As part of the IASB 'Annual Improvement Project', issues related to IFRS 3 Business Combinations and IFRS 13 Fair Value Measurement were brought in front of the IASB Board (Board) with the intent of proposing amendments to each of the discussed standards. Ultimately, if approved by the Board, the proposed amendments would be included in the 2011 Annual Improvements ED that would be issued in December 2011 for further consideration.
At the onset of the Board meeting, the IASB staff discussed the agenda, highlighting the fact that the issue related to IFRS 13 will be addressed first followed by the issues related to IFRS 3.
IFRS 13 Fair Value Measurement — Short-term receivables and payables issue
The IASB staff provided a brief overview of a matter raised by a constituent specific to the deletion of IFRS 9, paragraph B5.4.12 upon the issuance of IFRS 13. This paragraph, among other things, provides a practical expedient for measuring short-term receivables and payables as the original invoice amount in instances where there is no stated interest rate and the effect of discounting is immaterial.
The IASB staff indicated that that paragraph was deleted to eliminate discussion related to 'discounted cash flow analysis' considerations, which is now included in IFRS 13. The unintended result was the deletion of the guidance on measuring short-term receivables and payables with no stated interest rate.
The IASB staff provided two alternative approaches to addressing the aforementioned issue:
This view would provide that paragraph B5.4.12 be reinstated by adding a paragraph to IFRS 13, Appendix D (Amendments to Other Amendments), which would reinstate the deleted paragraph under a newly added heading 'Short-term Receivables and Payables with No Stated Rate'. In addition, a paragraph would be added to IFRS 13 Basis for Conclusion, detailing the fact that the deletion of the paragraph was not intended to remove an entity's ability to apply a practical expedient for measuring short-term receivables and payables with no stated interest rate. View B: The IASB staff reiterated the fact that supporters of this view have the belief that paragraph B5.4.12 was deleted on the basis that this guidance was no longer needed in IASB 9 as it is now incorporated into IFRS 13. Furthermore, the concept of materiality is addressed in IAS 1 Presentation of Financial Statements and includes the practical expedient. So, proponents of this view recommend not reinstating this paragraph and addressing constituent concerns by adding a paragraph to in the Basis for Conclusions of IFRS 13 under a heading 'Short-term receivables and payables with no stated interest rate'.
The Board voted, concluding that View B was the appropriate approach which would result in the amending of the Basis of Conclusions by adding the following paragraph:
After issuing IFRS 13 the Board was made aware that an amendment to IFRS 9 that resulted in the deletion of paragraph B5.4.12 might be perceived as removing the ability [to apply a practical expedient] to measure short-term receivables and payables with no stated interest rate at invoice amounts without discounting when the effect of discounting is immaterial. The Board did not intend to change practice in the measurement of those short-term receivables and payables. In determining whether to retain paragraph B5.4.12 in IFRS 9, the Board concluded that the paragraph was no longer needed for two reasons: (a) IFRS 13 contains guidance for using present value techniques and (b) IAS 1 Presentation of Financial Statements addresses materiality [, effectively providing such a practical expedient].
One of the Board members also indicated that the proposed paragraph language should exclude the practical expedient concept as it is not necessary in the context described.
IFRS 3 Business combinations — Contingent consideration guidance issue
The IASB staff provided a quick overview of the background leading to the identification of four issues related to the accounting for contingent consideration. These issues were identified during the review of IFRS 3 in conjunction with certain guidance included in IAS 32, IAS 37, and IFRS 9.
The IASB provided a quick synopsis of the four issues:
- Issue 1: Current guidance seems to be unclear and more clarity is needed in determining the appropriate guidance that should be used to identify whether contingent consideration is classified as a liability or equity. Currently IFRS 3, paragraph 40 refers to IAS 32 as well as 'other applicable IFRSs', which may cause confusion to those applying the guidance;
- Issue 2: Guidance on subsequent measurement of contingent consideration as included in IFRS 3, paragraph 58(b)(ii) is not clear since it explicitly states that changes in fair value should be measured in accordance with IAS 37, though IAS 37 requires a 'best estimate' measurement rather than fair value;
- Issue 3: Guidance included in IFRS 3, paragraph 58(b)(i) states that subsequent measurement of contingent consideration classified as a financial asset or financial liability should be at fair value in accordance with IFRS 9, though IFRS 9 permits a financial asset or financial liability to be measured at amortised cost in some instances;
- Issue 4: Certain constituents are unclear of the contingent consideration disclosure requirements as IFRS 3, paragraph B64 details certain disclosure requirements and the other referenced IFRSs include other disclosure requirements.
The IASB staff highlighted proposed amendments to IFRS 3, as detailed in paragraph 23 and 37 of IASB Staff Paper 6A. In addition, the IASB staff proposed an amendment to IAS 39 Financial Instruments: Recognition and Measurement, to provide a partial scope exclusion for contingent consideration arising from a business combination. These three amendments would work to improve the guidance by eliminating inconsistencies in contingent consideration classification and measurement guidance and clarifying subsequent measurement rules.
Appendix B to Staff Paper 6A details the amendment recommendations:
Proposed amendments to IFRS 3, paragraph 58 (changes underlined or struck):Some changes in the fair value of contingent consideration that the acquirer recognises after the acquisition date may be the result of additional information that the acquirer obtained after that date about facts and circumstances that existed at the acquisition date. Such changes are measurement period adjustments in accordance with paragraphs 45—49. However, changes resulting from events after the acquisition date, such as meeting an earnings target, reaching a specified share price or reaching a milestone on a research and development project, are not measurement period adjustments. The acquirer shall account for changes in the fair value of contingent consideration that are not measurement period adjustments as follows:
- Contingent consideration classified as equity shall not be remeasured and its subsequent settlement shall be accounted for within equity.
- Other contingent consideration classified as an asset or a liability that:
- is a financial instrument and is within the scope of IFRS 9 shall be measured at fair value at each reporting date, with any resulting gain or loss recognised either in profit or loss for the period, unless the recognition of the resulting gain or loss is required or in other comprehensive income in accordance with the relevant IFRSIFRS 9.
- is not within the scope of IFRS 9 shall be accounted for in accordance with IAS 37 or other IFRSs as appropriate.
This session concluded with the Board voting on three questions posed by the IASB Staff:
All Board members in attendance answered affirmatively to the three posed questions and the proposed amendments will be included in the 2010-2012 Annual Improvements cycle and be exposed accordingly.