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Annual improvements 2010-2012 (IASB only)

Date recorded:

The IASB discussed two of the eleven proposed amendments included in the May 2012 exposure draft ED/2012/1 Annual Improvements to IFRSs 2010-2012 Cycle, on the basis of constituent feedback to the proposals and the recommendations of the IFRS Interpretations Committee (the “Committee”).

IAS 24 Related Party Disclosures: Key management personnel

The exposure draft proposed to clarify the requirements for related party transactions that take place when key management personnel (KMP) services are provided by a management entity that is not otherwise a related party of the reporting entity by 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 and excluding from the disclosure requirements of IAS 24 KMP compensation that is provided by a management entity to its own employees.

Having considered the constituent comments received to the exposure draft, the Committee recommended that the IASB should finalise the proposed amendment, but further recommended that the IASB should:

  1. require the disclosure of additional information about the nature of the KMP services provided;
  2. extend the proposed Basis for Conclusions to explain why the reporting entity is not a related party of the management entity; and
  3. apply additional sundry drafting suggestions.

At this meeting, the staff asked the Board whether it agreed with the recommendations of the Committee.

One Board member noted that the proposals indicated that a reporting entity is not necessarily a related party of a management entity solely because of the provision of KMP services. On this basis, he asked whether disclosure would be required if a management entity is controlled by the same person as the reporting entity. The staff noted that in such an environment, the management entity and reporting entity are related parties and existing related party disclosure requirements would apply. The Board member requested that the staff consider amending the proposals to clarify the relationship to existing related party disclosure requirements.

Another Board member, focused on the proposed requirement to disclose information about the nature of the KMP services provided, expressed strong reservations about the need for this disclosure. His reservations were primarily practical ones. For example, he noted that only a few respondents to the exposure draft suggested the need for such a disclosure and he believed the disclosure would unnecessarily increase the burden on preparers. He also noted that the proposal would result in asymmetry between the disclosure requirements for transactions that take place when KMP services are provided by a management entity and transactions that take place when KMP services are provided by an individual. The staff expressed a belief that the proposed disclosure would provide useful information to investors and others in assessing the effect of the management entity on the reporting entity (in particular, the degree of influence that is exerted by the management entity). However, when put to a vote, the Board tentatively decided to remove the proposal to require disclosure about the nature and extent of KMP services provided.

Absent the above, the Board tentatively supported the Committee’s recommendations.

The staff then asked the Board to reaffirm the transition provisions and effective date included in the 2012 exposure draft (i.e., apply the amendment for annual periods beginning on or after 1 January 2014). Without debate, the Board reaffirmed its previous tentative decisions.

IAS 1 Presentation of Financial Statements: Current/non-current classification of liabilities

The exposure draft proposed to amend IAS 1 to clarify that a liability is classified as non-current if an entity expects, and has the discretion, to refinance or roll over the obligation for at least 12 months after the reporting period under an existing loan facility with the same lender and on the same or similar terms.

Having considered the constituent comments received to the exposure draft, the Committee recommended to the IASB that it should not confirm the proposed amendment to IAS 1 in its current form. The Committee noted that the proposed amendment proposes to tie the classification requirements of financial liabilities in IAS 1 to the derecognition requirements of financial liabilities in IAS 39 and IFRS 9. In that case, the assessment of whether the terms are the same or similar would include a quantitative analysis based on the so-called ‘10 per cent test’. The Committee thinks that this test is not appropriate for classification purposes and would raise practical issues. The Committee decided to recommend to the IASB that this issue should be addressed through a narrow-scope project to amend IAS 1 rather than to finalise the proposed annual improvement.

At this meeting, the staff asked the Board whether it agreed with the recommendations of the Committee.

One Committee member questioned what element of the original proposals was causing a lack of clarity: the proposed amendments to the core standard or the Basis for Conclusions. Specifically, he noted the Committee and the Board agreed to propose to link the classification requirements of financial liabilities in IAS 1 with the derecognition requirements of financial liabilities in IAS 39/IFRS 9 such that the classification basis focused on whether the discretionary refinance facility had the same or similar terms. He believed the proposals clearly captured this tentative decision. However, he acknowledged constituent feedback to the Basis for Conclusions which suggested the proposed amendment may be seen to indicate that the classification of a financial liability should depend on whether the financial liability will be derecognised less than 12 months after the reporting date. He therefore proposed amending the Basis for Conclusions. However, the staff noted more broad concerns to the proposals than that which is captured in the Basis, including the general linkage to derecognition requirements for financial liabilities in IAS 39/IFRS 9 (which was designed for a purpose other than classification and would result in practical application issues) and a lack of clarity over the use of certain terms in the proposals such as ‘discretion’ or ‘unconditional’ as used in paragraphs 73 and 69(d) of IAS 1, respectively. As a result, the Committee had recommended that the narrow-scope project should address the issues that are linked to paragraphs 69(d) and 73 of IAS 1; in particular, what is the meaning of the words ‘unconditional right’ and ‘settlement of the liability’ in paragraph 69(d) and ‘discretion’ and ‘refinance or roll over an obligation’ in paragraph 73. Many Board members questioned the lack of clarity regarding the use of such terms and feared that the Committee’s efforts to address these issues would be fruitless. However, the Board supported kicking the issue back to the Committee to consider whether further clarification could be achieved.

A couple of Board members did question whether this project should be addressed through an interpretation or annual improvement rather than a narrow-scope amendment. The primary reason for raising this issue was a fear that the growing number of narrow-scope amendments may frustrate constituents. The staff noted a belief that the proposed project would not meet the criteria for an annual improvement. However, the staff noted that it would raise this concern with the Committee and allow the Committee to consider how best to address this project.

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