In August 2015, the IASB issued exposure draft ED/2015/7 Effective Date of Amendments to IFRS 10 and IAS 28. For an overview of the proposals, see our Need to know newsletter.

In this session, the staff seek permission to publish the final amendment resulting from the exposure draft which defers the effective date of the September 2014 amendment for an indefinite period.

Subject to approval by the IASB, the staff expect to have the amendment ready to be issued in December 2015, ensuring that it is published before the effective date of the September 2014 amendment, which is 1 January 2016.

Staff also ask if any of the IASB members plan to dissent from the publication of the amendment.

The IASB continued deliberations of the Disclosure Initiative Project. In this session, the staff presented a PowerPoint proposal for the initial phase of the project, on which the staff sought the views of the IASB. 

• Objective and output of the project: The staff proposed that the IASB would develop a Drafting Guide for its internal use in setting out future amendments and or standards.
• Issues with existing disclosure requirements: The agenda paper presented a summary of issues discussed in prior sessions related to the existing disclosure requirements (i.e. disclosure overload, overly prescriptive language, and absence of clear disclosure objectives in each standard).
• Proposed approach for the initial phase of the project: The staff proposed to use feedback from the Principles of Disclosure Discussion Paper, which it was aiming to publish in the first quarter of 2016, to help with their work on (i) the objectives for notes disclosures and (ii) proposed redraft of disclosure requirements. The analysis would also include current disclosure requirements and FASB’s related projects. The staff would commence work on a Drafting Guide once the Discussion Paper has been published. That work would run alongside the development of a proposal during 2017 for a General Disclosure Standard and proposed amendments to disclosure requirements.
• Proposed content of the Drafting Guide: The staff proposed that a Drafting Guide should include guidelines on writing disclosure requirements, processes to help applying the guidelines and tools to help implement the guidelines and processes. The Drafting Guide would be a living document which would be continuously updated and publicly available.
• Next steps: The staff proposed to discuss potential steps to be taken following completing of the initial phase which could include the following options (i) focus only on new standards; (ii) focus on all standards; (iii) review current standards only for specific reasons: (iv) focus on target standards; (v) focus on additional drafting issues; or (vi) a combination of these options.

Discussion

The Board supported the staff recommendations. There was general consensus that the drafting guide, and the possibility of having a set of tools and resources, would be very helpful for developing disclosure requirements in future standards.

There was extensive discussion regarding the use of particular words to require specific disclosures, for example “at a minimum”. Some Board members indicated that they expect that the Practice Statement on Materiality would help users to apply materiality more effectively; however, the Board still believed that the disclosure objectives should be more specific to the standard rather than boiler plate. The Chairman also pointed out that he did not expect that the Practice Statement on Materiality would solve on its own the existing issues regarding the application of materiality.

There was also discussion regarding the proposal that the drafting guide would be a living document and that it would be available to the public. The concerns expressed were related to (i) the need to permanently update the document and explain the changes; (ii) whether users would expect the Board to explain how they were applying the guidance on each new standard; (iii) whether it would be more useful to set target dates for updating the document instead of using the term “live” or whether it should be informally tested first before going public and (iv) even though the document would not be open for comments, it would still be necessary to obtain informal feedback.

In relation to the content of the guidance, it was suggested that the staff should not start from zero; rather they should start analysing existing guidance that could be available from standard setters and regulators. During the discussion it was suggested that in future Exposure Drafts, the Board could add specific questions to get feedback on the language being used and to take advantage of the upcoming PIR on IFRS 12 and 13 to get feedback on the disclosure requirements of those standards. The staff also clarified that the work already done by the New Zealand standard setter will be useful in developing the guide and they will analyse the feedback obtained and see whether it will help this project.

Amendments to IAS 7: Sweep issues — Agenda paper 11B

The objective of this session was to discuss sweep issues identified by the staff during the review of the pre-ballot draft. The staff concluded that the proposed amendments should not be re-exposed given that the issues identified were very narrow.  And further, the effective date should remain as 1 January 2017.  The staff expected to issue a ballot draft after the meeting.

The issues identified and the staff proposals were as follows:

• Additional and supplementary information: The pre-ballot draft stated that an entity may disclosure supplementary information; the feedback received indicated that it was not clear how an entity could distinguish supplemental from mandatory information and what information could be included as supplemental. The staff agreed with these concerns and proposed to remove these recommendations from the text of IAS 7 but retained them in the Basis for Conclusions.
• The need to disclose a reconciliation: The pre-ballot draft stated that an entity may provide a reconciliation to achieve the disclosure objective of the standard. The feedback received indicated that it was not clear as to whether a reconciliation should be provided because it seemed contradictory with the fact that the amendments also proposed a minimum content of the reconciliation. The staff agreed with these concerns and proposed to redraft the wording to state that the reconciliation is one way to fulfil the disclosure objective.
• Minimum content of the reconciliation: The staff received concerns related to potential unintended consequences because the disclosure requirements seemed restrictive and there was confusion for the use of the terms may and shall. The staff agrees with these concerns and proposes wording changes on the text of the amendments.

