Annual improvements to IFRSs - 2009-2011
IFRS 1 First-time Adoption of IFRSs - Repeat application of IFRS 1
The Board discussed the recommendation of the IFRS Interpretation Committee to include in the Annual Improvements Project an issue to clarify whether an entity can apply IFRS 1 First-time Adoption of International Financial Reporting Standards more than once. (e.g. in a situation when the entity applied IFRSs as a listed company but was then de-listed from the stock exchange and was required to apply national GAAP. After certain period the local jurisdiction changes national GAAP to IFRSs.)
The Board considered the IFRS Interpretation Committee recommendation that proposed clarification that an entity is required to apply IFRS 1 each time it prepares and presents financial statements that meet definition of its first IFRS financial statements (i.e. when the entity's most recent previous financial statements do not contain an explicit and unreserved statement of compliance with IFRSs), even if the entity has applied IFRS 1 in the past.
Some Board members were uncomfortable with the proposal as they noted that aim of IFRS 1 was to provide relief to facilitate IFRS 1 adoption with a set of optional and required exemptions and therefore it should be applied only once.
Another Board member noted that the reference to statement of unreserved compliance was not helpful (e.g. in case of European carve-out, if the carve-out ended, that would require applying IFRS 1 for all companies). Nonetheless, the staff noted that this is already the requirement of IFRS 1 and the amendment only clarifies unclear requirements rather than changes practice.
Some Board members noted that they could agree with the proposal if the period between the last application of IFRS and the re-applying IFRS 1 is sufficiently long.
Finally, the Board narrowly (by 9 votes) agreed to publish this proposal in the forthcoming exposure draft.
The Board considered the proposed change against current Annual Improvements Criteria and agreed to include the proposal in the Exposure Draft Improvements to IFRSs which will be published later in the year.
IFRS 3 Business Combinations - Regrouping and consistency of contingent consideration guidance
The Board discussed the recommendation of the IFRS Interpretation Committee to include in the Annual Improvements Project an issue to amend the guidance on contingent consideration and to present it within one standard.
The Board considered the IFRS Interpretation Committee recommendation to clarify that contingent consideration that is a financial instrument in accordance with IAS 32 is not in the scope of IAS 39 or IFRS 9. The IFRS Interpretation Committee also proposed that all contingent consideration shall be measured at fair value at each reporting date, with any resulting gain or loss recognised in profit or loss.
The Board was uncomfortable with the proposal. One Board member questioned whether the proposal leads to convergence with US GAAP, given that IFRS 3 was developed together with the FASB with the aim to achieve convergence. The staff agreed to further investigate the impact of the proposal on convergence.
Several Board members were concerned with the proposal as they noted that the proposal would lead to fair valuing liabilities that are currently in scope of IAS 37. These Board members noted that this amendment raises questions about the broader issues of liability measurement and could potentially change current practice and thus it was in their view inappropriate to address this issue within Annual Improvement Project. The staff responded that the proposal only tries to address inconsistent wording within IFRS 3 rather than addressing broader issues.
Another Board member asked about the consistency of contingent consideration guidance between IFRS 3 and the proposed revenue recognition guidance. The staff will investigate the issue.
Finally, some Board members expressed concerns about the issue of own credit in contingent consideration measured at fair value. The staff noted that the own credit issue is pervasive and relates to the principle in IFRS 3 as such when fair value is applied.
The Board asked the staff to perform additional research to address the current practice, consistency with US GAAP and proposed revenue recognition guidance.
The Board also considered the proposed change against current Annual Improvements Criteria and noted that it needs to consider whether the issue is best addressed by annual improvements project or by post-implementation review of IFRS 3. The Board will revisit this issue at a later meeting.
IAS 24 Related Party Disclosures - Key management personnel
The Board discussed the recommendation of the IFRS Interpretation Committee to include in the Annual Improvements Project an issue to clarify the required disclosures in accordance with IAS 24 Related Party Disclosures in cases where reporting entity hires key management services from a separate management entity (e.g. in case of mutual funds who hire a separate management entity rather than management personnel).
The Board discussed modification of the definition of a related party to include among related parties the entity or members of its group that provides key management personnel services to the reporting entity and clarification whether the employees of the entity that provides these services, are key management personnel for the purposes of IAS 24.
Several Board members expressed concerns over these proposals as they considered potential unintended consequences on consolidation guidance. The staff noted that the fact that the management entity is identified as related party would not necessarily lead to consolidation (but rather it would depend on the agent or principal relationship and the nature of the benefits earned from the management relationship).
Other Board members questioned whether change in definition of related party fulfils the annual improvements criteria. The staff noted that the objective of the amendment is clarification of the inconsistency and change of definition is only a way how to achieve the objective.
Some Board members were also concerned by the number of related parties created by this changed definition. The staff clarified that the management entity is identified as a related party only if it provides key management services as defined by IAS 24 rather than by virtue of being a management entity.
As the Board was split on this issue, it asked the staff to bring the issue back and to provide examples that would clarify the proposals and consider potential unintended consequences.
Annual improvements - criteria
The Board considered the package of decisions (those annual improvements already agreed, i.e. IAS 1 - Clarification of borrowing costs exemption, IAS 1 - Comparative information, IAS 16 - Classification of servicing equipment, IAS 32 - Income tax consequences of distributions, IAS 34 - Segment information for total assets and IFRS 1 - Repeat application of IFRS 1) against the set of the proposed annual improvements criteria.
Without much discussion the Board agreed with the assessment against the annual improvements criteria and directed the staff to proceed to the balloting phase. The Board agreed to expose the proposal with a 90 days comment period. The staff is expecting to publish the Exposure Draft within a month.
IAS 40 - Transfers from investment property
This issue originated during the 2009 Annual Improvements process when concerns were raised about the changes in measurement bases from transferring investment property from one asset category to another. The 2009 Annual Improvements proposed:
- removing the requirement to transfer investment properties to IAS 2 at the commencement of development with a view to sale
- investment properties held for sale should be displayed as a separate category in the balance sheet
- investment properties held for sale should be subject to the same disclosures as non-financial assets held for sale in accordance with IFRS 5.
However, the comment letter analysis highlighted several issues in the interaction between IAS 40 and other IFRS.
Based on the comment letter responses, the IFRS Interpretations Committee recommended not finalising the proposals. During the May 2010 Board meeting, the Board asked the IFRS Interpretations Committee to reconsider the issue. After additional consideration the IFRS Interpretations Committee recommends that the transfers to inventories required by IAS 40 be retained and continue the present recognition and measurement of investment properties under other IFRSs, depending on the intended use and stage of development. The Board agreed with the recommendation of the IFRS Interpretations Committee.
Annual improvements - issues not to be addressed
During the September 2010 IFRS Interpretations Committee meeting, certain issues were reviewed for potential resolution through the Annual Improvements process.
The IFRS Interpretations Committee tentatively decided not to address two issues through the Annual Improvements process:
- The first issue related to IAS 1 regarding encouraged versus required disclosures which was not addressed primarily because current Board projects are proposing the inclusion of disclosure principles in IFRSs
- The second issue related to IAS 21 and repayments of investments and foreign currency translation reserves. The IFRS Interpretations Committee could not reach a consensus view on this issue.
The Board agreed with the IFRS Interpretations Committee's decision not to address these issues through the Annual Improvements process.