Annual improvements

Date recorded:

The IASB discussed four issues for potential inclusion in the next Improvements to IFRSs exposure draft.

IFRS 8 Operating Segments – Aggregation criteria and identification of the CODM

The IASB received a request to make improvements to IFRS 8 Operating Segments about the application of the aggregation criteria and the identification of the chief operating decision maker (CODM). More specifically, the request asked the Board to:

  • include an additional disclosure in paragraph 22 of IFRS 8 requiring a brief description of both the operating segments that have been aggregated and the economic indicators that have been assessed in order to conclude that the operating segments have 'similar economic characteristics' in accordance with paragraph 12 of IFRS 8; and
  • to emphasise in paragraph 7 of IFRS 8 the 'operating nature' of the function of the CODM and to clarify in paragraph 1 of IFRS 8 that there is a presumption that management reviews the information that is reported to it.

At its September 2011 meeting, the IASB acknowledged the similarities between the requirements in IFRS 8 and the equivalent guidance in US GAAP in Topic 280 Segment Reporting in the FASB Accounting Standards Codification® from which IFRS 8 was developed. Thus, the Board asked the staff to research further how similar concerns had been addressed in US GAAP and to consider whether this might help to identify how these concerns about IFRS 8 might be addressed.

The IASB staff presented its analysis which observed that the US Securities and Exchange Commission (SEC) staff considers segment reporting to be an area of primary focus given observation of inappropriate aggregation and identification of operating segments. On the basis of SEC staff observation, the original request received by the IASB and underlying discussions by both the IASB and IFRS Interpretations Committee, the staff recommended amending through an annual improvement disclosure requirements regarding the aggregation of operating segments and clarifying that non-executives are not included as part of the CODM as they do not make operating decisions.

Considering these recommendations, Board members generally supported the proposed addition to paragraph 22 of IFRS 8 (to disclose the judgements made by management in the application of the aggregation criteria in paragraph 12 of IFRS 8). However, concerns were expressed regarding the proposed amendments to paragraph 7 (to clarify that non-executives are not included as part of the CODM if they do not make operating decisions). Specifically, Board members noted the clarity in current guidance; observing that under paragraph 5 and 7 of IFRS 8, the CODM is actively involved in reviewing information of an operating nature and fulfils two distinct but related functions of performance assessment and resource allocation. Also, paragraph 9 of IFRS 8 notes that the CODM generally discusses operating activities, financial results or other plans for the segment with the 'segment manager'. Based on this available guidance, the principle of defining the CODM was considered sufficiently clear (including the notion that non-executive directors are not considered part of the CODM if they do not make operating decisions), and thus, Board members did not recommend adding any specific guidance which might distort the underlying principle of defining a CODM.

While one Board member expressed concern that a failure to amend paragraph 7 may lead to continuing uncertainty regarding the identification of the CODM (as was raised in the original submission), Board members noted a preference to retain the principle as opposed to defining more explicit rules given that board structures and general management is unique around the world.

Thus, the Board tentatively decided to include the proposed amendments to paragraph 22 in the next Improvements to IFRSs exposure draft, which would require disclosure of judgements made by management in the application of the aggregation criteria in paragraph 12 of IFRS 8 if operating segments have been aggregated.

IAS 7 Statement of Cash Flows – Classification of interest paid that is capitalised

As part of its September 2011 Board meeting, the IASB discussed proposed amendments to IAS 7 Statement of Cash Flows to clarify the classification in the statement of cash flows of interest paid that is capitalised into the cost of property, plant and equipment.

The amendments proposed that the example guidance in paragraph 16(a) of cash flows arising from investing activities should explicitly include interest paid that is capitalised into the cost of property, plant and equipment and clarified that interest paid that is capitalised in accordance with IAS 23 Borrowing Costs should be classified in conformity with the classification of the underlying asset to which those payments were capitalised.

As its September 2011 meeting, the Board tentatively decided to include the proposed amendments in the next Improvements to IFRSs exposure draft, subject to certain editorial amendments. While the staff assessed the proposed amendments against the enhanced annual improvements criteria, it failed to supply the IASB with the details of the criteria assessment as part of the September 2011 meeting. Therefore, the staff presented its assessment at the November 2011 Board meeting. The Board tentatively agreed with the staff's assessment, and thus, the proposed amendments tentatively agreed in September will be included in the next Improvements to IFRSs exposure draft.

IAS 16 Property, Plant and Equipment – Meaning of receivable

The staff presented a request previously considered by the IFRS Interpretations Committee to clarify the guidance in paragraph 65 of IAS 16 Property, Plant and Equipment concerning when the compensation for property, plant and equipment that has been impaired, lost or given up (for example, as a result of a natural disaster) becomes receivable (i.e., the point at which the insured loss occurs or at the point when the reimbursement is agreed with the insurer). The staff paper, following the recommendations of the IFRS Interpretations Committee, recommended that the Board not add this issue to the Annual Improvements process for 2010-2012 based on the fact that the term 'becomes receivable' is sufficiently understood within IFRSs.

