LATEST MATTERS FROM THE INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)
The following is a summarized update of key matters arising from the discussions and decisions taken by the IASB at its meetings on the following dates:
- 13–15 November 2023
- 12–14 December 2023
The full update, as published by the IASB, can be found here.
RESEARCH AND STANDARD-SETTING
On 15 November 2023 the IASB continued discussions on whether to propose improvements to disclosure requirements for investments in joint ventures and subsidiaries; and the transitional requirements for the proposed amendments to IAS 28 Investments in Associates and Joint Ventures. The IASB tentatively decided to propose:
a) the same improvements to the disclosure requirements that it has tentatively decided to propose for investments in associates for investments in joint ventures.
b) that a parent that elects to use the equity method to account for its investments in subsidiaries in separate financial statements would disclose the gains or losses from the parent’s transactions to its subsidiaries.
The IASB tentatively decided to propose that an investor or a joint venturer would:
a) retrospectively apply the requirement to recognise the full gain or loss on all transactions with its associates or joint ventures.
b) recognise and measure contingent consideration at fair value at the transition date, and recognise any corresponding adjustment to the carrying amount of its investments in associates or joint ventures.
c) prospectively apply all the other requirements from the transition date.
PRIMARY FINANCIAL STATEMENTS
On 15 November 2023 the IASB discussed sweep issues identified in drafting IFRS 18 Presentation and Disclosure in Financial Statements (draft Standard). The issues relate to subtotals and categories, aggregation and disaggregation, and other topics.
Sweep issues related to subtotals and categories
In previous meetings, the IASB specified the assets for which an entity is required to classify income and expenses in the investing category (specified assets). At this meeting, the IASB tentatively decided to clarify that the income and expenses from the specified assets comprise:
a) the income generated by the specified assets;
b) the income and expenses arising from the initial and subsequent measurement of those assets; and
c) the incremental expenses directly attributable to acquiring and disposing of those assets (for example, transaction costs and costs to sell)
Consequently, to maintain consistency between the investing and financing categories, the IASB tentatively decided to clarify that the income and expenses from liabilities arising from transactions involving only the raising of finance comprise:
a) the income and expenses arising from the initial and subsequent measurement of those liabilities; and
b) the incremental expenses directly attributable to issuing and disposing of those liabilities (for example, transaction costs).
The IASB also tentatively decided to add application guidance with examples of assets that generate returns individually and largely independently of an entity’s other resources, and those that do not. This application guidance replaces the application guidance of the IASB at its July 2022 meeting to add on income and expenses from financial assets arising from providing financing to customers.
The IASB also tentatively decided:
a) to clarify that an entity need not assess whether the classification requirements determining a primary financial statement’s structure will result in a useful structured summary
b) to clarify that an entity need not present separately a specific line item in a primary financial statement if doing so is unnecessary for the statement to provide a useful structured summary—even if other IFRS Accounting Standards contain a list of specific required line items or describe the line items as minimum requirements.
PROPOSED AMENDMENTS TO IFRS FOR SMEs
The IASB met on 14 November 2023 and 13 December 2023 to redeliberate the proposals in the Exposure Draft Third edition of the IFRS for SMEs Accounting Standard.
Proposed amendments to Section 15 Investments in Joint Ventures (to be renamed Joint Arrangements)
The IASB tentatively decided:
a) to align the definition of ‘joint control’ in Section 15 of the IFRS for SMEs Accounting Standard with the definition in IFRS 11 Joint Arrangements.
b) to retain the classification and measurement requirements for jointly controlled assets, jointly controlled operations and jointly controlled entities in Section 15 of the Standard.
c) to align Section 15 of the Standard with the requirements of paragraph 23 of IFRS 11, so that a party to a jointly controlled operation or a jointly controlled asset that does not have joint control of those arrangements would account for its interest according to the classification of that jointly controlled operation or jointly controlled asset.
