IFRS Interpretations Committee issues

Date recorded:

IFRIC Update

The Director of Implementation Activities highlighted some of the issues contained in the March 2014 IFRIC Update.

The first issue was 'IAS 12 Income Taxes – recognition of deferred tax assets for unrealised losses'. He said that this issue had been brought to the Board previously as part of the Annual Improvements project. Based on the feedback on the Annual Improvements the Board had asked the IFRS Interpretations Committee to reconsider the issue in order to identify whether a narrow-scope amendment was needed. He advised the Board that they would receive a paper in a future meeting that showed the conclusions of the Committee and their recommendation for this issue.

The next item was 'IAS 16 Property, Plant and Equipment and IAS 2 Inventories – core inventories'. This issue dealt with inventories that needed to be in an item of equipment at all times in order for the equipment to operate. One example was a minimum amount of oil in an oil pipeline. The submission to the Committee asked whether this minimum amount should be accounted for in accordance with IAS 2 or IAS 16. The IFRS Interpretations Committee decided to work on an interpretation to address the diversity in practice in this area. The Director of Implementation Activities said that he had received some input from Board members which he would bring to the attention of the IFRS Interpretations Committee meeting in May.

One Board member did not agree with accounting for these items as property, plant and equipment. He asked the Director of Implementation Activities how widespread the diversity in practice was. The Director of Implementation Activities replied that the diversity in practice varied from country to country and from industry to industry. He said that, for example, a minimum amount of gas in gas storage facilities, often referred to as 'cushion gas', was often accounted for as a component of property, plant and equipment, whilst core inventories in metal refinery processes were often accounted for as items of inventory. He conceded that even with these items there was still diversity in practice.

Another Board member said that he would not be worried about diversity across different industries as they had different technical processes. However, he would be worried about diversity for the same processes in different countries. A fellow Board member did not share this view. He was concerned that across different industries the relative value of an entity that recognised those items as inventory would be different from the relative value of those that recognised them as property, plant and equipment. In his view, this also affected the perceived profitability of those entities.

The Director of Implementation Activities continued by saying that the IFRIC Update included four finalised agenda decisions that had been exposed for comment. He said that with three of those issues, the Committee had concluded that there was sufficient guidance within IFRSs and had therefore been able to provide its views on the technical conclusion of those issues.

Also, he mentioned that the paper listed the tentative agenda decisions that had been exposed for comments. He highlighted 'IAS 1 Presentation of Financial Statements – disclosure requirements relating to assessment of going concern'. He said that this issue had been discussed by the Committee and subsequently by the Board. The tentative agenda decision reminded constituents of the existing requirements.

He also highlighted 'IAS 12 Income Taxes – recognition of deferred tax for a single asset in a corporate wrapper'. This issue was about the deferred tax requirements when an entity had a subsidiary in its consolidated financial statements that comprised only one asset. IAS 12 required comparing the carrying amount of the asset in the consolidated financial statements and the tax base of the asset. IAS 12 also required comparing deferred tax on temporary differences between the share of the net assets and the tax base of the shares. These temporary differences were also known as 'inside basis differences' and 'outside basis differences'. The IFRS Interpretations Committee had decided that this would be too broad a project for the Committee. The tentative agenda decision therefore recommended that the IASB analyse and assess this issue as part of its research project on Income Taxes. The Vice-Chairman warned that this could build an expectation that the IASB would be dealing with IAS 12 issues in the next one or two years. The Director of Implementation Activities replied that he was not worried about building an expectation as the discussions by the IFRS Interpretations Committee had shown that there was no short-term answer to this.

One Board member asked whether IAS 12 items were deleted in this process as, else, he would be concerned that every item that had been exposed became a research project. The Senior Director for Technical Activities replied that several issues had been taken off the research agenda. He said that there were four items on the list where the Board had decided not to discuss those before the next agenda consultation but encouraged others like national standard-setters to work on them.


