IAS 12 Income Taxes — Expected manner of recovery of indefinite life intangible assets when measuring deferred tax — Agenda paper 2

Background

The Interpretations Committee received a request to clarify how to determine the expected manner of recovery of indefinite life intangible assets for the purposes of measuring deferred taxes.

The question arises when an intangible asset had an indefinite life and was not being amortised for financial reporting purposes but the applicable tax law allowed or required the asset to be amortised and, as a result, the asset’s tax base and its carrying amount differed.

The submitter identified three views: (i) use the tax rate (and tax base) applicable to ordinary taxable income unless there was a current plan to sell the asset in question; (ii) use the tax rate (and tax base) that would apply if the asset were sold; or (iii) select the appropriate tax rate as an accounting policy choice.

The issue was discussed in May 2016 (see agenda paper 10 for further detail).

The staff concluded that IAS 12 provided the general principle to identify the appropriate tax rate, which was to consider the expected manner of recovery.  IAS 12 had two paragraphs (51B and 51C) that related to assets measured under the revaluation model in IAS 16 and investment property, which required an entity to apply the tax rate if the asset was sold.

The staff analysis was that intangible assets were not non-depreciable assets and having an indefinite life did not mean having unlimited life. Accordingly, the general principle in IAS 12 applied, rather than the specific requirements in IAS 12.51B-C.

At the May meeting the staff was asked to clarify how to determine the expected manner of recovery in this situation and explore the interaction between how an asset is amortised and the general requirements of IAS 12.  The purpose of this session was to discuss the staff analysis and the staff recommendation.

Staff analysis

The staff believed that the non-amortisation of an indefinite life intangible asset had no bearing on the manner of recovering its carrying amount.  An intangible asset with an indefinite life was consumed, but there was no foreseeable limit on the period during which an entity expects to consume its benefits.  Accordingly, even though an entity did not amortise an indefinite life intangible asset, an entity may expect to recover its carrying amount through use.

Staff recommendation

The staff recommended not to add the issue into the Interpretations Committee’s agenda. The staff proposed a tentative agenda decision which was included in appendix A of the agenda paper.

Discussion

The Interpretations Committee approved the staff recommendation to issue an agenda decision.

During the discussion there was general support for the staff recommendation. The Interpretations Committee members noted that the decision would help to clarify the issue.

A few concerns were raised about the wording of the agenda decision:

1. the importance to point out that there was no default position and that an indefinite-life intangible asset could be recovered either through use or sale—the staff agreed to add one sentence to reflect this point.
2. the agenda decision should not contradict the requirements already stated in IAS 12 for land or any other aspect in that standard.

The Chairman told the Interpretations Committee that they would receive a revised agenda decision incorporating these changes.   

Foreign Currency Transactions and Advanced Considerations — Agenda paper 3

Background

In October 2015, the IFRS Interpretations Committee published a Draft Interpretation Foreign Currency Transactions and Advance Consideration addressing the circumstances in which an entity paid or received an advanced payment in foreign currency.   The issue was how to determine the date of the transaction, on which the spot rate to account for the payment depends. The draft interpretation proposed that the date of the transaction was the earlier of: (a) the date of initial recognition of the non-monetary prepayment asset or deferred income liability; and (b) the date that the asset, expense or income (or part of it) was recognised in the financial statements

The Interpretations Committee discussed in May 2016 the analysis prepared by the staff of the comment letters received. (See agenda papers 7A and 7B for further detail).

The purpose of this session was to consider additional analysis of issues raised in the comment letters and to ask the Interpretations Committee if its wants to start the process to finalise the interpretation. 

Foreign Currency Transactions and Advanced Considerations — Analysis of matters raised in comment letters — Agenda paper 3A

Background

The purpose of this paper was to continue the discussion from May 2016 of issues raised in the comment letters. The topics discussed were: (a) transactions with a significant financing component; (b) embedded derivatives; (c) cost of implementation; (d) effective date and (e) transition for first-time adopters.