Discussion

The majority of the Board approved the staff recommendation. However, there was extensive debate on the following topics:

1. Whether the reconciliation should be mandatory: Some Board members questioned whether the reconciliation was not made mandatory to avoid the concerns raised from the comment letters about the lack of clarity of the requirements. During the discussion the staff reminded the Board that the issue was already decided by the Board and it was not expected to be re-opened for discussion. It was also pointed out that the fact that the reconciliation was not mandatory was based on concerns raised for financial institutions. Another concern expressed was that in order to meet the objective a reconciliation was the only realistic way of providing the information  (unless the information was not material).
2. How to differentiate mandatory from non-mandatory requirements: During the discussion some Board members indicated that if an entity decided to add supplemental information, it should be provided in extra lines subsequent to the minimum requirements set by the standard. There was general concern as to how the standard should be worded to make the objective clearer and to how distinguish required from supplemental information. There was another concern related that the clarification to permit supplemental information should not be made in the Basis for Conclusions, it should be made in the standard.

One Board member indicated that he would dissent because he disagreed with the direction of the amendments, particularly because the amendments should not be tied to IAS 7.

Agenda paper summary

The regular update summary paper on the most recent IFRS Interpretations Committee meeting was made available.

Board discussion

Specific attention was drawn to the tentative agenda decisions relating to the derecognition of modified financial instruments and variable payments associated with asset purchases and service concessions.

Narrow-scope amendments to IFRS 2 Share-based Payment Classification and Measurement of Share-based Payment Transactions

The IASB discussed the proposed amendments to IFRS 2 in its November meeting. After this meeting, steps have been taken to complete the narrow-scope project. Based on the relevant criteria, the staff proposed that the amendments be finalised without re-exposure (see Agenda Paper 12A).

The staff proposed that the amendment reflect the decisions made in the November meeting, specifically:

The effects of vesting conditions on the measurement of cash-settled share-based payments:  When accounting for cash-settled schemes including a performance condition, the approach used for measuring equity-settled schemes should be used (refer to paragraphs 19-21A of IFRS 2).

The classification of share-based payment transactions with net settlement features: 

Under existing requirements (paragraph 34 of IFRS 2) such transactions would be bifurcated into an equity-settled and a cash-settled component and accounting would follow based on this split.

The IASB had previously decided to create an exception and remove the requirement to bifurcate if certain criteria are met.  If a scheme is net settled by withholding a specified portion of equity instruments to meet a statutory withholding tax obligation, the transaction should be accounted for as equity-settled in its entirety. However, this will only be the case if the scheme would have been accounted for as equity-settled if the net settlement feature had not been included. Further, this exception would not apply to shares withheld in excess of the tax withholding.

The accounting for a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled:

Given that IFRS 2 did not provide guidance on how to account for such a situation, the IASB had previously decided to clarify that if a cash-settled scheme is modified such that it is equity-settled, the cash- settled scheme is replaced by a grant of equity instruments.  In such a situation, measurement of the transaction is based on the modification-date fair value of the equity instruments granted; the previous liability is derecognised and the equity-settled transaction is recognised in equity to the extent of services rendered to modification date and any difference between the liability and amount recognised in equity should be recognised in profit or loss immediately.

The IASB had sought to clarify that the guidance provided would also apply in a situation where a cash-settled scheme is cancelled or settled and equity instruments granted as replacement equity instruments.

The IASB was asked whether it agrees that the amendments be finalised without re-exposure, whether any members intended to dissent from the final amendments proposed, whether they agreed with a mandatory effective date for the amendments of 1 January 2018 and whether the members agreed that the required due process has been followed relating to the publication of the final amendments.

Board discussion

All members agreed to finalise the amendments without re-exposure, with the proposed mandatory effective date and that due process had been followed correctly. No members intend to dissent.

The staff propose to start the balloting process of the ED in January 2016 with finalisation in late February 2016.

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

Staff provided the IASB with an analysis of comment letters received and outreach conducted relating to this issue (see Agenda Paper 12B).

The IASB was asked whether it had any questions relating to the analysis presented and whether further analysis was required prior to finalising any amendments.

A number or questions were raised in the ED (Classification of Liabilities) and comments/responses have been received relating to these.

Question 1: Classification based on rights at reporting date

The proposals in the related ED clarify that classification of liabilities as current or non-current is based on rights that are in place at the end of the reporting period, and, to clarify this, wording amendments to IAS 1 were proposed by the IASB. These included:

(a)    replacing ‘discretion’ with ‘right’ in paragraph 73 to align it with paragraph 69(d);

(b)   making it explicit in these paragraphs that only rights in place at the reporting date affect the classification of a liability; and

(c)    deleting ‘unconditional’ from paragraph 69(d), therefore, ‘an unconditional right’ is replaced by ‘a right’.

