IFRS 10 transition guidance
Comment Letter Analysis
The IASB published an exposure draft Transition Guidance (Proposed Amendments to IFRS 10) in December 2011 to clarify the transition guidance in IFRS 10, Consolidated Financial Statements. In total that IASB received 64 comment letters from 6 continents. The objective of this meeting was to provide the Board with an analysis of the comment letters and make recommendations on whether the Board should:
- proceed with the amendments to the transition guidance of IFRS 10 proposed in the exposure draft;
- consider additional amendments to further clarify the transition guidance of IFRS 10;
- consider additional amendments to provide further transition relief in IFRS 10 and the related standards; and
- consider providing similar transition relief to first time adopters of IFRSs in IFRS 1 First-time Adoption of International Financial Reporting Standards.
Definition of the “date of initial application”
The exposure draft clarified that the date of initial application is “the beginning of the annual reporting period in which IFRS 10 is applied for the first time.” The majority of the respondents to the exposure draft agreed with clarification. The staff asked the Board to reaffirm the definition of the “date of initial application” as proposed in the exposure draft. All agreed unanimously.
Transition relief from retrospective application
Paragraph C3 in the exposure draft provides transition relief from the retrospective application in IFRS 10. It includes that an investor would not be required to apply IFRS 10 to an investee when the previously unconsolidated investee would be consolidated in prior periods as a result of adopting IFRS 10, but the interest is disposed of before the date of initial application of IFRS 10. The Board reaffirmed the amendments to provide transition relief as proposed.
Proposed amendments to clarify paragraph C4 and C5
The amendments to paragraph C4 and C5 in the exposure draft clarify how an investor should retrospectively adjust its comparative period(s) if the consolidation conclusion differs under IFRS 10 and IAS 27/ SIC-12. The proposed amendment requires that any difference between previously recognized amounts and the revised amounts recognized on initial application of IFRS 10 must be recorded as an adjustment only to retained earnings. The Board unanimously agreed with the staff recommendation that the reference to “retained earnings” in paragraph C4 and C5 should be replaced with the term “equity” to give preparers some flexibility in recording the difference.
The staff also raised three additional issues that were not addressed in the exposure draft;
- Constituents indicated that IFRS 10 and the amendments in the exposure draft were unclear as to which version of IFRS 3 should be used when an investor concludes that it should consolidate an investee that was not previously consolidated and the control was obtained before the effective date of IFRS 3(2008). Similarly, some respondents questioned which version of IAS 27 should be used when changes in the non-controlling interests occurred before the effective date of IAS 27(2008). The staff recommended that the Board allow flexibility in determining which version of IFRS to use, based on which version is suitable for a particular investee. They proposed that the Basis for Conclusions of IFRS 10 should be amended to reflect this guidance.
As a result of in-depth discussion, the Board tentatively agreed with the staff’s recommendation to provide flexibility in applying the appropriate version of the standards, but recommended to that the clarification should be provided in the body of the standard, rather than the Basis for Conclusions.
- Some respondents to the exposure draft requested that the Board provide limited relief from the requirements in IFRS 10, IFRS 11, and IFRS 12 for presenting comparative information. Although the Board had previously rejected a request for complete relief from restating all comparative years, at this time the staff proposed limited transition relief. The staff proposed that the presentation of adjusted comparative information on the retrospective application of IFRS 10 should be required for the preceding period only. However, an entity would not be prohibited from adjusting comparatives for earlier periods. Their recommendation is on the basis that the presentation of comparative information has imposed an additional operational burden on preparers.
Based on the discussion, twelve of the Board members agreed to restrict the requirement for comparative information to only the preceding year when applying IFRS 10, IFRS 11, and IFRS 12 for the first time. They also proposed to include the decision in the Basis of Conclusion. The Board also proposed that an investor should clearly indicate on the face of its financial statements that the statements are not comparable where they have elected to not adjust the comparative amounts. A few Board members noted that this issue should be discussed with regulators.
Furthermore, the Board agreed to provide additional relief to eliminate the requirement for comparative information with regard to unconsolidated structured entities in the first year in which IFRS 12 is applied.
- Respondents to the exposure draft also requested that transition relief should be provided to first-time adopters of IFRS when they first apply IFRS 10. They argued that transition relief will be provided to existing IFRS preparers for investees that were disposed of during a comparative period, but not to first time adopters. However, the staff indicated that they do not believe that transition from IAS 27 to IFRS 10 is similar to the transition from local GAAP to IFRS 10. For that reason, the staff recommended that no relief should be provided to first-time adopters.
The Board discussed this issue at length and noted that there are wider issues related to IFRS 1. As the number of first-time adopters increases in different jurisdiction, various types of issues would be raised in implementing IFRS since conversion/adoption is progressed in various fashions. The Board tentatively reached an agreement to solve issues related to IFRS 1 separately.
One Board member proposed incorporating some guidance for retrospective application of IFRS 10, so that it could alleviate some of operational difficulties for the first time adopters. The staff responded that this issue is not specific to IFRS 10 and it should be carried forward as future consideration when evaluating IFRS 1 issues. The Board agreed.
Due Process consideration
The staff indicated that they believe the Board has received sufficient feedback from constituents and that the Board has performed sufficient non-mandatory due process steps. The Board concurred. The Board also agreed that the staff should proceed with the proposed amendments as agreed at this meeting, including a ballot to be provided to the Board without formal re-exposure.