Staff analysis

• a)      Transactions with a significant financing component: The staff noted that respondents requested more guidance on how to apply the interpretation when there are significant financing components. The staff proposes to include a new example (instead of as originally suggested to amend existing ones in the ED) which is included in the agenda paper.
• b)      Embedded derivatives: The ED did not address embedded foreign currency derivatives that require separation at contract inception. The staff believes that the ED does not require further modifications because paragraph 24 of IAS 21 already states that the carrying amount of an item is determined in conjunction with other relevant Standards. 
• c)       Cost of implementation: The new requirements required an analysis on a transaction by transaction basis. The staff concluded that the feedback received does not indicate that the implementation is impractical.
• d)      Effective date: Some respondents requested the effective date to be aligned with IFRS 15. The staff agree and are recommending an effective date of 1 January 2018.
• e)      Transition for first-time adopters: The staff noted a potential conflict with the provisional transition requires for first-time adopters in the ED and those existing in IFRS 1. The Interpretation states that it is to be applied prospectively whereas IFRS 1 requires full comparative information. The staff recommends not providing transition relief for first-time adopters because of the conflict with IFRS 1.  

Foreign Currency Transactions and Advanced Considerations — Due process — Agenda paper 3A

The staff recommendation was that the Interpretation could be finalised without re-exposure.  The staff planned to commence the balloting process (the process by which members of the Interpretations Committee formally sign-off the final wording) in July 2016.  Once that is completed, the Board would be asked, in October 2016, for its approval to issue the Interpretation which should be published by the end of 2016.

Decision

The Interpretations Committee approved the staff recommendations with the exception of the transition requirements. The Interpretations Committee agreed to provide some relief to first time adopters on transition. The staff will analyse if there are any implications on the transition requirements for hedging documentations. Then, the staff will proceed with the balloting process. The staff will also address some drafting issues noted during the discussion.

Discussion

There was general support for the staff recommendations.

In relation to the effective date proposed by the staff (to be aligned with IFRS 15), there were some concerns noted by some Interpretations Committee members that the text should make it clear that this interpretation was not intended to be aligned with IFRS 15.  It is dealing with a separate issue. Some members suggested that it would be better to express a view that the effective date should not be earlier than IFRS 15.

A concern raised in relation to the staff recommendation not to address the embedded derivative issues was that rationale presented would not be obvious to most preparers.  IAS 21 already requires an entity to first evaluate transactions for embedded derivatives that require separation at contract inception.  It was suggested that a sentence could be added in the Basis for Conclusions to clarify this point.

One Interpretation Committee member raised a specific issue on the transition requirement. They thought that preparers would need additional time to revise their hedging documentation. The staff did not agree. However, the staff agreed to undertake additional analysis and if need be bring it back as a sweep issue. They will also liaise with the member who raised this matter.

The interpretation includes an example proposed to clarify the accounting treatment for transactions with significant financing components.  Committee members thought the example was useful but it would be important to clarify the rationale used by the staff to translate the accretion over the period and it should explain why the interest is translated at the same exchange rate. Some members thought the example was simplistic and could be misleading.

Several Interpretation Committee members noted concerns about the lack of transition relief for first time adopters.  Some members thought that although comparative information is important, applying full retrospective approach would be problematic. The staff response was that IFRS 1 does not provide transition relief for any other aspect of IAS 21. Some members still noted they would prefer some relief such as the approach noted in the agenda paper as A2(b)(iii). The Chairman called to vote and the majority of the Interpretation Committee members approved this approach.

IFRS 11 Joint Arrangements — Remeasurement of previously held interests — Loss of control — Agenda paper 4

Recap

The IFRS Interpretations Committee had been considering the requirements in IFRS when an entity transfers an asset (or group of assets) it controls to a joint operation, but retains an interest in that asset (or group of assets).  Specifically, does IFRS require that the retained interest(s) be remeasured?    

Some members of the Interpretations Committee though that the retained interest should be remeasured when the asset, or group of assets, constituted a business.  However, the Interpretations Committee concluded that there was a conflict between the requirements in IFRS 10 and IFRS 11 with respect to the loss of control transaction which was similar to the conflict that exists between IFRS 10 and IAS 28.  IFRS 11 required an entity to recognise gains or losses on the sale or contribution of assets to a joint operation only to the extent of the other parties’ interests in the joint operation whereas IFRS 10 required that an entity should remeasure any retained interest when it loses control of a subsidiary.

