c) of IFRS15 requires an entity to recognise as expenses those costs that relate to satisfied or partially satisfied performance obligations i.e. costs that relate to past performance. The Committee concluded that the costs referred to in the question should be recognised as an expense because they related to past performance.
- Subsurface Rights (IFRS 16 Leases)
The Committee received a request about the accounting for a contractual right to place an oil pipeline in an underground space for a fixed period of time in return for consideration, and whether IFRS 16, IAS 38 or another standard should be applied.
The Committee concluded that IFRS 16 should be applied because the contract was not scoped out and it met the definition of a lease because:
- The underground space is a physically distinct asset that the landowner has no rights to substitute;
- The pipeline operator has the rights to obtain substantially all of the economic benefits from exclusive use of the asset for the period; and
- The contract includes a right to direct the use of the asset, as specified in the contract.
- Effect of a Potential Discount on Plan Classification (IAS 19 Employee Benefits)
The Committee received a request regarding the accounting by an employer of a post-employment benefit plan. In this circumstance, the employer has an obligation to pay fixed annual contributions to the plan and has no obligation to make further contributions if the plan does not hold sufficient assets. However, the employer is entitled to a discount on contributions if the ratio of plan assets to plan liabilities exceeds a set level.
The Committee concluded that the existence of the potential discount would in itself not result in accounting for the plan as a defined benefit scheme.
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.
- Application of the Highly Probable Requirement when a Specific Derivative is Designated as a Hedging Instrument (IFRS 9 Financial Instruments and IAS 39 Financial instruments: Recognition and Measurement)
The Committee received a request as to how an entity should apply the “highly probable” requirement within IFRS 9 and IAS 39 in a cash flow hedge when the notional amount of the derivative designated as a hedging instrument (load following swap) varies depending on the outcome of the hedged item (forecast energy sales).
The Committee observed that the terms of the hedging instrument (i.e. the load following swap) do not affect the highly probable assessment because the highly probable requirement is applicable to the hedged item only.
- Physical Settlement of Contracts to Buy or Sell a Non-financial Item (IFRS 9 Financial Instruments)
The Committee received a request about how an entity applies IFRS 9 to particular contracts to buy or sell a non-financial item in the future at a fixed price when:
- it is initially accounted for as a derivative instrument i.e. measured at FVTPL; but
- physical delivery of the non-financial item occurs in exchange for cash and settlement of the derivative instrument.
The request asked whether, in accounting for the physical settlement of these contracts, the entity is permitted or required to make an additional journal entry that would:
- reverse the accumulated gain or loss previously recognised in profit or loss on the derivative (even though the fair value of the derivative is unchanged); and
- recognise a corresponding adjustment to either revenue (in the case of the sale contract) or inventory (in the case of the purchase contract).
The Committee concluded that IFRS 9 neither requires, nor permits, the additional journal entry described.
- Credit Enhancement in the Measurement of Expected Credit Losses (IFRS 9 Financial Instruments)
The Committee concluded that if a credit enhancement is required to be separately recognised by IFRS Standards, an entity cannot include the related cash flows in their measurement of expected credit losses as set out in paragraph B5.5.55 of IFRS 9.
- Curing of a Credit-impaired Financial Asset (IFRS 9 Financial Instruments)
The Committee received a request about how amounts recognised in the statement of profit or loss should be presented when a credit-impaired financial asset is subsequently cured (i.e. paid in full or no longer credit-impaired).
The Committee concluded that entities are required to present the difference between the initial estimate of a credit impaired asset and a revised estimate as a reversal of an impairment loss in the profit and loss account following the curing of the credit impaired financial asset.
- Sale of Output by a Joint Operator (IFRS 11 Joint Arrangements)
In the request received, a joint operator received output from a joint operation that differs from the output it was entitled to. This will be subsequently resolved through the receipt of future output, not cash.
The committee concluded that the joint operator should recognise revenue that depicts only the transfer of output to its customers in accordance with IFRS 15 and should not recognise revenue for the output to which it is entitled but which it has not yet received from the joint operation and sold. This is based on the requirement in IFRS 11 paragraph 21 which requires a joint operator to account for the revenues relating to its interest in the joint operation by applying the IFRS Standards applicable to the particular revenues.
- Liabilities in relation to a Joint Operator’s Interest in a Joint Operation (IFRS 11 Joint Arrangements)
The Committee was asked how a joint operator, as the sole signatory to a lease contract, should recognise its liabilities when the joint operation will use the leased asset and they have the right to recover a share of the lease costs from the other joint operators.
The Committee concluded that the standard did not require amendment because paragraph 20(b) of IFRS 11 addresses the point in question, i.e. it requires a joint operator to recognise its liabilities, including its share of liabilities incurred jointly, as well as liabilities it incurs in relation to its interest in the joint operation and its share of any liabilities incurred jointly with other parties to the joint arrangement.
- Over Time Transfer of Constructed Good (IAS 23 Borrowing Costs)
The Committee received a request about whether borrowing costs in relation to the construction of a residential multi-unit real estate development (building) should be capitalised. Revenue from the sale of the units is recognised over time because the developer's performance did not create an asset with an alternative use and it had an enforceable right to payment for performance completed to date.
Given that the assets recognised in relation to these units would be receivables / contract assets and / or inventory that is ready for its intended use or sale in its current condition, the Committee concluded that none of these met the definition of a qualifying asset.
- Customer’s Right to Receive Access to the Supplier’s Software Hosted on the Cloud (IAS 38 Intangible Assets)
The Committee concluded that a contract that conveys to the customer only the right to receive access to the supplier’s application software in the future is a service contract. The customer receives the service, i.e. the access to the software, over the contract term. If the customer pays the supplier before it receives the service, that prepayment gives the customer a right to future service and is an asset for the customer.
For more detailed and comprehensive information on the IC’s discussions see: https://www.ifrs.org/news-and-events/updates/ifric-updates/march-2019/