RSM News in Brief on IFRS 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)
- IFRS INTERPRETATIONS COMMITTEE (IC) LATEST DECISIONS SUMMARY
- RSM INSIGHTS from around the world
- IFRS query of the month
The following is a summarised update of the main discussions and decisions taken by the IASB at its meeting on 14, 15 and 16 May 2019. The full update, as published by the IASB, can be found here.
Amendments to IFRS 17 Insurance Contracts
In advance of issuing an exposure draft amending IFRS 17, the Board tentatively decided:
a. to specify the criteria that must be met for an insurance contract to provide an investment return service;
b. to include guidance that a positive investment return can occur even when the absolute return is negative (relevant for determining whether insurance contracts without direct participation features may provide an investment-return service);
c. to clarify that an entity need not disclose investment components and refunds of premiums separately in the reconciliation of insurance contract liabilities;
d. to clarify that changes in the liability for remaining coverage related to amounts lent to customers are not recognised as insurance revenue.
A comment period of 90 days was set for the Exposure Draft Amendments on 23 April 2019.
Disclosure Initiative – Targeted Standards-level Review of Disclosures
In response to stakeholder feedback regarding employee benefit and fair value disclosures the Board tentatively decided to:
a. explore whether disclosure of new or different information about employee benefits would be more relevant than that provided currently under IAS19. Feedback suggested users were interested primarily in the future expected cash flow effects (and associated sensitivities) of defined benefit plans;
b. explore helping preparers to make effective materiality judgements about fair value measurement disclosures; the issue being that many users said they often get a lot of information about immaterial fair value measurements, and little information about material measurements.
The Board will discuss detailed technical analysis of the disclosure requirements in IAS 19 and IFRS 13 Fair Value Measurement at future meetings.
The Board discussed, but was not asked to make any decisions on, the revised Practice Statement 1 Management Commentary.
The revision of the Practice Statement is intended to promote preparation of management commentaries that better meet the needs of the primary users of financial reports.
The revised Practice Statement will provide guidance that:
a. consolidates innovations in narrative reporting such as value creation and concepts which emphasise longer term aspects of performance;
b. addresses gaps (e.g. lack of focus on matters important to the future of the business and the inability to tell the coherent story of the business) in reporting practice; and
c. remains principles-based but contains sufficient detail to support rigorous application.
Goodwill and Impairment
The Board discussed, but was not asked to make any decisions on:
a. how to improve disclosure requirements for business combinations (such as the key /objectives of a business combination and subsequent performance); and
b. whether to remove the requirement to carry out an annual impairment test for goodwill (and for intangible assets either with indefinite useful economic lives or not yet available for use) when no indicator of impairment exists.
2019 Comprehensive Review of the IFRS for SMEs Standard
In advance of the 2019 review of the IFRS for SMEs, the Board decided that a request for information should seek views regarding alignment with full IFRS, along with amendments not currently incorporated into the IFRS for SMEs.
In considering alignment, the Board would apply and balance three principles:
a. relevance to SMEs;
b. simplicity; and
c. faithful representation.
The summary of the Board’s tentative decisions to date on the 2019 review should include application guidance.
Provisions and onerous contracts.
Following responses to the December 2018 exposure draft ED 2018/2 (Onerous contracts the costs of fulfilling a contract: proposed amendments to IAS 37), the Board is considering whether to provide examples of costs that do, or do not, relate directly to the cost of fulfilling a contract.
Primary Financial Statements
The Board is focusing on improvements to the statements of financial performance and the cash flow statement. Matters under consideration include:
a. Requiring the presentation of an “EBIT-type” subtotal in the statement(s) of financial performance;
b. Distinguishing between items in OCI that will subsequently be reclassified to profit and loss from items which will not; and
c. Removing the options for classification of cash flows from interest and dividends in the statement of cash flows
The Board decided the consultation document for this project should be an exposure draft.
The following is a summarised update of the main discussions held by the IC at its meeting on 11 and 12 June 2019. The full update, as published by the IASB, can be found here.
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.
Fair Value Hedge of Foreign Currency Risk on Non-Financial Assets (IFRS 9 Financial Instruments)
The Committee received requests asking whether foreign currency risk can be a separately identifiable and reliably measurable risk component of a non-financial asset held for consumption (such as PPE or inventory) that can be designated as the hedged item in a fair value hedge accounting relationship.