Review of the IFRS Interpretations Committee’s activity

The Director of Implementation Activities explained to the Board that the agenda paper had been presented to the IFRS Interpretations Committee in its March meeting. He said that the paper highlighted activities of the Committee during 2013. He pointed the IASB’s attention to table 1 in the paper ('Key figures summary') to show the number of issues the Committee had dealt with in 2013 in comparison with earlier years. He said that the Committee had dealt with 47 issues of which 32 were new issues, which were about 50% more than in the previous year. Most of those were dealt with through Annual Improvements or agenda decisions. He continued explaining that 16 issues had been rejected by the IFRS Interpretations Committee of which 12 had been rejected because the Committee thought there was sufficient guidance within the IFRSs.

One Board member asked whether those statistics would be published in the annual report of the Foundation. The Director of Implementation Activities replied that this had been done last year and he expected it to be done this year as well.

The Director of Implementation Activities then asked the Board to look at table 8 of the agenda paper ('Summary of issues analysed as narrow scope amendments (2013)'). He pointed out that two issues had been finalised which were the amendments to IAS 19 ('employee contributions') and IAS 39 ('novation'). He then continued with the four IFRS 2 issues that needed to be confirmed by the Board. The IFRS Interpretations Committee had originally thought that there would be a post-implementation review of IFRS 2. However, as this was not the case, the Committee had asked the staff to reconsider those issues. He suggested that the issues should all be dealt with in one exposure draft for practical reasons.

He then went on to the graph in the agenda paper ('Number of Issues per Standard 2011-2013'). He said that it was worth noting that IFRS 3, which had received the highest number of issues, was in post-implementation review at the moment. The Standard with the second-most issues, IFRS 10, had recently had the investment entities amendment. He said that about half of the issues that had arisen on IFRS 10 were pertaining to this amendment. He mentioned that it was not unusual to receive more submissions on Standards that were new or had been significantly amended. He explained that the same was true for IAS 19. The high number for IFRS 2 could be attributed to the fact that the Committee had asked the staff to bring back some older IFRS 2 issues as previously explained.

One Board member asked whether she remembered correctly that some of the IFRS 2 issues had been raised in advance of the amendment on vesting and non-vesting conditions and that it would have been helpful if these had been dealt with before the mandatory effective date of that amendment. She said that it was decided not to address these issues and that the staff’s consideration revealed a number of other interpretive issues. She said that it should be carefully considered whether items on the current list were open submissions by constituents or whether they were additional items raised by staff and would therefore not need to be dealt with by the Committee.

The Chairman asked the Director of Implementation Activities to make sure that the activities were represented in the annual statement.


Narrow-scope amendments to IFRS 2 Share-based Payment

The project manager introduced the series of agenda papers pertaining to four issues around IFRS 2 that had been discussed in the February 2014 meeting. He said that for Issue 1 ('Accounting for cash-settled share-based payment transactions that include a performance condition') and Issue 3 ('Share-based payments settled net of tax withholdings') the IASB had tentatively decided to amend IFRS 2 at the February 2014 meeting. However, he said for Issue 2 ('Share-based payments in which the manner of settlement is contingent on future events') and for Issue 4 ('Modification of a share-based payment transaction from cash-settled to equity-settled') the IASB had asked the staff to perform further work. He said that the result of this work could be found in agenda papers 12D and E, whilst agenda paper 12F contained proposed transition requirements for the entire narrow-scope amendment.