The key messages from comment letters and outreach include:

• the majority of respondents agree with proposal (a) above;
• most respondents agree with proposal (b) above, but some suggested that, ‘right’  should refer solely to substantive rights; and
• mixed responses were received relating to proposal (c) above.

Board discussion

The IASB discussion focussed on the need to ensure that what was trying to be achieved through the amendments was clearly understood and that further testing of the proposals would be beneficial.

Question 2: Linking settlement with the outflow of resources

The IASB had previously proposed to clarify the link between the settlement of a liability and the outflow of resources from the entity by adding, ‘by the transfer to the counterparty of cash, equity instruments, other assets or services’ to paragraph 69.

The majority of respondents supported this proposal.

Four related topics were also dealt with:

(a)    when timing of settlement is uncertain

A minority of respondents sought clarity for situations when the timing of settlement was uncertain. The staff think that IAS 37 provides sufficient guidance in such situations.

(b)   rollover and refinancing

Many respondents agree that the term ‘transfer’ clarifies that rollover of debt does not constitute settlement whereas refinancing would do.

(c)    nature of the counterparty

The staff, in response to a comment received, recommend that the IASB consider using the wording ‘the counterparty or any entity authorised by the counterparty’ instead of ‘transfer to the counterparty’.

(d)   the inclusion of ‘equity’ in the proposed wording

A number of respondents thought this inclusion could lead to confusion.  The staff intend to prepare further analysis for presentation to the IASB.

Board discussion

Similarly to question 1, the IASB discussion focussed on the need to be clear as to what was trying to be achieved and what the overall outcome of the amendments is - it is important to determine whether information presented should focus on the maturity of the liability or the liquidity thereof.

Question 3: Transition arrangements

The proposal to retrospectively apply any amendments was agreed to by the majority of respondents. They thought that consistency of information was vital despite analysis that indicates that the proposed amendments exhibit the characteristics of a change in estimate (which would require prospective application).

Many responses received highlight that the proposals are likely to affect existing practice.  Therefore, the staff recommends that any decisions made should be tested against the transactions referred to in comment letters prior to finalisation and publication of the amendments.

Board discussion

There were no comments raised by the IASB.

The staff proposed to conduct more work relating to the various questions, comments and responses received.  The IASB agreed with this.

IFRS 9 Financial Instruments and IAS 28 Investments in Associates and Joint Ventures – Measurement of long-term interests

The staff provided a summary (see Agenda Paper 12C) of the IFRS IC discussions relating to the issue. The issue relates to the interaction between IFRS 9 and IAS 28—the measurement, impairment in particular, of long-term interests in associates and joint ventures that form part of the net investment.

The IASB was asked for its opinion regarding how the issue should be dealt with – in other words, how the scope exclusion to IFRS 9 is understood by the IASB and, depending on this, whether the IASB agreed with the staff’s recommended alternative view to the accounting for long-term interests.

The issue had been raised because of a lack of clarity about whether such impairment is governed by IFRS 9, IAS 28 or a combination of the two.

A number of views have been identified relating to accounting for such long-term interests:

- View A: the interests are entirely within the scope of IFRS 9 (subject to a loss allocation in accordance with IAS 28);

- View B: the interests are entirely within the scope of IFRS 9 (subject to a loss allocation in accordance with IAS 28) and also within the scope of IAS 28 for impairment;

- View C: entirely within the scope of IAS 28; and

-  View D: within the scope of IFRS 9 for classification and measurement purposes, excluding the impairment (subject to a loss allocation in accordance with IAS 28), and within the scope of IAS 28 for impairment.

The findings from outreach reflect that the majority of respondents feel that the requirements are unclear and therefore any or all of the views are possible.

Based on the current wording of IAS 28 and IFRS 9, the staff concluded that View D should be adopted.  In their September 2015 meeting, the IFRS IC largely supported this view, but noted that a narrow-scope amendment should be made to clarify the issue as well to clarify the interaction between the two standards.

To address the potential interaction problem, the staff developed an alternative view to View D.  This view accounts for the long-term interest in accordance with IFRS 9 (including impairment), is subject to the allocation of the share of losses of an investee in accordance with IAS 28 and is assessed as part of the net investment using IAS 28 guidance. The IFRS IC’s view were mixed when this alternative was discussed at their November 2015 meeting. The issue was, therefore, been brought to the IASB.

Board discussion

The IASB discussion was lively and, at times, quite heated. A small majority of IASB members (7 out of 13) agreed with the staff recommendations especially given that the alternative approach could ‘deal’ with the issue without an amendment to IFRS 9 with the amendment instead being to IAS 28.

Those who did not agree cited paragraph 34 of IAS 28 and its requirements that items that are in substance part of the net investment should be included as such and accounted for as equity.  However, they conceded that such instances were likely to occur infrequently.