The Committee’s response assessed the following:
Whether an entity can have exposure to foreign currency risk on a non-financial asset held for consumption that could affect profit or loss?
It was concluded that it is possible for this situation to arise where the fair value of a non-financial asset is determined only in one particular currency which is not the entity’s functional currency.
Where the conditions in above are present, is it a separately identifiable and reliably measurable risk component?
It was concluded that foreign currency risk can be a separately identifiable and reliably measurable risk component.
Whether the designation of foreign currency risk on a non-financial asset held for consumption can be consistent with an entity’s risk management activities?
The Committee observed that changes in the fair value of the non-financial asset held for consumption may be of limited significance to the entity as the entity may not be managing or hedging risk exposures on this asset and consequently it cannot apply hedge accounting.
Compensation for Delays or Cancellations (IFRS 15 Revenue from Contracts with Customers)
A request was received regarding an airline’s obligation to compensate customers for delayed or cancelled flights.
The request asked whether the entity should account for this obligation either:
- as variable consideration under IFRS 15; or
- applying IAS 37 separately from its performance obligation to transfer a flight service to the customer.
The Committee concluded that this is variable consideration in the contract and IFRS 15 should be applied.
Lessee’s Incremental Borrowing Rate (IFRS 16 Leases)
A request was received regarding the definition of a lessee’s incremental borrowing rate in IFRS 16. The request asked whether the lessee’s incremental borrowing rate is required to reflect the interest rate on a loan with both a similar maturity to the lease and a similar payment profile to the lease payments.
The Committee concluded that there is no explicit requirement to determine the borrowing rate on this basis. However, in applying judgement in determining its incremental borrowing rate, a lessee might have regard to the rate referred to in the request above.
Holding of Cryptocurrencies
The Committee considered which IFRS should be applicable to holdings of cryptocurrencies and concluded that:
- IAS 2 ‘Inventories’ applies when they are held for sale in the ordinary course of business; or
- IAS 38 ‘Intangible Assets’ in other circumstances.
Lease Term and Useful Life of Leasehold Improvements (IFRS 16 Leases and IAS 16 Property, Plant and Equipment)
The Committee received a request about cancellable or renewable leases asking two questions:
How to determine the lease term of a cancellable or renewable lease?
The request specifically asked whether an entity should consider the broader economics of the contract, and not only contractual termination payments when assessing whether a penalty is significant or not.
The Committee concluded that in determining the enforceable period, the entity should consider the broader economics and whether there is in fact an enforceable period at all. A lease would not be enforceable where both parties have the right to terminate the lease without permission from the other party with no more than an insignificant penalty.
Whether the useful life of any related non-removeable leasehold improvements is limited to the lease term determined applying IFRS 16?
The non-removeable leasehold improvements are, for example, fixtures and fittings acquired by the lessee and constructed on the underlying asset. The lessee will use and benefit from the leasehold improvements only as long as it uses the underlying asset.
The Committee observed that applying the requirements on the useful life of an asset in IAS 16, an entity might often reach this conclusion.
Subsequent Expenditure on Biological Assets (IAS 41 Agriculture)
The Committee received a request about the accounting for subsequent expenditure related to the transformation of biological assets measured at fair value less costs to sell. The request asked whether an entity should capitalise such costs or, instead, recognise subsequent expenditure as an expense when incurred.
The Committee concluded that whichever approach is taken there is no overall effect on:
- The carrying value of the asset; or
- The reported profit or loss.
Presentation of Liabilities or Assets Related to Uncertain Tax Treatments (IAS 1 Presentation of Financial Statements)
A request was received about whether, in its statement of financial position, an entity is required to present uncertain tax liabilities as current (or deferred) tax liabilities or, instead, within another line item such as provisions.
The Committee observed that neither IAS 12 nor IFRIC 23 contain requirements on the presentation of uncertain tax liabilities or assets and entities should apply the presentation requirements in IAS 1. The Committee concluded that applying IAS 1, entities are required to present uncertain tax liabilities as current (or deferred) tax liabilities.
Costs to Fulfil a Contract (IFRS 15 Revenue from Contracts with Customers)
A request was received regarding the recognition of costs incurred to fulfil a contract as an entity satisfies a performance obligation in the contract over time. The entity measures progress towards complete satisfaction of the performance obligation using an output method and, at the reporting date, has incurred costs that relate to construction work on a good for is being transferred to the customer as it is being constructed.