Contrary to the IFRS Interpretations Committee recommendation, one Board member expressed a preference to align the wording in paragraph 65 of IAS 16 with paragraph 53 of IAS 37 Provisions, Contingent Liabilities and Contingent Assets (i.e., IAS 16 could be modified to state that compensation from third parties when an asset is impaired, lost or given up is recognised when the compensation is virtually certain to be received instead of when compensation 'becomes receivable'. He noted that it promoted consistency between the standards (IAS 16 and IAS 37) and made the requirements in IAS 16 more robust. However, other Board members noted that the requirements of IAS 16 were not intended to be consistent with the requirements of IAS 37. Specifically, IAS 16 acknowledges that an unconditional agreement has already been reached with the insurer to compensate the policyholder for an event related to asset impairment or for lost profits and that the recognition of the compensation right is only awaiting for that event to happen whereas IAS 37 waits for the reimbursement to be agreed by a third party and for the policyholder to settle the obligation to which the compensation relates (in order to eliminate any avoidance of doubt or uncertainty that the reimbursement will be received).

When put to a vote, the Board tentatively agreed not to add this issue to the next Improvements to IFRSs exposure draft.

IAS 24 Related Party Disclosures – Key management personnel

At its September 2011 meeting, the Board discussed a proposed amendment to clarify the disclosure requirements for related party transactions that are identified when a management entity provides key management personnel (KMP) services to a reporting entity in the specific circumstances where the management entity does not control, jointly control or have significant influence over the reporting entity. Some Board members raised concerns about potential unintended consequences of the proposed amendments. The Board therefore asked the staff to consider these concerns and to bring the proposals back to a future meeting.

At the November 2011 meeting, the staff presented its analysis in the context of the queries raised in the original submission: can key management personnel as defined in IAS 24 Related Party Disclosures include an entity as opposed to individuals and should the reporting entity disclose the remuneration paid by the management entity to the individuals providing the KMP services or the service fees paid by the reporting entity to the management entity for the KMP services?

Based on this analysis, the staff made the following recommendations:

  • IAS 24 should be amended to include management entities providing any key management services within the definition of related entities.
  • Compensation costs relating to KMP not employed by the entity should be excluded from the disclosure requirements of paragraph 17 of IAS 24. However, paragraph 18 of IAS 24 should be amended to require that transactions with related parties for the compensation of KMP or the provision of KMP services be disclosed separately (i.e., disclosure of the service fee paid to the management entity that employs, or has as directors, the persons that provide the key management services).
  • The existing definition of KMP would be retained in IAS 24 to prevent any unintended consequences of excluding management entities from related parties (i.e., to prevent double-counting of service fees under both paragraph 17 and 18 of IAS 24).
  • Further research should be performed regarding relevant disclosure of variable payments to related parties (e.g., bifurcation of variable and fixed payment components) for purposes of a potential amendment to IAS 24 as part of the 2011-2013 annual improvements project.

The Basis for these recommendations included:

  • IAS 24 is unclear as to what information to disclose with respect to key management personnel when those persons are not employees of the reporting entity.
  • Because key management personnel would still be identified as a related party, the reporting entity would be required to disclose compensation to key management personnel by category of benefits in accordance with paragraph 17, along with other direct transactions between key management personnel and the reporting entity as required in paragraph 18. Given concern about the impracticability of accessing the detailed information that is required in paragraph 17 when compensation is paid to separate managing agent as fees, the proposal provides relief in that the reporting entity would not be required to disclose compensation to key management personnel paid through another entity. Instead payments in respect of KMP compensation or services payable to another entity would be separately disclosed in accordance with paragraph 18 of IAS 24.

In consideration of these recommendations, one Board member requested that the research regarding disclosure of variable payments be performed more timely and included as part of the 2010-2012 annual improvements project. He preferred that annual improvements to IAS 24 be addressed holistically. However, the staff highlighted that the impending timing of the Improvements to IFRSs exposure draft did not allow adequate time to address potential consideration of variable lease payments.

With little debate, the Board tentatively agreed with the proposed recommendations of the staff (subject to editorial changes). As such, the next Improvements to IFRSs exposure draft will include proposed changes to IAS 24 including:

  • extending the definition of a related party to include management entities;
  • extending the disclosure requirements of IAS 24 to require the separate disclosure of transactions for the provisions of KMP services.
  • excluding from the disclosure requirements of paragraph 17 of IAS 24 the KMP compensation provided through managing entities.

Because the proposed changes relate to the disclosure of financial information, entities would apply the amendments retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

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