Discussion at the March 2008 IASB Meeting
The Board discussed submissions received from the Canadian Accounting Standards Board (AcSB) and the Canadian oil and gas industry. The submission of the AcSB addresses IFRS 1 issues of jurisdictions expecting to adopt IFRSs in the near future. The issue raised by the Canadian oil and gas industry relates to practical difficulties encountered by Canadian entities applying full cost accounting under Canadian GAAP.
The issues were presented by AcSB staff and a representative of the Canadian oil and gas industry and propose amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards in relation to:
- Derecognition of financial assets and liabilities
- Reassessment of accounting under previous GAAP
- Retrospective restatement of fair values
- Oil and gas industry issue: Full cost accounting
Derecognition of financial assets and liabilities
The AcSB staff recommended that the exception regarding the derecognition requirements of IAS 39 in paragraph 27 of IFRS 1 be revised to refer to transactions that occurred prior to 'the date of transition to IFRSs' in order to address the transitional issues of countries whose transition date to IFRSs is significantly later than 1 January 2004 (such as 1 January 2011 for Canada).
The IASB staff noted that 1 January 2004 is the date the derecognition requirements of IAS 39 became effective and is therefore not related to transition dates. In addition, the IASB staff was of the view that the practical problems raised may be covered by other exemptions in IFRS 1 relating to retrospective application of IFRSs.
The Board agreed and decided not to change paragraph 27 of IFRS 1.
Reassessment of accounting under previous GAAP
This proposal relates to jurisdictions that have been gradually phasing-in IFRSs rather than making a one-time complete changeover. Under a phase-in approach, individual IFRSs will be incorporated into national standards before entities are able to claim full compliance with IFRSs.
The AcSB staff proposed precluding reassessment of previous GAAP accounting when that previous GAAP adopted the respective IFRS word for word and provided the same transitional provision as in accordance with IFRS 1 except for the transition date. The AcSB staff noted that in these cases, even though the accounting under previous GAAP is identical to that in accordance with IFRSs, IFRS 1 would require an entity to again reassess that accounting retrospectively.
Some Board members disagreed and stated that the type of previous GAAP should not influence the first-time adoption. Other Board members acknowledged that the efforts of reassessing things twice (e.g. all leasing contracts of an entity) may outweigh the benefit.
Eventually, by majority vote the Board decided to proceed with the proposal. The AcSB staff was asked to redraft the proposal, in particular, to clearly identify the scope of such an amendment. There seemed to be a consensus that any amendment should only apply when the previous GAAP adopted the respective IFRS word for word and that reassessment should 'not be required' but not 'precluded'.
Retrospective restatement of fair values
The AcSB staff recommended adding a principle to IFRS 1 prohibiting the retrospective restatement of fair values unless the fair value information was determined or was available as at the date IFRSs required the fair value to be determined.
The Board agreed and asked the AcSB staff to draft an amendment for discussion at a future meeting.
Oil and gas industry issue: Full cost accounting
The representative of the Canadian oil and gas industry pointed out that this issue appears to be country specific.
The representative explained that under full cost accounting, costs incurred during the exploration and evaluation phase are accounted for in a manner substantially consistent with IFRS 6 Exploration for and Evaluation of Mineral Resources. Once it is determined that the exploration has been successful, the accumulated costs are accounted for in a single cost centre for each country and as a single amount. He pointed out that consequently the unit of account under IFRSs is smaller than under full cost accounting and that recreating the historical cost or determining the fair value for each oil and gas asset would be impractical.
The proposal was to allow these entities allocating the existing carrying amount of each cost centre to the oil and gas assets within that cost centre (a so called 'CGU approach').
Most of the discussion was spent on understanding the implications of cost accounting. Finally, the Board decided to proceed with this proposal and asked the AcSB staff to prepare a comprehensive description of the issue.
The Board postponed the decision in which type of project any amendments should be addressed.
Discussion at the May 2008 IASB Meeting
The Canadian Accounting Standards Board (AcSB) provided follow-up analysis of the issues discussed at the March 2008 meeting.
At the March 2008 meeting the Board decided to proceed with the following proposed exemptions to IFRS 1 but asked the AcSB staff to draft amendments taking into account the Board's decisions and comments made at that meeting.
- Reassessment of accounting under previous GAAP
- Retrospective restatement of fair values
- Oil and gas industry issue: Full cost accounting
Regarding a fourth issue dealing with derecognition of financial assets and financial liabilities, the Board was less supportive of providing an exemption and asked the AcSB staff to investigate whether the exemption regarding the retrospective restatement of fair values would resolve the issue.
In addition, at this meeting the AcSB staff presented a proposed amendment to IFRS 1 relating to non-IFRS-compliant amounts in property, plant and equipment. This issue was raised by the Canadian rate-regulated industry.
Reassessment of accounting under previous GAAP
The AcSB staff amended the March proposal by clarifying that the amendment should only apply when the previous GAAP required the same accounting treatment and that an entity would be permitted not to reassess the accounting for a past transaction.