The Committee concluded that the costs referred to in the question should be recognised as an expense because they related to past performance in accordance with paragraph 98 (c) of IFRS 15.
Disclosure of Changes in Liabilities Arising from Financing Activities (IAS 7 Statement of Cash Flows)
The Committee received a request from investors about the adequacy of the requirements in IAS 7 to provide disclosures which enable users to evaluate changes in liabilities arising from financing activities.
The Committee concluded that, the disclosure requirements in paragraphs 44B-44E of IAS 7, together with requirements in IAS 1, are adequate to require an entity to provide disclosures that meet the objective in paragraph 44A of IAS 7.
Consequently, notwithstanding that the two approaches would result in different presentation of amounts in profit and loss, the Committee decided that it is unnecessary to prescribe the accounting treatment for subsequent expenditure related to biological assets which are measured at fair value.
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 which IFRS should be applied.
The Committee concluded that IFRS 16 should be applied as 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)
A request was received about whether a post-employment benefit plan should be treated as a defined contribution or a defined benefit plan in accordance with IAS 19.
In the circumstance presented, 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 scheme as a defined benefit plan.
Recent articles from RSM firms around the world addressing complexities within accounting standards can be found on our website.
- RSM UK’s Lee Marshall has published an overview on the Interest Rate Benchmark Reform under IFRS.
- RSM UK’s Danielle Stewart OBE has published an article on the IASB narrow scope amendments as part of the annual improvements to IFRS Standards 2018–2020.
- RSM UK’s Lee Marshall provides an overview on the consultation into improvements to the reporting of intangibles.
- RSM UK’s Alan Aitchison has published a summary of the requirements of IFRIC 23: Accounting for uncertain tax treatments.
- RSM Canada’s Liam Neilson explains the proposed changes to IFRS 17 Insurance Contracts
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.
An entity grants share options to certain of its employees. These options include a requirement for recipients to remain employed for a minimum period (a “service condition”) which is expected to be met in all of the scenarios which follow. Additionally, the options include the following performance conditions and the options become exercisable if either of the conditions are met:
The entity’s share price reaches a specified target price (a “market condition”); or
The entity achieves a specified level of sales growth (a “non-market condition”)
Consequently, there are four possible scenarios: both conditions are met, neither of the conditions are met, only the market condition is met, or only the non-market condition is met.
The entity should account for the share-based payment based on the most likely outcome at the reporting date, which may differ from one reporting period to the next.
How does the entity approach the estimation of the fair value of the share options under each possible scenario?
Under IFRS 2 share-based payments, market conditions are taken into account when estimating the fair value of the equity instruments granted. However, non-market conditions are not taken into account in determining the initial valuation. Instead, the entity adjusts the number of share options it expects to vest to reflect the likelihood of the non-market condition being met.
In this scenario, the first thing to consider is the grant date fair value of the options whose value is determined irrespective of whether the non-market conditions are met. Since the market conditions might be met or not met, there will in fact be two grant date fair values:
- One grant date fair value on the basis that the non-market conditions are expected to be met (“full fair value”) on the basis that meeting the conditions set out in the option agreement does not depend upon meeting the market conditions, and
- One grant date fair value on the basis that the non-market conditions are not expected to be met (“reduced fair value”) on the basis that meeting the conditions does depend upon meeting the market conditions and the fair value needs to reflect the possibility that the market conditions might also not be met – note this value is unlikely to be zero.
The accounting for each of the four scenarios has the share-based payment expense based on the following expectations in respect of the achievement of conditions:
Scenario A – Market condition probable, non-market condition not probable
The expense would be based on the reduced fair value
Scenario B – Market condition not probable, non-market condition probable
The expense would be based on the full fair value
Scenario C – Market condition not probable, non-market condition not probable
The expense would be based on the reduced fair value
Scenario D – Market condition probable, non-market condition probable
The expense would be based on the full fair value
It is important that both fair values are established in the first reporting period because if the vesting period straddles more than one accounting period then the judgement regarding the most likely scenario might differ from one year to the next. In such a case, in the later years, an adjustment would be needed to reflect a total accumulated charge based on the scenario associated with the later judgement.