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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:
- 11 April 2023
- 25-27 April 2023
- 3 May 2023
- 22-24 May 2023
- 20-22 June 2023
The full update, as published by the IASB, can be found here.
AMENDMENTS TO IAS 12 AND TO THE IFRS FOR SMES STANDARD – INTERNATIONAL TAX REFORM – PILLAR TWO MODEL RULES
The IASB decided to amend IAS 12 Income Taxes to:
a) Introduce a temporary exception to the requirements in IAS 12 for an entity to recognise and disclose information about deferred tax assets and liabilities related to Pillar Two Income taxes.
b) Make the temporary exception mandatory without specifying for how long.
c) Disclose specific information before and after the Pillar Two model rules are in effect, especially for periods in which such legislation is enacted or substantively enacted but not yet in effect.
d) Require an entity to apply the temporary exception immediately upon issue of the amendments and retrospectively.
e) Require an entity to apply the disclosure requirements for annual reporting periods beginning on or after 1 January 2023 without being required to apply such disclosure requirements in interim financial reports for interim reporting periods ending on or before 31 December 2023.
The IASB issued the amendments to IAS 12 in May 2023.
The IASB decided to perform similar amendments to the IFRS for SMEs standard, except that no new disclosure requirements would be introduced in periods in which Pillar Two legislation has been enacted or substantively enacted but is not yet in effect. The exposure draft issued in June 2023 is open for comments until 17 July 2023.
PRIMARY FINANCIAL STATEMENTS
Associates and joint ventures accounted for using the equity method
The IASB:
a) Reconfirmed its tentative decision to require all entities to classify, in the investing category in the statement of profit or loss, income and expenses from associates and joint ventures accounted for using the equity method.
b) Tentatively decided to provide transition requirements that will permit an entity to elect to measure investments in associates or joint ventures at fair value through profit or loss in accordance with IFRS 9 Financial Instruments when the investment is held by, or is held through, an entity that is a venture capital organisation, a mutual fund, unit trust and similar entities including investment-linked insurance funds.
c) Tentatively decided to require an entity to classify in a single category of the statement of cash flows dividends received from associates and joint ventures accounted for using the equity method, applying the requirements applicable to the entity for other dividends received.
Issues related to Management Performance Measures and IFRS 8 Operating Segments
The IASB tentatively decided:
a) To clarify that management performance measures are measures that reflect management’s view of the performance of the entity as a whole.
b) To confirm that, if one or more of an entity’s management performance measures are the same as part of the operating segment information disclosed by the entity in applying IFRS 8, the entity may disclose information about those management performance measures in the same note as the operating segment information, provided the entity either:
i. includes in that note all the information required to be disclosed for management performance measures; or
ii. includes in a separate note all the information required for management performance measures.
Issues related to categories and subtotals
The IASB tentatively decided to clarify that in the statement of profit or loss:
a) Income and expenses arising from the derecognition of an asset or liability are classified in the same category as the income and expenses generated by that asset or liability immediately before derecognition.
b) Income and expenses arising from a transaction or other event that changes the classification of income and expenses from an asset or liability (without affecting the recognition of the asset or liability) are classified in the category in which income and expenses were classified immediately before the transaction or other event.
c) If income and expenses described in (a) and (b) arise from a single transaction or other event that involves a group of assets and liabilities for which income and expenses were classified in different categories immediately before the transaction or other event:
i. the gain or loss on the transaction or other event is classified in the operating category if any of the assets in the group generated income and expenses that were classified in the operating category; and
ii. the gain or loss on the transaction or other event is classified in the investing category if all the assets in the group generated income and expenses that were classified in the investing category.
The IASB tentatively decided to confirm that specific entities would not present the subtotal ‘profit or loss before financing and income tax’. This prohibition would apply when an entity that provides financing to customers as a main business activity classifies in the operating category all income and expenses from liabilities that arise from transactions that involve only the raising of finance.
Issues related to IAS 29 Financial Reporting in Hyperinflationary Economies and IAS 12 Income Taxes
The IASB tentatively decided to:
a) Clarify that the gain or loss on the net monetary position would be classified in the operating category in the statement of profit or loss when an entity applying IAS 29 presents it in a single line item.
b) Clarify that the foreign exchange differences arising from assets and liabilities within the scope of IAS 12 that are recognised in profit or loss in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates would be classified in the income tax category in the statement of profit or loss, unless doing so would involve undue cost or effort.
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF EQUITY
Scope of IFRS 7 Financial Instruments: Disclosures and additional disclosures
The IASB tentatively decided:
a) Regarding the scope of IFRS 7:
i. to expand the objective of IFRS 7 to enable users of financial statements to understand how an entity is financed and what its current and potential ownership structures are; and
ii. to delete the reference to derivatives that meet the definition of an equity instrument in IAS 32 Financial Instruments: Presentation from paragraph 3(a) of IFRS 7, which excludes such derivatives from the scope of the latter Standard.
b) Regarding disclosure requirements on terms and conditions:
i. to include explanations and examples of ‘debt-like’ and ‘equity-like’ as application guidance and illustrative examples;
ii. to clarify that the disclosures of ‘debt-like’ and ‘equity-like’ features would include both quantitative and qualitative information;
iii. to require an entity to disclose the amounts allocated initially to the financial liability and equity components of compound financial instruments;
iv. to require an entity to disclose the significant judgements it made in classifying the financial instrument, or its component parts, as a financial liability or as equity; and
v. to require an entity to disclose, if applicable, information about terms and conditions that become, or stop being, effective with the passage of time before the end of the contractual term of the instrument.
c) Regarding disclosure requirements to complement the proposed clarifications to the classification and presentation requirements in IAS 32:
i. to relocate the disclosure requirement in paragraph 80A of IAS 1 Presentation of Financial Statements to IFRS 7 and expand it to cover reclassifications when changes in the substance of the contractual terms arise from changes in circumstances outside the contract. An entity would be required to disclose the amounts reclassified into and out of financial liabilities or equity, and the timing and reason for that reclassification.
ii. to require specific disclosure, for instruments containing obligations for an entity to redeem its own equity instruments;
iii. to require the separate disclosure of the total gains or losses in each reporting period that arise from remeasuring financial liabilities containing contractual obligations to pay amounts based on an entity’s performance or changes in the entity’s net assets.