The AcSB staff recommended that the following principle be added to IFRS 1:
This IFRS permits a first-time adopter not to reassess the accounting for a past transaction at the date of transition to IFRSs, based on facts and circumstances at that date, when previous GAAP had introduced the same accounting as IFRSs based on an assessment of facts and circumstances at an earlier date. A first-time adopter electing not to reassess its previous accounting in such circumstances shall continue to use the assessment made in accordance with the previous GAAP.
The Board agreed to the proposed amendment subject to drafting suggestions. In particular, the Board decided that 'same accounting' should be replaced by 'identical accounting and assessment'.
Retrospective restatement of fair values
The AcSB staff was of the view that a broad linkage of IFRS 1 to the impracticality guidance in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors would risk that the exception not only captures retrospective restatement of fair values but also other, probably inappropriate items.
Consequently, the AcSB staff recommended proceeding with the (slightly redrafted) proposal presented at the March meeting:
This IFRS prohibits a first-time adopter from retrospectively determining fair values as of dates prior to the date of transition to IFRSs when those fair values were not available when IFRSs required them to be determined. When a fair value was not available, an entity shall use in its place the carrying amount at that date under its previous GAAP.
The Board agreed.
Oil and gas industry issue: Full cost accounting
The AcSB staff provided an analysis regarding the need for accompanying disclosure requirements if an entity elects to measure oil and gas assets in the development and production phase at the amount determined under previous GAAP. According to this analysis the election to use the proposed exemption would normally result in the oil and gas assets as a whole being measured at a higher amount than if they were reported using the IFRSs effective at the reporting date for its first IFRS financial statements. In addition, the existing IFRS 1 would not require disclosures since the exemption would not result in using fair values as deemed cost and, accordingly, would not be covered by paragraph 44 of IFRS 1.
The AcSB staff suggested adding the following paragraphs to IFRS 1:
The exemption:
19A An entity may elect to measure oil and gas assets at the date of transition to IFRSs on the following basis:
(a) exploration and evaluation assets at cost, less any impairment, determined in accordance with IFRS 6, Exploration for and Evaluation of Mineral Resources; and
(b) other assets (i.e. those in the development or production phases) at the amount determined under the entity's previous GAAP, first adjusted by the difference between the decommissioning, restoration or similar liability as measured in accordance with IAS 37 and that recognised under the entity's previous GAAP. The adjusted amount is then allocated on a pro rata basis using reserve volumes or related values as of that date. An entity making this election does not apply paragraph 25E for these assets.
The deemed cost for each oil and gas asset determined as above shall be tested for impairment at the date of transition to IFRSs. For purposes of this paragraph, oil and gas assets comprise only those used in the exploration, evaluation, development or production of oil and gas.
Disclosure requirements:
44A. Paragraph 19A provides an exemption for oil and gas assets. If an entity uses that exemption, it shall disclose that fact and the basis on which carrying amounts under previous GAAP were allocated."
The Board agreed.
Derecognition of financial assets and financial liabilities
The AcSB staff concluded that its proposal to introduce a principle prohibiting retrospective fair value measurement would resolve the derecognition issue and withdrew the proposed amendment.
Canadian rate-regulated industry: Non-IFRS-compliant amounts in property, plant and equipment of first-time adopters
The ACSB staff highlighted the following:
- Some Canadian rate-regulated entities have capitalised, as part of the historical cost of property, plant and equipment (PP&E), amounts not permitted to be capitalised in accordance with IFRSs, for example, imputed cost of equity and not directly attributable costs (indirect overheads etc).
- In many cases these costs were capitalised as part of the total cost of an item of PP&E and not tracked separately after inclusion.
- Due to the capital intensive nature of the industry, the age of many items and the difficulty in obtaining fair value information, neither retrospective restatement nor use of fair values as deemed cost is practicable in many cases.
Consequently, the AcSB staff proposed to amend IFRS 1 to include an exemption permitting all first-time adopters facing this issue to elect to use the IFRS transition date carrying amount of an item of PP&E (containing previously capitalisedamounts not in compliance with IFRSs) as deemed cost at that date. Under this proposal entities applying the exemption would be required to undertake impairment testing at the transition date.
Most of the discussion was spent on understanding the accounting for these items of PP&E. Some Board members questioned how the impairment test would be undertaken when fair value information can not be obtained. The staff responded that a rough estimate for purposes of an impairment test could be made but that a precise fair value calculation would not be possible in many cases.
Eventually, by majority vote the Board decided to proceed with the proposal but that the exemption should be restricted to rate-regulated entities only.
Way forward
The AcSB staff was asked to prepare an exposure draft on behalf of the Board. The Board decided that the comment period should be 120 days. No Board members indicated that they would dissent.
Discussion at the September 2008 IASB Meeting
The purpose of this session was to resolve five additional matters that arose during the balloting of the exposure draft of proposed additional exemptions for first-time adopters in IFRS 1.
Need for additional exemption related to IAS 17
The staff informed the Board that on further reflection, this additional exemption was considered unnecessary. The Board agreed.
Fair value before the date of transition to IFRSs
The staff expressed concerns about the necessity of this additional exemption. The reason was the risk that values for items previously derecognised would under IFRSs be determined with hindsight. On balance, the staff recommended to delete this additional exemption from the exposure draft. The Board agreed.
