This months IFRS News in brief issue summarises recent IASB discussions and decisions, highlights RSM thought leadership from around the world, and addresses an IFRS application question each month.
LATEST MATTERS FROM THE INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)
The following is a summarised update of the main discussions and decisions taken by the IASB at its meeting on 9, 10 and 11 April 2019. The full update, as published by the IASB, can be found here.
Amendments to IFRS 17 Insurance Contracts
The Board confirmed the deferral of the date of initial application of IFRS 17 and the expiry date for the exemption from applying IFRS 9 by a year, to periods beginning on or after 1 January 2022.
Staff will seek a reduced comment period for the exposure draft of proposed amendments on account of this delay.
The Board will set the comment period at its May 2019 meeting.
Business Combinations under Common Control
The Board expects to continue its discussions on measurement approaches for transactions within the scope of the project at future meetings. In the meantime, staff will continue developing measurement approaches for Business Combinations under Common Control (BCUCCs).
These will include consideration of the ways in which BCUCCs differ from business combinations that are not under common control, of the information which would be useful to the primary users of financial statements, as well as a cost-benefit analysis of the approaches proposed.
Primary Financial Statements: management performance measures
The Board tentatively decided to clarify that management performance measures are subject to the general requirement that information in the financial statements must provide faithful representation, and to specify that therefore, management performance measures should faithfully represent the financial performance of the entity to the users of financial statements.
The Board therefore deemed it unnecessary to explicitly prohibit misleading management performance measures, which would defeat the faithful representation requirements.
The Board also tentatively decided to specify that an entity may only identify a measure as a management performance measure in its financial statements if it uses the same ones in its other public communications with users.
They also tentatively decided entities would not be required to identify unusual items of income or expenses which are excluded from the entity’s management performance measures.
Primary Financial Statements: financial entities
The Board tentatively decided the following matters:
a. To require an entity to include income from cash and cash equivalents in operating profit if, in the course of its main business activities, the entity invests in financial assets that generate a return individually and largely independently of other entity resources;
b. To require an entity to include in operating profit, expenses related to liabilities arising from investment contracts with participation features that it issues that are within the scope of IFRS 9 Financial Instruments;
c. To clarify and illustrate the types of entity the Board had in mind when developing the requirements that refer to ‘main business activities’.
d. To specify that when a business activity constitutes a separate reportable segment applying IFRS 8 Operating Segments, this indicates the activity may be a main business activity.
e. To clarify that income, expenses and dividend cash flows from associates and joint ventures not accounted for using the equity method should be classified in the same way as income, expenses and dividend cash flows from other investments.
Dynamic Risk Management - presentation of derivatives within the DRM model
The Board discussed how derivatives designated within the DRM model should be presented in financial statements, and tentatively decided it should not require:
• the designated derivatives to be presented in a separate line item on the face of the statement of financial position, nor
• the changes in fair value of designated derivatives to be presented in a separate line item in other comprehensive income.
However, this information should be clearly communicated to users in the notes to the financial statements.
The Board also tentatively decided that in the statement of profit and loss:
- the aligned portion of the designated derivatives should be communicated in a way that makes it clear it is related to interest revenue and expense, and should be presented as a separate line on the face of the statement of profit or loss.
- the misaligned portion of the designated derivatives should be communicated in a way that makes it clear it is not related to interest revenue, interest expense, and the aligned portion; but is not required to be presented in a separate line item on the face of the statement of profit or loss.
However, this should be clearly communicated to users in the notes to the financial statements, which should specify the line item in profit or loss where misalignment is presented.
Dynamic Risk Management - dynamic risk management strategies
The Board discussed whether the Dynamic Risk Management (DRM) model should preclude an entity from designating specific types of strategies within the target profile, and tentatively decided that:
a. the DRM model should not permit negative balances to be defined within the target profile;
b. when changes in risk management strategy are frequent, an entity should discontinue the DRM model prospectively; and that
c. an entity’s risk management strategy should be clearly documented with the time horizon specified. If a strategy is defined in a way that is contingent on future events, the occurrence of those contingent events should be treated as a change in strategy.