Further points were raised concerning: the longer term project associated with equity accounting and whether and how this could address the issue and whether the staff’s recommended approach could lead to double-counting of losses.

Ultimately, the staff stated that they would report back the outcomes of the discussion to the IFRS Interpretations Committee for their consideration as to what steps to take next.

Recap

In the October 2015 meeting, the IASB tentatively decided to change the application guidance related to the definition of a business, by proposing changes to IFRS 3 using the same changes being proposed by the FASB—the IASB and FASB definitions are the same.  At that meeting, IASB members asked whether those changes would address the practical problems that had been raised with the IFRS Interpretations Committee.

The Interpretations Committee discussed the proposed amendments in its November 2015 meeting. Committee members agreed that the proposals should address the problems it had examined.  However, they raised some comments and questions about the proposed amendments.

The staff identified the four main questions as follows:

(a)    Is the assessment of whether substantially all of the fair value of the assets acquired is concentrated in a single asset (or group of similar assets) needed or workable?

(b)   Are there circumstances under which the acquisition of an outsourcing agreement would represent acquisition of a substantive process?

(c)    What is the impact of the proposed changes on vertical integration?

(d)   Can examples be added for financial institutions and extractive activity entities?

Is the assessment of whether substantially all of the fair value of the assets acquired is concentrated in a single asset (or group of similar assets) needed or workable?

The IASB had previously decided that if substantially all of the fair value of the assets acquired is concentrated in a single asset (or group of similar assets), the acquired set of activities and assets would not constitute a business.

Some Committee members had noted that the existence of a process distinguishes a business from an asset and questioned whether the ‘substantially all’ threshold would therefore be needed.

The staff recommended that the threshold be retained. They conceded that the proposed guidance on substantive processes would lead to the same conclusion because a process would have a more than insignificant value and, therefore, the value of the acquired set of activities and assets would not be concentrated in one asset. However, the ‘substantially all’ threshold would be easier to apply and would be less subjective.

Furthermore, the staff proposed to clarify whether and how to apply the proposed threshold when a building is acquired with an in-place operating lease. When applying the FASB codification the acquirer recognises an intangible asset for in-place leases separately, whereas IFRS requires the acquirer to include the lease in the measurement of the leased property.

Staff identified two options:

• Option 1: Estimate the fair value of the building and the fair value of the lease separately for the purpose of this assessment.
• Option 2: Clarify that the building and the in-place operating lease shall be considered a single asset for the evaluation of the threshold.

Staff expressed a preference for Option 2 as Option 1 would create additional costs for the preparer. Furthermore, Option 2 would be consistent with the U.S. requirements in all common cases.

Are there circumstances under which the acquisition of an outsourcing agreement would represent acquisition of a substantive process?

The IASB had previously decided that to be considered a business, a transaction must include, at a minimum, an input and a substantive process that together contribute to the ability to create outputs.

Some Committee members were concerned that there would be no guidance on whether and how inputs and processes that have been outsourced should be considered in the assessment of whether an acquired set of assets constitutes a business.

The staff are in the view that the proposed guidance on substantive process does not distinguish between inputs and processes of the seller and processes that have been outsourced by the seller. Consequently, this means that the acquirer would need to consider whether the outsourced workforce performs a substantive process and whether the entity controls the substantive process.

The staff intend to clarify this in the proposed amendment.

What is the impact of the proposed changes on vertical integration?

The IASB had previously proposed to narrow the definition of an output to exclude returns in the form of lower costs or other economic benefits directly to investors or other owners, members or participants because many asset acquisitions may provide lower costs.

One IFRS Interpretations Committee member asked whether the focus on goods and services provided to customers would have an impact on a vertical integration (i.e. the acquisition of a supplier). Since the supplier does not provide goods or services to a customer after the acquisition, it might not be considered a business under the proposals.

The staff believe that the focus of this assessment is on whether the supplier is capable of generating revenues after the acquisition. Accordingly, it would be considered a business.

The staff recommend to add this explanation to the Basis for Conclusions.

Can examples be added for financial institutions and extractive activity entities?

The staff agree with the proposals by Interpretations Committee members to add examples for financial institutions and extractive activity entities.

They propose to add the examples included in the appendix of the agenda paper.

The Board were asked whether they agree with the staff recommendations to the above questions (see Agenda Paper 13).

Board discussion

All Board members agreed with the staff recommendations.

Thereafter, the Board was then asked to consider the due process steps taken for the proposed amendments to IFRS 3 (see Agenda Paper 13A) and the related proposed amendments to IFRS 11 relating to the remeasurement of previously held interests (see Agenda Paper 13B).

In both cases the Board was satisfied that the due process steps had been followed correctly, the comment period for each ED would be 120 days and the staff have permission to commence the balloting process.  No Board members plan to dissent.