Decommissioning, restoration and similar liabilities included in the cost of PP&E
The Board had a lengthy discussion on whether and how to allocate the additional asset resulting from an asset retirement obligation recognised as a liability between cost of sales, inventory and PP&E. In the end, the Board seemed to lean towards a retained earnings approach (that is, recognising the cost for the liability in retained earnings), but it was agreed that more work would have to be done on this issue.
Oil and gas assets
The staff highlighted that the Basis for Conclusions provided the rationale on why the Board agreed to provide an exemption for the measurement of oil and gas assets. Some Board members questioned the relevance and, hence, the inclusion of the words used. After some debate, the Board agreed to delete the paragraphs concerned in the Basis for Conclusions.
Question regarding additional circumstances in which relief is necessary for assessments under previous GAAP before the date of transition
Some Board members questioned the inclusion of a specific question in the Invitation to Comment, which had been specifically requested by some (other) Board members. The Board agreed to keep the question in the Invitation to Comment.
September 2008: Exposure Draft issued
On 25 September 2008, the IASB issued an exposure draft of proposed amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards. The proposals address the retrospective application of IFRSs in selected areas and are aimed at ensuring that entities applying IFRSs will not face undue cost or effort in the transition process. The exposure draft proposes:
- to exempt companies from retrospective application of IFRSs for oil and gas assets using the full cost method and for operations subject to rate regulation.
- to exempt companies with existing leasing contracts accounted for in accordance with IFRIC 4 Determining whether an Arrangement contains a Lease from reassessing the classification of those contracts according to IFRSs when the same classification has previously been made in accordance with national GAAP.
The exposure draft Additional Exemptions for First-time Adopters (proposed amendments to IFRS 1) may be downloaded without charge from the IASB's website. Comment deadline is 23 January 2009. Click for Press Release (PDF 48k).
Discussion at the April 2009 IASB Meeting
Oil and Gas issues
The Board reviewed its proposed amendments to IFRS 1 with respect to certain exemptions for oil and gas assets in light of comments received on the Exposure Draft issued in September 2008. The staff noted that 95 responses were received and the vast majority of those responses had been favourable towards the proposed amendments.
The Board confirmed the proposals. In doing so, they agreed to amend the proposed paragraph 19A to describe the attributes of 'full cost accounting' rather than refer to the method by name. Other minor amendments were made with little debate.
The Board will discuss the proposed exemptions related to rate-regulated activities at a subsequent meeting.
Discussion at the May 2009 IASB Meeting
The Board considere comments received relating to the remaining proposals in the September 2008 Exposure Draft Additional Exemptions for First-time Adopters (Proposed Amendments to IFRS 1)
Operations subject to rate regulation
The Board discussed and agreed:
- To extend the scope of the exposure draft proposals to include qualifying items classified as an intangible asset;
- To amend the definition of operations subject to rate regulation included in the proposals to reflect the current thinking of the Board's potential project on rate-regulated activities on which entities should be within the scope of an eventual standard on this topic;
- To remove the requirement for an entity to demonstrate the impracticability of both retrospective restatement and fair value as deemed cost before being permitted to use the proposed exemption;
- To add a sentence to paragraph D23 to clarify that an entity uses the proposed exemption or the borrowing costs exemption, not both.
In addition, the Board agreed not finalise these actions pending deliberations on its potential separate project on rate-regulated activities (this is so that the IFRS 1 exemptions can be aligned with the product, if any, of the Board's activities on rate-regulated activities).
Leases
The Board agreed to extend the exposure draft proposals to allow no reassessment of the determination of whether an arrangement contains a lease when previous GAAP the same as IFRIC 4 was applied prospectively rather than retrospectively. At the same time, the Board agreed to clarify that the determination applies on an arrangement-by-arrangement basis.
The Board agreed to amend paragraph D9 to explain that a determination of whether an arrangement contains a lease under previous GAAP should have been in accordance with requirements that would give the same result as would be achieved in accordance with IAS 17.
Assessments under previous GAAP before the date of transition to IFRS
The Board agreed that no additional changes to the exposure draft regarding assessments under previous GAAP before the date of transition to IFRSs were necessary.
July 2009: Final Amendments to IFRS 1 Issued
On 23 July 2009, the IASB amended IFRS 1 to address the retrospective application of IFRSs in two particular first-time adoption situations:
- Full-cost oil and gas assets. The amendments exempt entities using the full cost method from retrospective application of IFRSs for oil and gas assets. Entities electing this exemption will use the carrying amount under its old GAAP as the deemed cost of its oil and gas assets at the date of first-time adoption of IFRSs.
- Determining whether an arrangement contains a lease. If a first-time adopter with a leasing contract made the same type of determination of whether an arrangement contained a lease in accordance with previous GAAP as that required by IFRIC 4 Determining whether an Arrangement Contains a Lease, but at a date other than that required by IFRIC 4, the amendments exempt the entity from having to apply IFRIC 4 when it adopts IFRSs.
The amendments are effective for annual periods beginning 1 January 2010, with earlier application allowed. Click for IASB Press Release (PDF 104k).
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