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IFRS Interpretations Committee issues

Date recorded:

Report from the January meeting of the Interpretations Committee – IFRIC Update

The Director of Implementation Activities provided an update of the Interpretations Committee’s work in progress, noting five issues that the Staff wanted to highlight to the Board.

The first issue the Interpretations Committee looked at related to the interaction between the investment entity amendments and the exemption from preparing consolidated financial statements that has always been in IFRS 10. The context in which this issue was discussed by the Interpretations Committee was whether an intermediate parent (that is not an investment entity) could use the exemption from preparing consolidated financial statements if it was reflected at fair value in its investment entity parent’s financial statements. The Interpretations Committee had mixed views on whether or not it was appropriate to take that exemption and asked that the Board be consulted – with a view to the Interpretations Committee potentially proposing a clarification to IFRS 10 on this matter.

The second issue the Interpretations Committee looked at related to how a non-investment entity should apply the equity method to an investment in an investment entity when it had either joint control or significant influence over that investment entity. The question discussed was whether the entity should equity account using the fair value results of the investment entity, or whether the entity would have to ‘unwind’ the fair value accounting of its joint ventures or associates that were investment entities. The Interpretations Committee thought that there was some interaction with the broader discussions on equity accounting – and thought that this issue should wait until the Board started discussions in its Research Project on the Equity Method of Accounting – due to come to the Board in a few months’ time.

A Board member noted that the Interpretations Committee did not seem to have any direction on these issues. The amendment was coming into effect this year and the Board needed to give guidance to preparers. The member suggested that it would make more sense to bring a paper directly to the Board to speed up the decision-making process. It was agreed the Staff would bring a paper on this directly to the Board in March.

The third issue the Director highlighted related to IFRS 11. The Interpretations Committee continued to discuss the application of the guidance requiring an assessment of ‘other facts and circumstances’ when determining the classification of a Joint Arrangement. The Committee would revisit and look at a number of examples at its March meeting.

The fourth item highlighted related to tentative agenda decisions. The Director noted that there were ten tentative agenda decisions that had been published in the January 2014 IFRIC Update that the Interpretations Committee had considered that it did not want to take onto its agenda for different reasons, some of which it felt that there was sufficient guidance in the Standards and was setting out where it thought preparers ought to look to address the issues that had been submitted.

The final item highlighted by the Director related to the project on going concern that the Board had decided to stop in the November meeting. The members of the Interpretations Committee understood but were concerned about the Board’s decision. Members of the Committee noted that it would still be helpful to have clarification about when judgements were made in assessing going concern that this would be an example of the existing disclosure requirements in IAS 1, and the Staff would look and see how to explore this with the Interpretations Committee.

 

IFRS 2 issues

The next subject in this session was devoted to a series of four separate IFRS 2 issues considered by the Interpretations Committee. The Committee sought the Board’s approval for its tentative leaning.

 

Accounting for cash-settled share-based payment transactions that include a performance condition

The Interpretations Committee had tentatively decided that the guidance in IFRS 2 for measuring of equity-settled awards that included a performance condition should be applied by analogy to account for cash-settled SBP transactions that included a performance condition. The Interpretations Committee further suggested that further guidance be added to IFRS 2 to describe how vesting and/or non-vesting conditions have a different impact in the measurement of the liability. In addition, an example should be added to the Implementation Guidance of IFRS 2 demonstrating the impact of a performance condition on the measurement of a cash-settled share-based payment transaction.

A Board member asked the Staff to clarify whether the proposed application by analogy achieved convergence with the U.S. The Staff noted that the proposed guidance in IFRS 2 would be more specific than what was in U.S. GAAP, but would be consistent with U.S. GAAP.

Another Board member noted that he agreed with the Committee, noting a suggestion for drafting regarding the basis for this conclusion. The member noted that the reason vesting conditions were excluded from the measurement for equity-settled share-based payments was because of the complexity of applying them in option pricing models, and this would be the same for cash-settled awards; accordingly, this fact should be brought out in the drafting.