In this session, the Director of Research informed the IASB about changes to the research programme since the last update in September 2015.

Since the previous update, the project on definition of a business has advanced from research stage to maintenance and implementation stage.

Regarding the project on the equity method of accounting, at its September meeting some ASAF members expressed concern about the staff’s proposals for progressing the project.  ASAF has discussed the scope of the project in the December meeting.  After considering the ASAF discussions, the staff expect to revise the project plan at the beginning of 2016.

In the public session, the Director of Research confirmed that for many projects the staff awaited the results of the Agenda Consultation. He said that there were projects that might not be continued, however, if the Board were to make such a decision, the staff would present one final wrap-up session to conserve the research performed.

One Board member suggested enhancing the overview by providing information on how different research projects are linked. Another Board member proposed not to wait for IPSAS decisions on polluting pricing mechanisms before moving on with the research project.

The Board was not requested to make any decisions in this session.

The IASB issued an ED Clarifications to IFRS 15 to amend IFRS 15 Revenue from Contracts with Customers in July 2015, with a comment period that ended on 28 October 2015. In this session, the staff presented the feedback received from the comments letters and provided their recommendations on the topics discussed in the ED.  

The session covered agenda papers 7A-E and H. Agenda papers F and G will be covered in the joint the session to be held in October 16 2015.

Summary of feedback on Exposure Draft Clarifications to IFRS 15- Agenda paper 7A

The agenda paper covered feedback received on the general approach taken by the IASB to address the issues related to IFRS 15. At this stage the staff papers did not include any recommendations.  A summary of the feedback obtained is detailed below:

• The high hurdle set by the IASB when considering amending IFRS 15:  The ED proposed that the IASB would consider amendments that were essential to clarifying the Boards intention when developing IFRS 15 or when convergence was view with greater benefit than amending the standard. The agenda paper explained that most of the respondents agreed with the IASB approach.
• The status of convergence of IFRS 15 and Topic 606: The agenda paper indicated that many respondents expressed concerns that the IASB and the FASB were proposing different amendments.
• Feedback from ASAF: The agenda paper indicated that ASAF members supported the IASB approach and highlighted the importance of maintaining convergence. ASAF members suggested that when convergence was not possible, that fact should be explained in the Basis for Conclusions.
• Transition Resource Group (TRG) for Revenue Recognition: The majority of respondents supported the continuation of the TRG group until the mandatory effective date of the standard.
• Other questions raised by respondents: There were additional comments received related to the interaction of IFRS 15 and IFRS 9.

Discussion:

 Some Board members expressed a concern that existence of the TRG could be preventing companies from implementing the standard. During the discussion it was suggested that there could be a “cut-off date” to ensure that any have suggestions from the TRG  are implemented by the IFRS 15 effective date, with any issues that come after that date being treated separately.

There was also discussion about the need to maintain convergence with US GAAP. In that regard some Board members argued that the high hurdle to changing IFRS 15 should be maintained because it the issues have already been discussed by the Board and supported in the comment letters; on the other hand, others indicated that when the outcome was expected to be similar, then the IASB and FASB should use the same words. The Chairman indicated that primarily it was the accounting firms who were asking to give convergence a priority, he said that if the outcome would be similar there should not be issues with having different wording, and if there were a risk for unintended consequences, that could be solved by exposing the draft and obtaining feedback.

The paper provided a general overview of the comments received, so no decisions were made.

Identifying Performance Obligations-feedback on ED Clarifications to IFRS 15 and re-deliberations- Agenda paper 7B

The staff proposed to discuss the responses to question 1 in the ED, and the staff proposals to address those comments. The topics were:

• Identifying performance obligations

The TRG had raised concerns that there was potential diversity developing around how stakeholders understand the principle for determining whether promised goods or services were distinct.  To address those concerns the FASB exposed proposed amendments to the requirements.  In contrast, the IASB’s ED proposed that, rather than amending the requirements, illustrative examples would be added.   

A majority of respondents to the IASB agreed with adding the illustrative examples, although many raised concerns and sought further clarifications (for example the fact that it is not clear how the conclusions in the example have been reached). The staff identified two possible approaches to address the comments raised: amend paragraph 29 of IFRS 15 and the illustrative examples to align with the FASB wording.  In this case, the staff considered that the FASB amendments should be considered as a package; or revise the illustrative examples on the basis of the feedback received and add comments to the Basis for Conclusions. The staff recommends the second of these approaches.   

• Promised goods or services that were immaterial in the context of a contract

The TRG discussed an implementation question about whether an entity should identify items or activities as promised goods or services that were not identified as deliverables or components under previous revenue Standards. The FASB proposed an amendment that would permit an entity not to identify promised goods or services that were immaterial in the context of a contract. The feedback received indicated that the amendments introduced by the FASB were not considered necessary and accordingly the staff proposed not to include in IFRS 15 the amendments introduced by the FASB on this matter. 