The Board was considering the relationship between IFRS 10 and IAS 28 as part of its research project on equity accounting, and had already deferred amendments to IFRS 10 and IAS 28.  On this basis, the Interpretations Committee exposed for comment a tentative agenda decision that these matters should be considered by the Board and not the Interpretations Committee.

The purpose of this session was to consider the comment letters received and consider the staff recommendations to finalise the agenda decision.

Comment letter analysis

The Interpretations Committee received four comment letters. Two comment letters supported the tentative agenda decision and two disagreed.

The disagreement centred on whether a “loss of control” transaction was similar to a sale or contribution of assets to an associated or joint venture and whether the equity method of accounting was relevant.

The staff reiterated their analysis included in the Mach 2016 Agenda paper 3 which outlined the reasons they recommended that the Interpretations Committee publish the tentative agenda decision.  The staff did not agree with the respondent that stated that the sale or contribution of assets to an associate or a joint venture was an intra-group transaction, on the grounds that a group was defined as “a parent and its subsidiaries”, and associates, joint ventures and joint operations were not part of a group.

The staff also indicated that although there is diversity in practice, they do not think the matter is urgent.

Staff recommendations

The staff recommendation was that the Interpretations Committee confirm the tentative agenda decision.

Decision

The Interpretations Committee approved the staff recommendation to finalise the agenda decision.

Discussion

The Chairman asked the staff to clarify how the staff planned to notify the Board about the decision.  The staff stated that at the next Board meeting they would present an IFRIC update. Some committee members said that they would like clearer feedback from the Board than they had been getting on recommendations the IFRS Interpretations Committee makes to the Board.  The Chairman noted that the intention was to ensure there is a “paper trail” to keep track of communications between the Interpretations Committee and the Board.

There was general support for finalising the agenda decision and some members added that the future PIR on IFRS 10 and 11 would be a good opportunity to address this issue.

One Interpretations Committee member expressed a concern about the amendments to IFRS 10 and IAS 28 (that address the accounting for the sale or contribution of assets to an associate or a joint venture). He noted that although these amendments had been postponed they were available for early application.  If an entity decided to apply those amendments would they be required, or could they choose, to also apply them to this issue? The staff clarified that they did not intend to imply that if an entity early applies the amendments to IFRS10 and IAS 28 that they would be obliged to apply those amendments to this issue. The staff also acknowledged that in this agenda decision the Interpretations Committee was not providing and answer and there may be more diversity in practice.

IFRIC 12 — Payments made by an operator to a grantor in a service concession arrangement — Agenda paper 5

Background

A request was received relating to the accounting for variable contractual payments made by an operator under a service concession agreement within the scope of IFRIC 12.

The issue has been discussed in numerous Committee meetings, with the committee noting that this is part of the broader issue of accounting for variable payments for asset purchases. In their November 2015 meeting, the Committee decided that developing accounting for variable payments for asset purchases was too broad an issue for it to address and issued a tentative agenda decision.

The Committee then considered whether a solution could be reached relating to the accounting for payments made by an operator to a grantor without addressing the variable payments for asset purchases issue. They decided that this issue, too, was too broad and requested the staff to prepare a tentative agenda decision. The Interpretations Committee issued a tentative agenda decision in January 2016. The purpose of this session is to consider the comments letters received and the staff recommendation.

Analysis of comment letters

The staff indicated that the comment letters supported the tentative agenda decision.  The staff recommendation was that the Interpretations Committee finalise the agenda decision, but with some amendments to:

1. Clarify how the term agent was used; and
2. Make this decision consistent with the published agenda decision on the broader issue of variable payments—the tentative agenda decision refers to an obligation being outside the control of the purchaser whereas broader decision considered variable payments that are dependent on the purchaser future activity.