Another Board member had a comment regarding Paragraph 32 of the Staff Paper dealing with the difference in expense recognition between the favoured approach and a full fair valuation. The member asked the Staff to expand on this, because although the cumulative expense would be the same at the end of the day, the result could be significantly different between reporting periods. The Staff acknowledged that a full valuation would provide a more appropriate result, but because of the complexity involved in the application, is the Committee suggested to take the analogy route. The Staff further noted that if one were to reflect the probability of the satisfaction of performance conditions, this would need to be reflected in the fair value from day 1. However, the Staff noted that the same approach should be taken as was taken for equity-settled awards.

Another Board member noted that the ability to estimate performance conditions improved over time, and therefore, by the end you knew exactly what conditions you had satisfied. It was an estimation process from day 1 to settlement date, which was why the end result was the same. If non-market conditions were designed to be an incentive, then they were very difficult to estimate upfront. Therefore, is the approach suggested by the Committee was the best approach practically and also theoretically because it was a refinement of an estimate over time.

When called to a vote, the Board agreed with the Interpretations Committee’s recommendation.

 

Share-based Payments in which the manner of settlement is contingent on future events

The issue addressed in the agenda paper related to a request received by the Interpretations Committee to clarify the classification of share-based payment transactions in which the manner of settlement is contingent on a future event that is outside the control of both the entity and the counterparty.

The Interpretations Committee analysed five alternative approaches and tentatively decided to recommend to the IASB to amend IFRS 2 in a narrow-scope amendment project by adding guidance in line with the following approaches:

    1. A share-based payment in which the manner of settlement is contingent on a future event that is outside the control of both the entity and the counterparty should be classified as either cash-settled or equity-settled in its entirety depending on which outcome is probable.
    2. A change in classification of the share-based payment arising from a change in the most likely settlement method should be accounted for by recording a cumulative adjustment for the effects of the reclassification in a period in which the reclassification occurs, without restating comparatives.

A Board member noted that she did not agree with the approach recommended by the Committee, noting that an approach to bifurcate into cash-settled and equity-settled by using the compound financial instrument approach in IFRS 2:35-40 would be more appropriate. IFRS 2 already set out a regime to deal with situations where there may either be a cash or equity settlement when the event was outside the control of the issuing entity. If the entity had an unavoidable obligation, it would have to use the approach mentioned above. Given that this was already included in IFRS 2, she believed this would be a more natural approach to follow.

She also disagreed with the comment that IAS 32 was not a relevant reference point. There were differences between IFRS 2 and IAS 32, but not on this point. IAS 32 was clear that if there was an unavoidable obligation to pay cash, then that was a liability.

The Board member also noted that the probability-based approach recommended in the paper raised a concern about the complexity that was introduced into the measurement, and also a concern about the loss of information content. This was because preparers would start out by saying there was a zero probability that there would be a takeover, because they had no basis for coming up with something more scientific - with the effect that something would be treated as equity-settled until a takeover event occurred. At that point in time it would flip classification. She pointed out that the Board had recently decided not to pursue such an approach in the IFRS 9 project for reasons of complexity and loss of information content. For the same reasons the Board member noted she did not support using the approach in this proposal. Another Board member agreed with these comments and also supported a bifurcation.

The Staff noted that the Interpretations Committee did consider the bifurcation approach, but felt that it was not the best reflection of the situation. The Staff further cited an example which showed that there would be a lot of share-based payments that would have to be classified as cash-settled rather than equity-settled.

The Board member responded, noting that this would not trouble her because the entity did have an unavoidable obligation to pay cash – consistent with the existing notion of liabilities. The Board member further noted that she felt very uncomfortable in a narrow scope project to come up with something that was a fundamentally new idea.

The Staff noted that if this route was taken, it would result in a significant change in practice.

Another Board member agreed with the significant conceptual concerns expressed by other members and added the point that this could be introducing a probability-based notion into a Standard that did not have one. The Board member noted that it might be worth feeding back to the Interpretations Committee that several Board members had conceptual concerns about the recommendation.