• Shipping and handling activities

The ED did not propose including the accounting policy choice proposed by the FASB to account for shipping and handling activities that occur after the customer has obtained control of a good as fulfilment activities. The IASB decided not to propose this amendment because it would create an exception to the revenue recognition model and potentially reduce comparability. The majority of respondents to the IASB agreed, and consequently the staff proposed not to amend the Standard in relation to shipping and handling activities. 

• Other matters

The FASB included a question in its proposals about whether the requirement to account for a series of distinct goods or services as a single performance obligation should be changed to an optional practical expedient. The IASB decided not to include a similar question on the ED. The FASB had concluded that an amendment was not required.  The agenda paper also indicated that the TGR discussed the accounting for a series of distinct goods or services and those discussions provided educational material for stakeholders. Accordingly, the staff did not recommend amending the existing guidance on this topic.

Discussion

There was general support for the staff recommendations and the Board approved the staff proposal with the exception of the first issue —identifying performance obligations.  For that issue the Board decided to converge with the wording exposed by the FASB. The Board did not vote regarding the illustrative examples because the staff will analyse whether those examples might need to be changed to reflect the new wording.  

The Board decided to move to the FASB wording because Board members thought that their wording was clearer.  There was significant discussion before this decision was reached, because some Board members pointed out that the majority of the comment letters agreed with the staff recommendation for not amending paragraph 29 of IFRS 15. The staff acknowledged that they were unable to conclude whether there could be unintended consequences or different outcomes if the IASB did not adopt the amendments introduced by the FASB.

Some Board members thought that the illustrative examples would help in the application of the standard. However, some Board members expressed caution, noting that there are already a significant number of illustrative examples and it would be impossible to cover every situation; one Board member commented that the standard should work with or without the clarifications introduced by the FASB.

There were no significant issues raised on the other topics in the paper.

Feedback on ED Clarifications to IFRS 15 and re-deliberations. Agenda paper 7C

The staff discussed the feedback obtained in relation to question 3- Licencing and their recommendations. Question 3 in the ED asked whether respondents agree the IASB approach to amending the application guidance and illustrative examples on determining the nature of the entity’s promise in granting a licence of intellectual property and the Application Guidance on the scope and applicability of the sales-based and usage-based royalties exception. The agenda paper indicated that most respondents agreed with the ED proposals. Many respondents expressed concern that the IASB and the FASB proposed different amendments on this topic; however, most respondents indicated a preference for the IASB approach. Accordingly, the staff recommended that the IASB confirm the proposals set out in the ED. The staff did not recommend adding the alternative approach proposed by the FASB for determining the nature of the entity’s promise in granting a licence of intellectual property, nor additional application guidance addressing (i) the effect of particular contractual restrictions in a licence; and (ii) when the guidance on determining the nature of the entity’s promise in granting a licence applied. The staff also recommended that the IASB conclude that the issues discussed in the November 2015 TRG meeting about licence renewals and identifying attributes of a single licence versus identifying additional licences were outside the scope of the ED.

The paper explored in detail the feedback in the comment letters received on (a) general comments on the ED regarding licencing; (b) determining the nature of the licence: (c) sales-based or usage based royalty (d) topics for which the IASB did not propose any clarification; (e) other matters raised by respondents; and (f) issues raised after the publication of the ED.

Discussion

Some Board members stated that it would not be appropriate to change the wording of the standard given that many companies had probably already started analysing their licencing contracts and changing the standard could cause those  companies to re-perform the analysis.

In relation to the use of the word “predominantly”, it was pointed out that the Board had discussed an issue with similar wording and it was concluded that it would mean “more than 75%”. If the staff had a different understanding in the context of the revenue standard, then it should be clarified. The staff responded that the FASB was using similar wording and they were not making any clarification.  It was also emphasised that there would always be a need for judgement in applying the standard, including how to apply this concept.  

The Board approved the staff recommendations.

Practical expedients on transition—feedback on ED Clarifications IFRS 15 and re-deliberations- Agenda Paper 7D

The agenda paper discussed the feedback received on the proposed practical expedients on transition set out in the ED. The ED proposed two practical expedients (i) to permit an entity electing to use the full retrospective method not to apply IFRS 15 retrospectively to completed contracts (as defined in paragraph C2) at the beginning of the earliest period presented; and (ii) to permit an entity to use hindsight in (i) identifying the satisfied and unsatisfied performance obligations in a contract that has been modified before the beginning of the earliest period presented; and (ii) determining the transaction price. There was broad support for the proposals included in the ED and accordingly, the staff recommended the IASB to confirm the proposals included in the ED.

The staff did not recommend amending the definition of a completed contract because some preparers had either already adopted or were planning to adopt IFRS 15.  However, the staff recommended including in the Basis for Conclusions a summary of the IASB discussion to provide entities more guidance on this topic.

Discussion

The Board agreed with the staff recommendations. No significant comments or issues were raised during the discussion.

