IFRS 1 — Government loans – Comment letter analysis
The staff presented an analysis of the comment letters received on the Board's exposure draft Government Loans (Proposed amendment to IFRS 1) published in October 2011. The exposure draft includes a proposed amendment to amend IFRS 1 to provide the same relief to first-time adopters as the same prospective application provisions in certain IFRSs granted to existing preparers of IFRS financial statements.
The staff noted that 35 comments letters were received which were supportive of the proposed amendment. However, the respondents raised several comments on the following areas which the staff addressed:
- Scope of the proposed amendment — The staff proposed drafting revisions to limit the scope of the proposed exemption to matters of recognition and measurement such that a first-time adopter would be required to classify such a loan as a liability in accordance with IAS 32 Financial Instruments: Presentation, but would not be required to restate the carrying amount of the previous GAAP balance for the loan at the date of transition. This would provide the same relief as provided to existing preparers. The staff clarified that this relief should only apply to loans entered into prior to the transition to IFRS. The Board tentatively agreed with the staff's view that the amendment be limited to matters of recognition and measurement and asked the staff to consider during the drafting stage whether it was clear that the relief would apply to loans entered into prior to the transition to IFRS.
- Clarification on how to apply the exception after the date of transition — The Board tentatively agreed with the staff's view that its intention was to require an entity to apply IFRS 9 after transition date to a government loan at a below-market rate of interest entered into before the date of transition to IFRSs. To apply IFRS 9 after the date of transition, an entity should calculate the effective interest rate by comparing the carrying amount at the date of transition with the amount and timing of expected repayments to the government. The staff recommended drafting changes to clarify this point. The Board tentatively agreed to include an example as part of the implementation guidance. In addition, the Board asked the staff to include as part of the example, a situation where the government loan had previously been recorded in equity and had to be reclassified into a loan in accordance with IAS 32. One of the Board members questioned what amount should be attributed to this reclassification if this specific amount of equity had not been traced through historically. The Board tentatively agreed that this amount would be based on the amount originally received.
- Clarification on whether the option to apply IFRS 9 retrospectively is available on a loan-by-loan basis — The Board tentatively agreed with the staff's view that the exception should be available on a loan-by-loan basis for all government loans that originated prior to the date of transition and for which the required information to apply IFRS 9 was obtained at the relevant time and agreed to the staff's revised drafting.
- Optional exemption versus mandatory exception and Board's future consideration of IFRS 1 — The Board tentatively agreed that no changes to the amendment were required in respect of the other comments discussed.
The Board tentatively agreed that the staff should proceed with the proposed amendment including finalisation of drafting and a ballot to be provided to the Board with the view to issuing the amendment by mid-February 2012. The final amendment would be effective for reporting periods beginning on or after 1 January 2013, with early adoption permitted.