Another Board member noted that he agreed with the recommendation by the Interpretations Committee, because he believed it was the only plausible way to address the issue in a practical manner. The Board member noted that a lot of schemes have features such as a change of control clause with very low probability, whereby taking the approach suggested by his fellow members would require an entity to bifurcate into cash-settled and equity settled portions – therefore, the Board member believed the approach proposed by the Interpretations Committee was the only straightforward one. He conceded there were conceptual issues that needed to be addressed, but from an outcome perspective, this approach appeared to be the right one.

The serious concerns raised by the Board regarding the conceptual underpinning of the recommendation and its conflict with other requirements in IFRSs regarding other liabilities were noted. It was agreed that the issue should be taken back to the Interpretations Committee for its March session.

 

Share-based Payments settled net of tax withholdings

The issue addressed in this paper relates concerned the classification of a share-based payment transaction in which the entity withholds a specified portion of the shares that would otherwise be issued to the counterparty upon exercise (or vesting) in order to make a payment to the tax authorities in respect of the counterparty’s tax due in relation to the share-based payment. The Interpretations Committee decided to address the diversity in practice by recommending adding specific guidance to IFRS 2. The guidance would be to clarify that a share-based payment as outlined above would be classified as equity-settled in its entirety, if the entire share-based payment would otherwise be classified as equity-settled without the net settlement feature. This amendment would result in more converged guidance with U.S. GAAP.

A Board member noted that it was not hard to derive an answer for what you should do from IFRS 2, because the Standard was clear that if an entity issued an equity instrument and had a past practice or stated intent of repurchasing from the employee, the award would have to be classified as cash-settled. This was a clear principle at the start of the classification section of the Standard.

She further noted that the Interpretations Committee has identified some valid complexity concerns that came out of trying to split the award, and on that basis had recommended a change or an exception (rather than a clarification). The Board member noted that she would not object to this recommendation if it was characterised as an exception considering the complexity concerns, noting similar language in U.S. GAAP. For her, this point was very important to be added to the Basis for Conclusions, as it avoided calling into question whether there was a clear principle in IFRS regarding the intent to repurchase.

The Board agreed with the staff recommendation, subject to the comments of the member as documented above.

 

Modification of a share-based payment transaction from cash-settled to equity-settled

The issue addressed in this paper relates to clarifying the accounting for a modification to the terms and conditions of a cash-settled share-based payment that involves a change in the classification from cash-settled to equity-settled.

The Interpretations Committee had agreed with a sizeable majority that the share-based payment analysed should be measured at the modification date fair value of the new equity-settled award, with a majority its members preferring to recognise the change in fair value of the share-based payment as a result of the modification in profit or loss immediately. The Interpretations Committee decided to recommend to the IASB to amend IFRS 2 in a narrow-scope amendment to clarify this issue.

A Board member noted that she did not agree with the Staff’s recommendation. She noted that there was a clear principle in IFRS 2 regarding modifications, whereby, if you had a modification, there was a requirement to recognise at a minimum the grant date fair value of the original award, and for cash-settled awards, to re-measure to the actual outcome.

The Board member noted that IFRS 2 made a distinction that people tended to ignore because there was often not much difference between the amount of compensation that was nailed down at grant date fair value and the subsequent re-measurement. IFRS 2 laid out in one of the examples that if one was in a situation where one was capitalising compensation costs, only the original grant date fair value would be capitalised; all the re-measurements were to be recorded in profit or loss. That implied that it was a financial expense.

The Board member further noted that it was not the outcome in this issue she was worried about, but the fact that the reasoning concerned the distinction between compensation expense and re-measurement and took the two together: By failing to maintain the grant date fair value, one would lose it. It was for this conceptual concern that she did not support the Staff’s conclusion.

Another Board member said that she had initially agreed to the Committee’s suggestion, but paused when hearing her colleague’s concern. She said she would be interested to an analysis whether it was in fact true that one needed the store the grant date fair value even for share-based payments that were cash-settled.

Another Board member said she understood from the first Board member that she was concerned about everything being booked against profit or loss, where some expenses might have qualified for capitalisation, e.g. as inventory. When asked, the Staff confirmed that the Committee had not looked into this point. It was agreed to explore this issue further and bring the issue back at a future meeting.

 

The last two subjects in this session were devoted to dealing with sweep issues in limited amendment projects.

Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Inconsistency with paragraph 31 of IAS 28

The issue addressed in this paper relates to an issue identified by the IFRS Interpretations Committee during its work on the Exposure Draft Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (proposed amendments to IFRS 10 and IAS 28. The Interpretations Committee noted that paragraph 31 of IAS 28 was not consistent with the forthcoming amendments to (and the existing requirements of) IAS 28. It also noted that its deletion would not have significant unintended consequences. Consequently, the Interpretations Committee recommended that the IASB should amend IAS 28 and change the forthcoming (final) amendments to IFRS 10 and IAS 28 (without re-exposure of those amendments).

A Board member raised the concern around a lack of analysis surrounding the origins of paragraph 31 and why it was included in IAS 28 to start with. The paper seemed to say that there were not a lot of these types of transactions; therefore, removal of said paragraph does not matter. The member said that she would be very apprehensive about deleting the paragraph without some exposure to solicit feedback from constituents as to why it was actually there and how many transactions would be affected. Further, she also noted that there were a number of amendments being made to IAS 28, and she was concerned that the Board would be making a lot of ad-hoc amendments without seeing how they interacted. Hence, she recommended a similar approach be taken as for the IFRS 2 package.

The Staff noted that this paragraph had originally come from SIC-13 and had been inserted into IAS 28 in 2011 as part of the joint arrangement amendments.

A Board member asked the Staff about the outreach process. The Staff noted that they had received 17 or 18 responses, and only two respondents had said they had noted this type of transaction in their jurisdiction; none had thought this type of transaction was common in their jurisdiction, and there had been strong support to delete the paragraph.

Having heard other Board members agreeing with what was said before, it was agreed that the Staff would bring a paper to the Board that would answer the questions, look at the intention of the original paragraph in SIC-13 and how it is now read in the context of IAS 28, and work out whether simple deletion is appropriate or whether some form of modification would be better. As a result of that discussion the Board could then decide whether the amendment should be exposed separately or finalised as part of the amendment already exposed and discussed.

 

Equity Method: Share of Other Net Asset Changes – Application of the proposals in the Exposure Draft to some specific fact patterns

In December 2013, the IASB was presented with alternative proposals to the one contained in the Exposure Draft. The Board was aware of the fact that each alternative came with challenges; nonetheless, it was felt that it would be better to do something short-term to address existing diversity in practice than to wait until the outcome – if any – of its Research Project on the Equity Method of Accounting. The Board had therefore decided tentatively to finalise the proposals in the Exposure Draft, but had asked the Staff to look into some fact patterns to ensure that there would not be any unintended consequence.

At this meeting, the Staff reported back and said that their analysis had not revealed any unintended consequences. However, as part of the analysis the Staff noted that there were two additional aspects of the equity method which were deemed relevant to the application of the proposed amendments and warranting editing: Firstly, the changes in the net assets of an associate or a joint venture should be limited to only those changes that corresponded to an investor’s share in the associate’s or joint venture’s net assets. Secondly, when an investor’s ownership interest in an associate or joint venture was reduced, the proportionate amount should be reclassified from OCI to profit or loss; given that this was already in IAS 28, the Staff saw no need to amend the requirement.

A Board member stated he was concerned that the proposals were in breach with the principles of IAS 1. The Director of Implementation Activities reminded him that Staff was not suggesting anything new over the papers discussed in December and that the Board made a decision then.

Another Board member said she was worried that the examples in the paper lacked articulation of the concept behind them. A fellow Board member jumped in and said that she had understood the Staff saying that they had looked at them from a consolidated basis point of view, so had treated the equity method as a one-line consolidation.

Other Board members expressed their discomfort with the suggested route, saying that it meant change for many entities and possibly giving rise to further issues. Again, the Director of Implementation Activities replied that there was nothing new in this paper, all it was meant to accomplish was tidying up.

Lastly, another Board member remarked that the Board seemed to discuss the same issue over and over again. He acknowledged that this was a short-term fix to address the diversity in practice issue, and since the Staff had not found any unintended consequences, he felt the Board should move ahead. When called to vote by the Chairman, a majority of the Board agreed with the Staff’s recommendations.

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