Topics for which the IASB did not propose any clarifications — feedback on ED Clarifications to IFRS 15 and re-deliberations — Agenda paper 7E

The agenda paper discussed question 5 of the ED which asked respondents if they agreed with the IASB’s decision that amendments to IFRS 15 were not required on the following three topics for which the FASB was developing potential amendments: (a) collectability; (b) the measurement of non-cash consideration; and (c) the presentation of sales taxes. The staff recommended the IASB to confirm that it would not amend IFRS 15 for these matters—the majority of respondents agreed with that conclusion. 

The agenda paper provided further detail as to the reasoning from the IASB for not proposing amendments in those areas. In relation to collectability, the staff considered that the requirements in paragraph 9(e) and the supporting explanation in paragraph BC46 of IFRS 15 provided sufficient guidance. On the second issue, measurement of non-cash consideration, the staff indicateed that IFRS 15 required an entity to measure non-cash consideration at fair value although it did not specify the measurement date. The IASB did not propose additional clarifications because IFRSs generally  did not contain any specific requirements about the measurement date of non-cash considerations and the feedback obtained indicated that it was not expected significant diversity in practice.  In relation to the presentation of sales taxes, the staff indicated that if an entity’s sales were subject to sales taxes in different jurisdictions, then the entity should assess on a jurisdiction-by-jurisdiction basis whether it collected sales taxes on behalf of the tax collection authority in order to determine whether to include or exclude those taxes from the transaction price. The IASB decided not to propose an amendment to IFRS 15 to provide an accounting policy choice to exclude all sales taxes from the transaction price (as proposed by the FASB) because this could reduce comparability.  

Discussion

The Board agreed with the staff recommendations.

In relation to collectability, there were some concerns raised as to whether there could be different results derived from the changes introduced by the FASB. The staff indicated that they were unable to conclude because they were aware that the FASB received several comments that they had yet to discuss.

No significant comments were raised on the remaining topics.

Constraining estimates of variable consideration when the consideration varies based on a future market price- Agenda Paper 7H

The agenda paper discussed a question received from stakeholders regarding whether the requirements in IFRS 15 to constrain estimates of variable consideration must be applied to variability arising solely from changes in market prices such as commodity price. IFRS 15 required an entity to estimate the amount of consideration to which the entity would be entitled. The staff noted that in some cases the consideration was variable after the entity had satisfied its performance obligations (for example a contract to deliver a commodity with a price based on the market price on a date subsequent to delivery). The staff concluded that once the entity has completed its obligation (in this case delivery), the entity’s right to consideration was unconditional and the entity would recognise a receivable (under IFRS 9), and the variability considered in IFRS 15 related only to an entity’s performance and not to variability that aroused solely from changes in market prices. 

The staff clarified in the agenda paper that the determination of whether an entity was required to assess the existence of an embedded derivatives in a contract with a customer or whether the requirement for separation in IFRS 9 was met was not part of the scope of this analysis.

Discussion

The Board approved the staff recommendations. There was general agreement with the staff analysis and their conclusion. It was pointed out that it was not necessary to issue specific guidance at this stage.

Recap

In this educational session, the staff updated the IASB on their findings regarding the components of present value measurement and measurement methodology.

The staff have identified the following potential financial reporting problems in these areas:

1. application of an entity-specific perspective in measurement;
2. inconsistent reflection of liquidity risk; and
3. three issues relating to the methodology of reflecting tax in measurement.

Application of an entity-specific perspective in measurement

The staff has identified that there is a prevalence of companies not recognising any goodwill impairment even though their book value of equity is higher than their market value of equity. According to staff this could indicate that there is an issue with applying the entity perspective in practice, because value in use is used in goodwill impairment tests.

With regard to that, the staff identified two possible causes:

1. the principle of entity-perspective measurement as set out in IFRS is sound, but the problems stem from difficulties in implementation, audit and enforcement; or
2. the principle of entity-perspective measurement as set out in IFRS is flawed.

Inconsistent reflection of liquidity risk

Staff found that liquidity is not consistently reflected in entity-specific current value measurements.

Reflecting liability-specific liquidity would have a material impact on measurement of defined benefit liabilities and provisions.

Not reflecting the liquidity risk can have a material impact on comparability.

Three issues relating to the methodology of reflecting tax in measurement

The staff identified the following three issues regarding measurement methodology for tax:

• The pre-tax rate should only reflect tax effects that will not be picked up by the application of IAS 12. Market pre-tax rates reflect the market perspective and therefore include some tax. Recognising entity-specific deferred tax on this rate would overstate the tax effect.
• Users make mistakes when grossing up post-tax rates to arrive at a pre-tax rate.  Furthermore, as the terms ‘pre-tax’ and ‘post-tax’ are not defined, users may think that the pre-tax input does not depend on the rate of tax and therefore use an inappropriate pre-tax rate.
• IAS 36 adds complexity to the measurement methodology by mandating pre-tax rates. Often, the starting point for the calculation of value-in-use is the post-tax rate that then needs to be converted.