The staff recommendation was not to amend the agenda decision for the following matters raised by respondents:

1. Assessing what is a separate good, service or right-of-use. The staff believes that this analysis relates to whether particular assets or infrastructure are in scope of IFRIC 12, and is not within the scope of the agenda decision.
2. Variable payments not being addressed when the intangible asset model in IFRIC 12 applies. The staff believes that the issue cannot be addressed without addressing the broader issue of variable payments more comprehensibly.
3. The interaction of IFRIC 12 and the principal agent requirements in IFRS 15.

Staff recommendation

The staff recommended confirming the agenda decision with the changes in the wording as outlined in appendix A of the agenda paper.

Decision

The Interpretations Committee approved the staff recommendation to issue the agenda decision.

Discussion

There was general support for the staff recommendation. No significant issues or comments were raised other than drafting suggestions. The Chairman indicated that the Interpretations Committee would receive a revised wording before it was published in the next IFRIC update.

Exposure Draft of proposed amendments to IAS 19 and IFRIC 14 — Agenda paper 6

 Background

The IASB issued an ED to amend to IAS 19 Employee Benefits and IFRIC 14 IAS 19 — The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction). The purpose of this session was for the staff to inform the Interpretations Committee about the comments received. The Interpretations Committee was not asked to make technical decisions.

The staff presented the following agenda papers:

1. Agenda paper 6A: Summary of the feedback received on the proposed amendments to IFRIC 14 to address the availability of a refund from a defined benefit plan.
2. Agenda paper 6B: Summary of the feedback received on the proposed amendments to IAS 19 to address remeasurement when a plan amendment, curtailment or settlement occurs.

The staff analysis of the feedback received and recommendations would be presented at a future meeting.

Exposure Draft of proposed amendments to IAS 19 and IFRIC 14 — Comment letter summary of proposed amendments to IFRIC 14 — Agenda paper 6A

This paper summarised the feedback on matters that affect IFRIC 14 that the staff thought would require further consideration. Other issues were presented in Appendix A and B of the agenda paper.

Other parties can wind up a plan without the entity’s consent

The ED proposed to clarify (a) if other parties, such as its trustees, can wind up the plan without  the entity’s consent, the entity did not have an unconditional right to a  refund of a surplus; (b) amounts that other parties can use for other purposes without the entity’s consent are excluded from the amount of the surplus that the entity recognises as an asset; and (c) the power other parties have to buy annuities or make other  investment decisions, without affecting the benefits for plan members, did not affect the availability of a refund.   

There was general support for the proposed amendments. However, the following issues would need further analysis:

1. Potential inconsistencies between the principles in IAS 19 and IFRIC 14:  (a) the effect of uncertain future events on the existence of a right to a refund because of decisions by other parties; (b) inconsistent treatment of events that could affect the surplus; (c) appropriateness of the use of control to recognise any surplus as an asset; (d) the mixed measurement approach proposed; and (e) possible inconsistency between the proposal and the measurement of defined benefit obligations.
2. Reflection of the economic substance of defined benefit plans: (a) the proposal is too prescriptive and do not allow an entity to exercise judgement; (b) an entity should consider other parties powers only when the power is substantive or more likely than not to be executed; and (c) the proposed restrictions on the right to a refund may not be relevant given the practical reality of how decisions are made.
3. Other substantive issues: (a) the distinction between the purchase of annuities and the purchase of annuities as part of a wind-up of a plan; (b) an entity’s right to a refund if decisions must be made jointly between the entity and others; (c) how the proposals affect the availability of a refund in future contributions.

The statutory requirements that affect the economic benefit available to the entity

The proposal was that the entity takes into account the statutory requirements that are substantially enacted, as well as the term and conditions of a plan that are contractually agreed and any constructive obligations. The staff indicated that the majority of respondents agreed with the proposed amendments and the matters raised would be considered during drafting but would not be analysed further—see appendix A of the agenda paper.

Exposure Draft of proposed amendments to IAS 19 and IFRIC 14 — Comment letter summary of proposed amendments to IAS 19 — Agenda paper 6B

This paper summarised the feedback on matters that affected IAS 19 that the staff though would require further consideration. Other issues were presented in Appendix A of the agenda paper.

