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Annual improvements — comment letter analysis

Date recorded:

The Committee met to redeliberate and decide on the Committee's revised recommendations on the Improvements to International Financial Reporting Standards (ED).

IFRS 1 First-time Adoption of International Financial Reporting Standards — Repeated application of IFRS 1

The ED includes the Board's proposal for an amendment to clarify that an entity is required to apply IFRS 1 First time Adoption of International Financial Reporting Standards when the entity's most recent previous annual financial statements do not contain an explicit and unreserved statement of compliance with IFRSs, even if the entity has already applied IFRS 1 in a previous reporting period.

The staff noted from the comment letter analysis that a majority of the respondents broadly agreed with the proposed amendment to IFRS 1 but some respondents noted that the Board should also require entities to disclose the reason for ceasing to report under IFRS; and the reason for re-adoption (issue 1). Some respondents also noted that an entity that prepares its first IFRS financial statements, even if the entity has previously applied IFRS 1, should be allowed to apply IFRSs retrospectively in its first financial statements (issue 2). They also noted that the repeated application of IFRS 1 is inappropriate where such an entity is unable to express an unreserved statement of full compliance with IFRSs only because an endorsement body is late in ratifying an IFRS during its endorsement process (issue 3). These respondents also noted that when an entity applies IFRSs in its financial statements, but intentionally or unintentionally does not include an explicit and unreserved statement of compliance with IFRSs, an entity should not be required to apply IFRS 1 (issue 4).

In relation to issue 1, the staff noted while there was limited risk of an entity's potential abuse of the exemptions and exceptions provided by IFRS 1, this suggested disclosure would provide useful information. The staff's recommendation on issue 2 was that an entity should be allowed rather than required to apply IFRS 1 (if they have previously applied IFRS 1). The staff did not agree with the respondents view in issue 3 and therefore did not recommend a revision in the proposed wording on the basis that it is rare that such a scenario could occur. The staff's view was that contrary to issue 4, it was unlikely that such a situation would occur but that if such on omission occurred, this would be considered an error. The staff did not recommend revisions to the proposed amendment.

The Committee tentatively decided that an entity could adopt IFRS 1 more than once. Some Committee members expressed concern that the proposed amendment appeared to provide options to an entity and that some entities may chose to apply IFRS 1 retrospectively through comparatives whereas some entities may publish revised financial statements. Some Committee members expressed concerns with having multiple sets of financial statements out in the market as well the potential tax impact. The Committee tentatively agreed to inform the Board of the Committee's concerns around the issue of providing options to entities and the relative preferences of the various Committee members.

IFRS 1 First-time Adoption of International Financial Reporting Standards — Borrowing costs relating to qualifying assets for which the commencement date for capitalisation is before the date of transition to IFRSs

The ED includes the Board's proposal for an amendment to the exemption for borrowing costs in IFRS 1 that would clarify the transitional provisions that a first-time adopter may apply to account for borrowing costs for which the commencement date for capitalisation is before the date of transition to IFRSs.

The staff noted from the comment letter analysis that the majority of the respondents agreed in principle with the proposal but noted that some respondents felt that the drafting was not sufficiently clear. Their concerns centred on the requirements for first-time adopters appearing to be stricter than current guidance.

The Committee tentatively agreed with the staff's recommendations to recommend to the Board to proceed with the proposed amendment by adding some further changes that would make the proposed amendment clearer. The Committee tentatively agreed to modify the proposed wording to delete a reference to paragraph 27 of IAS 23 Borrowing Costs that might cause confusion, and clarify that a first time adopter should account for borrowing costs for qualifying assets for the commencement of construction or after the date of transition in accordance with IAS 23. The Committee asked the staff to make some drafting changes to the proposed wording.

IAS 1 Presentation of Financial Statements — Clarification of the requirements for comparative information

The ED includes the Board's proposal for an amendment to: (a) clarify the requirements for providing comparative information when an entity provides financial statements beyond the minimum comparative information requirements; and (b) address two aspects of the requirement in specific cases where an entity changes accounting policies, or make retrospective restatements or reclassifications. The proposed changes are that: (i) the opening statement of financial position should be presented as at the beginning of the required comparative period; and that (ii) related notes are not required to accompany this opening statement of financial position.

The staff noted from the comment letter analysis that most respondents supported the intention behind the amendment but there were concerns that some of the new terms used in the proposed amendment should be defined in the list of defined terms in paragraph 7 of IAS 1 Presentation of Financial Statements (issue 1). The staff suggested replacing the terms 'required comparative period' with explaining what was required in the respective paragraphs and clarifying that 'additional information' is information provided in addition to the minimum comparative requirements in paragraphs 38 and 38A.

There were also concerns by respondents that the Board should review its proposals for presenting additional comparative information in paragraphs 40A-40C and in paragraph 38B because they seemed inconsistent in that the requirements for providing voluntary additional comparative information in paragraph 38B appeared to give rise to a requirement to present related information in the notes (i.e. more information) whereas the requirements for providing mandatory additional comparative information in paragraphs 40A-40C do not give rise to a requirement to provide related information in the notes for the opening statement of financial position (issue 2). The staff noted that the Board's rationale for requiring related notes for selected additional information in paragraph 38B was different from its rationale for not requiring related information in the notes for an opening statement of financial position in proposed paragraph 40C (i.e. to provide relief to avoid repetition of information that is available in previous financial statements). The staff recommended that paragraph 38B should clarify the meaning of 'additional comparative information' (i.e. comparative information in addition or in excess to the minimum comparative information required by the IFRSs) and that the Basis for Conclusions should note that this could include voluntary information or information required by law or other regulations and that requiring related notes would present financial statements that achieve a fair presentation.