Fair value measurement
The IASB tentatively decided to finalise the proposals in the Exposure Draft to introduce a new Section 12 Fair Value Measurement
Unit of account and offsetting
The IASB tentatively decided that the prospective Accounting Standard on Rate-regulated Activities (RRA) would clarify that the unit of account is the right or obligation arising from a difference in timing or from a group of differences in timing. The differences in timing included in that group would:
i. be created by the same regulatory agreement;
ii. have similar expiry patterns; and
iii. be subject to similar risks.
The IASB tentatively decided that the prospective RRA Standard would:
a) require an entity to classify all regulatory income minus all regulatory expense (regulatory income or regulatory expense) as revenue.
b) require an entity to present regulatory income or regulatory expense as a separate line item in the statement(s) of financial performance.
c) omit the proposed amendment to paragraph 82 of IAS 1 that would have required an entity to present regulatory income or regulatory expense as a separate line item immediately below revenue.
d) retain the proposals to require an entity to include regulatory interest income within regulatory income and regulatory interest expense within regulatory expense.
e) amend the prospective IFRS Accounting Standard Presentation and Disclosure in Financial Statements (prospective PFS Standard) to clarify that regulatory interest is classified in the operating category.
f) retain the proposal to require an entity to present in its statement of financial position:
i. line items for regulatory assets and regulatory liabilities; and
ii. current and non-current regulatory assets and current and non-current regulatory liabilities as separate classifications by applying paragraphs 66 and 69 of IAS 1, except when the entity presents all assets and liabilities in order of liquidity.
a) include no additional presentation requirements for other comprehensive income. An entity would apply the requirements in IAS 1 or the prospective PFS Standard.
DISCLOSURE INITIATIVE—SUBSIDIARIES WITHOUT PUBLIC ACCOUNTABILITY: DISCLOSURES
The IASB met on 13 December 2023 to discuss the prospective IFRS Accounting Standard Subsidiaries without Public Accountability: Disclosures
The IASB agreed an approach to update the disclosure requirements proposed in the Exposure Draft Subsidiaries without Public Accountability: Disclosures in the light of the prospective IFRS Accounting Standard Presentation and Disclosure in Financial Statements (prospective PFS Standard) replacing IAS 1 Presentation of Financial Statements.
In addition, the IASB tentatively decided to change the disclosure requirements proposed in the Exposure Draft by:
a) omitting from the prospective Subsidiaries Standard guidance on applying the disclosure requirements in paragraphs 78, 98, 114 and 117 of IAS 1 (that are expected to be included in the prospective PFS Standard);
b) omitting from the prospective Subsidiaries Standard the presentation requirement in paragraph 106(d) of IAS 1 (that is expected to be included in the prospective PFS Standard); and
c) including in the prospective Subsidiaries Standard paragraph 128 of IAS 1 (that is expected to be included in the prospective PFS Standard).
MAINTENANCE AND CONSISTENT APPLICATION
The IASB met on 15 November 2023 to discuss possible amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
The IASB tentatively decided to propose amendments to IAS 37:
a) to specify the basis on which an entity calculates the discount rate it uses when measuring a provision.
b) to specify that an entity uses a rate that reflects the time value of money—represented by a risk-free rate—with no adjustment for non-performance risk.
USE OF A HYPERINFLATIONARY PRESENTATION CURRENCY BY A NON-HYPERINFLATIONARY ENTITY
The IASB met on 12 December 2023 and decided to add a maintenance project to its work plan for developing narrow-scope amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates to its work plan. The amendments would specify how to translate the results and financial position of an entity whose functional currency is non-hyperinflationary into a hyperinflationary presentation currency.
The IASB tentatively decided to propose amending IAS 21 to require an entity to translate all amounts (assets, liabilities, equity items, income and expenses, including comparative amounts) at the closing rate at the date of the most recent statement of financial position if that entity
a) has a non-hyperinflationary functional currency and presents financial statements in a hyperinflationary presentation currency; or
b) translates the results and financial position of a foreign operation that has a non-hyperinflationary functional currency into a hyperinflationary presentation currency.