On Issue 2, the staff and the IFRS Interpretations Committee recommended to address the issue in a narrow-scope amendment. In the February 2014 meeting, the staff presented the 'probable approach'. Under this approach a share-based payments would be classified as either cash-settled or equity-settled in its entirety depending on which settlement method was (more) probable. The staff recommended that if the IASB decided to take this approach for the classification of a share-based payment with a contingent settlement feature, the IASB should propose that a reclassification of the share-based payment should be accounted for in line with the approach recommended by the Interpretations Committee. Under the Committee’s approach an entity would account for the reclassification by recording a cumulative adjustment as if the new classification had been expected from the inception of the arrangement. However, some IASB members had recommended accounting for this scenario using the 'compound financial instrument approach', which applied to share-based payment transactions in which the counterparty had the choice of settlement. This would be a similar case as the entity did not have an unconditional right to avoid paying cash; moreover, it would be consistent with IAS 32. However, the IFRS Interpretations Committee had discussed and dismissed the approach. This was due to the fact that the 'compound financial instrument approach' would recognise a liability in full from the inception of the arrangement, regardless of how remote the occurrence of the contingent cash-settlement was. This would not result in useful information about the entity’s obligation. The outreach showed that contingent cash-settlements for unlikely cases (e.g. the employee’s death) could be found in practice and the most common approach applied was similar to the “probable approach”.

One Board member said she agreed with the staff’s recommendation. She said that the Committee had considered the Board’s concerns when formulating a recommendation. In her opinion, unless there was a fatal flaw, the IASB should not object to the recommendation. Another Board member appreciated the honesty of the paper; however, she strongly disagreed with the staff recommendation. She thought that the Board was asked to condone a practice that had developed over time but had, in her view, severe conceptual flaws. She said that it was inconsistent with the concept of a liability in the Conceptual Framework. She also mentioned it would give entities leeway and would add to the complexity of the standard. This was supported by two Board members of which one said that this was not the place to redefine a liability.

One Board member asked whether the objecting Board members suggested waiting for the Conceptual Framework project to be completed or rather deciding for the 'compound financial instrument approach'. One of the objecting Board members replied that she suggested doing nothing as she could not estimate the consequences such an amendment might have. The Director of Implementation Activities replied that the Basis for Conclusions in IFRS 2 described a difference between IAS 32 and IFRS 2. He believed that this had led to the current practice. The Board member replied that she thought that this difference was with regard to settlement in own shares only. However, she thought that there was no difference in the general concept of a liability.

The Executive Technical Director suggested postponing this issue until the Conceptual Framework project was completed. The Director of Implementation Activities said that, apparently, the current practice was problematic. The staff had tried to eliminate diversity in practice for the particular transaction, i.e. share-based payment in which the manner of settlement was contingent on future events. One Board member said that she understood how it could be distinguished from a technical point of view; however, she had strong concerns that by issuing this amendment the Board would be defining liabilities differently for certain transactions. Another Board member said that a second difference between IAS 32 and IFRS 2 was the intention factor. While IAS 32 was only looking at the contract, IFRS 2 was also looking at the intention to fulfil an obligation. One Board member said that if the Board did nothing, diversity would continue to exist for the foreseeable future. This was confirmed by the Director of Implementation Activities.

Upon calling a vote, only 7 Board members supported the staff recommendation. The Chairman concluded that on this issue the Board would wait for the Conceptual Framework project to be completed.

The project manager continued with Issue 4. The IFRS Interpretations Committee had recommended that the Board specify the accounting for the change in classification from cash- to equity-settled that arises from a modification of a share-based payment transaction. The project manager said that some IASB members had concerns about unintended consequences of the proposed amendment. He admitted that, at the discussion in the February 2014 meeting, the scope had been broader than intended. Therefore, staff had reduced the scope to a cash-settled share-based payment that is replaced with an equity-settled share-based payment. He asked the Board whether they supported the staff recommendation to amend IFRS 2 in this regard. The Board agreed.

The project manager went on to the transition requirements of the four issues. The staff had originally recommended that the amendments with regard to Issue 1 and Issue 2 be applied prospectively, while the amendments for Issue 3 and Issue 4 be applied retrospectively. However, if all amendments were considered collectively, he said that a retrospective application for only two of four issues could be confusing. Therefore, in that case a prospective application would be recommended, with retrospective application permitted. He asked the Board whether they agreed with the staff recommendation. The Board agreed.

One Board member said that she found it very helpful that it was considered by the staff that all issues could be addressed in one amendment. Another Board member supported that and agreed that he preferred the application of the whole package to applying a different amendment every year.

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