The staff agreed with some respondents' suggestion that the proposed paragraph 40A be amended such that the presentation of a third statement of financial position at the beginning of the preceding period only applies when the change in accounting policy, the correction of an error or the reclassification of items in the financial statements has a material effect upon the statement of financial position (issue 3).

Some respondents also noted that the Board should assess the interaction of the proposed requirements for comparative information with the requirements in some other standards (issue 4). The staff recommended that the requirement in paragraph 21 of IFRS 1 to present three statements of financial position and related notes be retained and not be cross-referenced to IAS 1 to avoid confusion.

The Committee tentatively agreed with the staff's recommendation to recommend to the Board to proceed with the proposed amendment by adding some further changes that would make the proposed amendment clearer. However, the Committee recommended the staff make drafting changes to the proposed amendment and Basis for Conclusions. The Committee also agreed to communicate to the Board that several Committee members had expressed concerns over the inclusion of the word 'materiality' within the proposed paragraph 40C.

IAS 16 Property, Plant and Equipment — Classification of servicing equipment

The ED includes the Board's proposal to amend paragraph 8 of IAS 16 Property, Plant and Equipment to clarify that servicing equipment should be classified as property, plant and equipment (PP&E) when it is used during more than one period and as inventory otherwise.

The staff noted from the comment letter analysis that the majority of the respondents broadly agreed with the proposed amendment but some raised comments that further clarification would be needed around the difference between spare parts and major spare parts, the definition of the term 'period', and some respondents disagreed with the full retrospective application of the proposed amendment. The staff recommended that the Committee should recommend to the Board that it should clarify that items such as spare parts, stand-by equipment and servicing equipment qualify as PP&E when they meet the definition of PP&E. However, the staff noted that a clarification of the definition of the term 'period' is outside the scope of the proposed amendment but proposed a simplification of the wording in the proposed amendment to omit the word 'period'. The staff noted that the modified proposed amendment should alleviate the respondents' concerns about retrospective application.

The Committee tentatively agreed with the staff's recommendation to recommend to the Board to proceed with the proposed amendment by adding some further changes that would simplify and make the proposed amendment clearer by stating that spare parts, stand-by equipment and servicing equipment qualify as property, plant and equipment when they meet the definition of property, plant, and equipment; otherwise they are classified as inventory if they meet the definition of inventory.

IAS 32 Financial Instruments: Presentation — Tax effect of distribution to holders of equity instruments

The ED includes the Board's proposal to amend IAS 32 to clarify that income tax relating to distributions to holders of an equity instrument and income tax relating to transaction costs of an equity transaction should be accounted for in accordance with IAS 12 Income Taxes.

The staff noted from the comment letter analysis that the respondents agreed with the proposed amendment. However, many respondents highlighted a perceived inconsistency between the guidance in IAS 12 on the income tax consequences on dividends in paragraph 52B and the guidance in paragraphs 58 and 61A. However, the staff noted that it had addressed the apparent consistency noted above in Agenda Paper 14C of July 2010.

The Committee (with the exception of one member) tentatively agreed with the staff's recommendation to recommend to the Board to proceed with the proposed amendment. The Committee also tentatively agreed with the suggested clarification changes proposed by the staff to the Basis for Conclusions to state in which cases each guidance should be applied that would make the proposed amendment clearer.

IAS 34 Interim Financial Reporting — Interim financial reporting and segment information for total assets

The ED includes the Board's proposal to clarify the requirements in IAS 34 Interim Financial Reporting in order to enhance consistency with the requirements in IFRS 8 Operating Segments. The proposed amendment clarifies that total assets for a particular reportable segment need to be disclosed only when the amounts are regularly provided to the chief operating decision maker and there has been a material change in the total assets for that segment from the amount disclosed in the last annual financial statements. The proposed amendment arose as a result of observations from constituents that paragraph 16A(g)(iv) of IAS 34 is inconsistent with paragraph 23 of IFRS 8 because the former requires disclosure of segment assets in interim financial statements regardless of whether the information is provided to the chief operating decision maker. The staff noted from the comment letter analysis that while respondents agreed with the proposed amendment, some respondents disagreed with the proposal that the amendment be applied prospectively.

The Committee tentatively agreed with the staff's recommendation to recommend to the Board that it should proceed with the proposed amendment (including the staff's modifications to IAS paragraph 16A(g)(iv) of 34 for consistency with paragraph 23 of IFRS 8) – “a measure of total assets and liabilities for a particular reportable segment if such amounts are regularly provided to the chief operating decision maker and if there has been a material change from the amount disclosed in the last annual financial statements for that reportable segment.” The Committee also tentatively agreed that this amendment should be applied retrospectively as this was consistent with the Board's intention as noted in the IASB Update of July 2010.

 

Correction list for hyphenation

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