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:
- 28–29 November 2023
The full updates, as published by the IASB, can be found here.
The Committee received a request asking it to clarify:
a) whether an entity’s commitment to reduce or offset its greenhouse gas emissions creates a constructive obligation for the entity;
b) whether a constructive obligation created by such a commitment meets the criteria in IAS 37 for recognising a provision; and
c) if a provision is recognised, whether the expenditure required to settle it is recognised as an expense or as an asset when the provision is recognised.
The Committee considered this request by reference to the following fact pattern.
In the fact pattern described in the request:
In 20X0 an entity, a manufacturer of household products, publicly states its commitment:
a) to reduce its current greenhouse gas emissions by at least 60% by 20X9; and
b) to offset its remaining emissions in 20X9 and thereafter, by buying carbon credits and retiring them from the carbon market.
With its statement, the entity publishes a detailed plan setting out how it will gradually modify its manufacturing methods between 20X1 and 20X9 to achieve the 60% reduction in emissions by 20X9. The modifications will involve investing in more energy-efficient processes, buying energy from renewable sources and replacing existing petroleum-based product ingredients and packaging materials with lower-carbon alternatives. Management is confident that the entity can make all these modifications and continue to sell its products at a profit.
Conclusion on whether a provision is recognised
The Committee concluded that in the fact pattern described:
a) whether the entity’s statement of its commitment to reduce and offset its greenhouse gas emissions creates a constructive obligation will depend on the facts of the statement and the circumstances surrounding it.
b) if the statement creates a constructive obligation:
i. the entity does not recognise a provision when it makes the statement. At that time, the constructive obligation is not a present obligation as a result of a past event.
ii. as the entity emits greenhouse gases in 20X9 and thereafter, it will incur a present obligation to retire the carbon credits required to offset its past emissions. Assuming it has not already retired the carbon credits needed to offset its past emissions and that a reliable estimate can be made of the amount of the obligation, the entity recognises a provision.
The Committee concluded that the principles and requirements in IFRS Accounting Standards provide an adequate basis for an entity to determine:
a. the circumstances in which an entity recognises a provision for the costs of fulfilling a commitment to reduce or offset its greenhouse gas emissions; and
b. if a provision is recognised, whether the costs are recognised as an expense or as an asset when the provision is recognised.
UPDATES FROM RSM MEMBER FIRMS
RSM US have published a compendium presenting significant differences between US GAAP and IFRS. The compendium is arranged on a topic-by-topic basis and focuses on the differences frequently encountered in practice.
QUERY OF THE MONTH – RIGHTS TO FUTURE EQUITY
Entity A is a technology start-up business. They have issued a “SAFE” – a Simple Agreement for Future Equity in return for seed capital of $1 million paid by an investor. Under the SAFE agreement, Entity A agrees to issue a fixed number of shares to the investor when a future triggering event occurs – in this case the triggering event is the first sale of the software that they are developing. There is no right to receive cash repayment of the $1m, although, if the company were to become insolvent, the investor would rank ahead of the ordinary shareholders for repayment
How should this be accounted for?
The accounting treatment of SAFEs depends on the terms of the agreement. In particular, in this case it will depend on whether the definition of a liability in IAS 32 is met.
There are two factors to consider in determining this:
- Is there any option for the investor to seek repayment of the $1m in cash? If there was, then it would meet the contractual definition of a financial liability, and be recognised as such on the balance sheet of Entity A. In this case, no such option exists.
- Is the number of shares to be issued in return for the $1m fixed or variable? If it is variable, it would be treated as a liability of Entity A under IAS 32, even if there is no option to be repaid in cash. However, in this case it is a fixed number of shares.
Therefore, the SAFE in this example is an equity instrument, and should be credited directly to equity, even though the shares have not yet been issued.
Other types of SAFE agreement may be classified as financial liabilities, particularly where the amount of future equity is variable based on future events.