Goodwill and Impairment
The Board discussed - but was not asked to make a decision on - the objective of the Goodwill and Impairment project - being to identify better disclosures for business combinations under IFRS 3 Business Combinations.
In particular, clarifying the IFRS 3 disclosure objectives and adding a new disclosure objective for entities to provide information on the subsequent performance of the acquired or combined, business; adding requirements for entities to disclose whether the key objectives of the business combination have been achieved; and making other targeted improvements.
Research programme update
Staff expect to start work on the Post-implementation Review of IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities in the second quarter of 2019, and on the pipeline research project on the Equity Method in the second or third quarter of 2019.
Accounting Policies and Accounting Estimates (Amendments to IAS 8) & Implementation matters
The Board was not asked to make any decisions in relation to the Exposure Draft Accounting Policies and Accounting Estimates (Proposed amendments to IAS 8) or in relation to implementation matters discussed in the IFRS Interpretations Committee.
Disclosure Initiative—Accounting Policies
After tentatively deciding to permit early application of proposed amendments to IAS 1 and IFRS Practice Statement 2, The Board plans to issue an exposure draft of proposed amendments to IAS 1 and IFRS Practice Statement 2 in the second half of 2019, and to allow 120 days for comment on the exposure draft.
The IFRS Interpretations Committee will be meeting in June 2019, so check back then for the latest decisions made by IFRIC. In the meantime, agenda papers for their meeting will be accessible here when published.
RSM Insights from around the world
Recent articles from RSM firms around the world addressing complexities within accounting standards can be found on our website.
- RSM Australia’s Ralph Martin has published a reminder to entities to apply the requirements of IAS 36 Impairment of assets (issued in Australia by the Australian Accounting Standards Board as AASB 136 Impairment of assets).
- RSM USA IIyaye Amabeoku has published a resource to assist with transitioning to the new leasing standard, focusing in particular on where embedded leases exist and haven’t previously been recognised. The article refers to ASC – 842 Leases under US GAAP, but is equally relevant to IFRS preparers.
- RSM UK’s Paul Merris provides an overview of the changes to the definition of materiality
- RSM Australia have made available an Excel lease model to assist entities with transitioning to IFRS 16.
IFRS QUERY OF THE MONTH
Each month, we will select and answer an IFRS query from matters raised with RSM member firms around the world. The advice contained in the response is general in nature, and should not be relied on for an entity’s specific circumstances.
A mining company with a mine in the production phase has made a provision for their mine rehabilitation obligations, as required by IAS 37. Since rehabilitation is not expected to occur until many years in the future, the discount rate is a significant factor in determining the value of this provision. What discount rate should they be using?
The relevant requirement is in IAS 37 Para 47. This requires that the discount rate used reflects current market assessments of the time value of money and the risks specific to the liability. The discount rate should not reflect risks for which future cash flow estimates have been adjusted.
The reference above is to “risks specific to the liability” and not to risks affecting the entity. The cash outflows related to rehabilitation obligations have some uncertainty associated with them, but these relate primarily to the amount and timing of the cashflows, and not to occurrence or performance risk: the requirement to rehabilitate is a matter of law, and therefore there is very little risk as to whether it will occur or not.
This differs from the appropriate discount used when determining the fair value of assets or when conducting impairment testing. The discount rate for assets must reflect that there are risks around future demand, commodity prices, competitor activity, and operational risk. It is often based on the entity’s cost of capital. However, rehabilitation and other similar liabilities are not subject to the same level of uncertainty, as they are mandated by law. Therefore it is not appropriate to use the same discount rate to discount both assets and environmental obligations.
In practice, it is difficult to appropriately risk-adjust discount rates for liabilities, and therefore the risk-free rate will usually be the most appropriate benchmark for discounting rehabilitation or environmental provisions. Indeed, if the discount rate for a provision were to be risk-adjusted, the result would usually be a rate lower than the risk-free rate reflecting the fact that a risk-adjusted liability would be higher to reflect a premium for risk. In other words, the discount rate for a risky asset is increased to reflect the risk of recovering less, while the discount rate for a risky liability is decreased to reflect the risk of paying more.