Transition requirements
The IASB tentatively decided:
a) To require an entity to apply the proposed amendments retrospectively with the restatement of comparative information.
b) For an entity already applying IFRS Accounting Standards:
i. to require the entity to treat the fair value at the beginning of the earliest comparative period presented as the amortised cost of the financial liability at that date if it is impracticable for the entity to apply the effective interest method retrospectively;
ii. not to require the entity to separate the liability and equity components if the liability component of a compound financial instrument with a contingent settlement provision was no longer outstanding at the date of initial application;
iii. to require the entity to disclose the nature and amount of any changes in classification resulting from initial application;
iv. to provide transition relief from the quantitative disclosures in paragraph 28(f) of IAS 8;
v. not to provide any transition relief for interim financial statements issued within the annual period in which the entity first applies the amendments.
c) For first-time adopters, not to require any additional transition relief.
Subsidiaries without public accountability—disclosures
The IASB tentatively decided to propose consequential amendments to be made to the IFRS Accounting Standard Subsidiaries without Public Accountability after it has been issued, that would add to the Standard disclosure requirements that are to be proposed in the FICE exposure draft.
EQUITY METHOD
Initial recognition of an investment in an associate—Deferred taxes
The IASB tentatively decided to propose that an investor would account for, and include in the carrying amount of its investment in an associate, a deferred tax asset (or liability) arising from recognising its share of the associate’s net identifiable assets and liabilities at fair value.
Moving the research project to the standard-setting work plan
The IASB decided:
a) To move the Equity Method research project to its standard-setting work plan.
b) To update the project’s objective so that it is now: To develop answers to application questions about the equity method, as set out in IAS 28 Investments in Associates and Joint Ventures, using the principles derived from IAS 28 where possible.
c) To work towards an exposure-draft for which the IASB tentatively decided:
i. not to develop proposals on how an investor applies the equity method when an associate grants an equity-settled share-based payment or a share warrant; and
ii. to propose that:
- on acquisition of an investment in an associate, an investor would recognise contingent consideration as part of the cost of the investment and measure that contingent consideration at fair value; and
- after the acquisition date, an investor would account for the subsequent settlement of contingent consideration classified as equity within equity, whereas it would measure other contingent consideration at fair value at each reporting date and recognise changes in fair value in profit or loss.
BUSINESS COMBINATIONS—DISCLOSURES, GOODWILL AND IMPAIRMENT
The IASB tentatively decided:
a) To retain the requirement to perform a quantitative impairment test annually.
b) Not to pursue any of the alternatives to it that were suggested by respondents to the IASB’s Discussion Paper Business Combinations—Disclosures, Goodwill and Impairment.
c) That it is not feasible to design a different impairment test that would, at a reasonable cost, be significantly more effective than the impairment test currently required by IAS 36.
MAINTENANCE AND CONSISTENT APPLICATION
Lessee Derecognition of Lease Liabilities (IFRS 9)—Potential annual improvement
The IASB tentatively decided to:
a) Include two proposed amendments in its next annual improvements cycle:
i. An amendment to paragraph 2.1(b)(ii) of IFRS 9 to add a cross-reference to paragraph 3.3.3 of IFRS 9 in order to clarify how a lessee is required to account for an extinguished lease liability. The proposed amendment would be applied prospectively.
ii. An amendment to paragraph IG14 accompanying IFRS 7 to make it consistent with paragraph 28 of IFRS 7.
b) Permit early application of the proposed amendments.
POST-IMPLEMENTATION REVIEWS
The following Request for Information Post-implementation Reviews have been issued:
a) IFRS 9—Impairment open for comment until 27 September 2023.
b) IFRS 15 Revenue from Contracts with Customers open for comment until 27 October 2023.
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:
- 22 March 2023 after addendum
- 7 June 2023 The full updates, as published by the IASB, can be found here.
MERGER BETWEEN A PARENT AND ITS SUBSSIDIARY IN SEPARATE FINANCIAL STATEMENTS (IAS 27 SEPARATE FINANCIAL STATEMENTS)
In the fact pattern described in the request:
a. A parent entity prepares separate financial statements and recognises an investment in a subsidiary applying IAS 27.
b. The subsidiary contains a business; and
c. The parent entity merges with the subsidiary, resulting in the subsidiary’s business becoming part of the parent entity (merger transaction).
The request asked how the parent entity should account for the merger transaction in its separate financial statements. In particular, the request asked whether the merger transaction constitutes a business combination and consequently the parent entity should apply the relevant requirements in IFRS 3 Business Combinations, or the merger should not be accounted for as a business combination in which case the parent entity recognises the subsidiary’s assets and liabilities at previous carrying amounts.
The Committee noted that evidence gathered to date indicates little, if any, diversity in accounting for the merger transaction described in the request and that parent entities generally do not apply the requirements in IFRS 3 that apply to accounting for a business combination. The Committee also concluded, based on its findings, that the matter described in the request does not have widespread effect. Consequently, the Committee decided not to add a standard setting project to the work plan.