Interaction between the asset ceiling and past service cost or gain or loss on settlement

The ED proposed that when a plan event occurs, an entity recognises the past service cost or a gain or loss on settlement separately from its assessment of the asset ceiling.  The staff indicated that most respondents agreed with the proposal. The main issues identified are: (i) inappropriate recognition of a gain or loss on settlement; and (ii) effective recycling of amounts recognised in OCI.

Accounting when a plan amendment, curtailment or settlement occurs

The proposed amendments specify that when an entity remeasures the net defined benefit liability (asset) when a plan event occurs, it determines:  (a) the current service cost and the net interest for the period after the remeasurement using the assumptions used for the remeasurement; and (b) the net interest for the remaining period based on the remeasured net defined benefit liability (asset).

The current service cost and the net interest in the current reporting period before a plan event are not affected by, or included in, the past service cost or a gain or loss on settlement.

The staff noted that close to half of respondents agreed with the ED.  However, other respondents either disagreed with the proposed amendments or expressed concerns about specific aspects of the ED.  The main issues raised were:  the consequences of a minor plan event (and materiality judgements); the unit of account and lack of comparability; additional costs in applying the proposed amendments; and the potential to make changes to achieve a particular accounting treatment.  Some respondents also expressed concerns about the lack of consistency with IAS 34.

Transition

The ED proposed that the amendments should be applied retrospectively with an exception included for adjustments to the carrying amount of assets outside the scope of IAS 19. The staff indicates that the majority agreed with the proposed amendments. The staff indicates that there were concerns about specific aspects of the transition requirements which are included in appendix A of the agenda paper.

Discussion

There were no significant comments or issues raised during the discussion. The Chairman pointed out that the objective of this session was for information purposes only. He also mentioned that the next discussion on this topic would take place in September.

One observing Board member pointed out that it would be important to separate in future analysis those concerns that were related to recognition and measurement issues from those concerns that related specifically to the application of the principle to determine whether an entity had an unconditional right. There was agreement from the staff and some Interpretation Committee members with this suggestion.

One Interpretation Committee member asked about the particular circumstances that lead to this issue. The staff noted that the issue was raised in the UK, some Interpretation Committee members added that in the UK the issue was widespread and there was diversity in practice.

IAS 12 — Uncertainty over income tax treatments — Comment letter summary — Agenda paper 7

Background

The Interpretations Committee published a Draft Interpretation Uncertainty over Income Tax Treatments in October 2015. The purpose of this session was for the staff to provide an overview of the feedback received. The Interpretations Committee was not asked to make technical decisions. The staff would present at a future meeting more detailed analysis and their recommendation.

Overview of the draft interpretation

The draft interpretation would apply to the determination of taxable profit (or loss), tax bases, unused tax losses, unused tax credits and tax rates when there is uncertainty over income tax treatments that affect the application of IAS 12. The draft interpretation proposed: (i) guidance on determining the unit of account, (ii) a presumption that a tax authority has full knowledge and will analyse the entity’s tax returns; (iii) measuring the uncertainty using the most likely amount approach or the expected value approach (iv) a requirement to reassess the estimates when facts and circumstances change; but (v) does not propose additional disclosure requirements. 

Comment letters received

The staff indicated that there was overall support for the interpretation. The following specific concerns were noted by respondents:

1. A few respondents disagreed with excluding interest and penalties from the scope, noting the diversity in practice and evidenced by most major accounting networks allowing an accounting policy choice between IAS 12 and IAS 37.
2. Some respondents would prefer the interpretation to cover uncertain tax treatments beyond those related to income tax.
3. A few respondents stated that the unit of account should allow entity specific factors.
4. Some respondents want additional clarification about the appropriate assumption when a taxation authority’s right to examine has no time limit. 
5. Approach to reflect uncertainty: Some respondents suggest that an entity should consider the probability of different scenarios in measurement, other respondents suggested that an entity should be allowed to use alternative methods to reflect the effect of uncertainty
6. Consideration of changes in facts and circumstances: Some respondents asked for clarifications, others asked about the interaction with IAS 10 and the meaning of period of change.
7. Applicability to business combinations: A few respondents asked for clarity in this respect.

The staff also indicated that respondents also suggested a number of editorial improvements.

Discussion

There were no comments or questions raised by the Interpretation Committee members.