The analysis was being discussed as part of the research project on discount rates and the Board was not being asked to make any technical decisions in this session.

Board discussion

Before getting to the specific financial reporting problems that the staff had identified, several IASB members pointed out that the term ‘financial reporting problem’ was not properly defined. Therefore it would be difficult to determine whether the issues identified by the staff were indeed financial reporting problems and it would also be challenging to determine whether there were any other financial reporting problems that had not been identified by the staff. One Board member said it had to be distinguished between cases where the Standard deliberately allowed diversity in practice and cases where the Standard was clear but the application led to diversity in practice. The former would not be an issue in his view.

Regarding the entity-specific perspective in measurement, several Board members suggested to define the term ‘time value of money’. One Board member suggested that the Conceptual Framework state that the time value of money should always be considered. Another Board member added that the discount rate should consider all possible factors and not only the time value of money. The Senior Technical Manager replied that in general there was no problem with time value of money, as a risk-free rate would be used. She conceded that deriving the risk-free rate could be an issue. Several Board members confirmed that government bonds might not always be the appropriate reference for the risk-free rate. One Board member stressed that the timing and the currency of a government bond should match the item that is valued. A fellow Board member replied that in some jurisdictions government bonds were very risky even though they matched the currency. The government might therefore not always borrow at the lowest rate in those countries. Also, own credit risk might play a role.

The Chairman proposed to develop sound principles for present value measurement techniques which would eliminate the inconsistencies in practice. The Senior Technical Manager confirmed that it should be explored what the measurement objectives for different present value measurement techniques were. However, this should be picked up in the project on the Conceptual Framework.

The Senior Technical Manager noted that the project was mainly about current measurements that are not fair value, e.g. pensions, provisions and value in use. She pointed to the fact that there were many entities with a book value of equity larger than their market value of equity and nevertheless, that did not have accounting impairments. The staff had concluded that this was due to the entity-specific value in use being higher than the market-based fair value. Regulators continued to struggle with “value in use” because as an entity-specific measure it was very difficult to challenge. The problem would not exist in the U.S. as value in use was not permitted by U.S. GAAP. However, the impairment triggers in the U.S. were higher. One Board member warned not to neglect the fact that the U.S. was a very different economy than Europe. The Chairman asked whether this was a general present value issue or solely an issue with value in use. The Vice-Chairman added that in some cases market values do not make sense (e.g. for pensions).

One Board member reminded the meeting that it had been a conscious decision to write off only the non-recoverable part of a book value. The Senior Technical Manager clarified that the staff had no intention of eliminating the value in use; however the issues linked to value in use should be identified and the Board needed to decide whether it was necessary to develop narrower guidance around it. Several Board members asked how the issues with value in use were linked to discount rates. For them it was more a question of measurement objective. The Senior Technical Manager replied that the Board would have to decide which components should be examined. She said that IFRS 13 and IAS 36 included all components, however, they led to different measurements. One Board member added that the Board needed to be explicit about components.

Regarding the inconsistent reflection of liquidity risk, the Senior Technical Manager said that liquidity risk was a fairly new consideration in standard-setting. She said that valuations could analogise to the new insurance Standard once published; however more research needed to be performed. One Board member stressed that liquidity risk would be applied differently to the asset and the liability side. A fellow Board member said that it should be thoroughly examined whether it is possible to include the liquidity risk and how including it would improve financial statements.

The Senior Technical Manager said that other risks would be difficult to assess. The Board would have to decide whether risk adjustments should be part of the measurement. One Board member said that he would not see a need to have a risk adjustment with provisions; however, other liabilities should reflect risks. A fellow Board member said that a risk adjustment should reflect all possible variabilities. One Board member replied that it should also include factors other than variability.

A Board member challenged whether discount rates would be needed in accounting at all. He conceded that they were useful in the market but it should be examined how useful they were in financial statements.

Regarding the tax issues, one Board member doubted that using a pre-tax rate on pre-tax cash flows would result in the same measurement as when post-tax rates and cash flows were used. The Senior Technical Manager replied that she would prepare a numerical example for the next session.

The discussion lasted the two hours allocated.  No decisions were made.  The staff plan to bring other parts of draft discussion paper to the Board in the coming months.  However, the general tone of the meeting was that more work and analysis needs to be incorporated into the discussion paper before the Board will be in a position to consider balloting it for publication.  However, Board members did acknowledge that this is important and necessary research.

Summary of feedback on proposed amendments to principal versus agent considerations — Agenda Paper 7F and 7G (Joint Session with FASB

The agenda paper provided an analysis of question 2 of the ED related to the amendments proposed in respect to principal vs agent considerations.  The agenda paper provided background information and a summary of the feedback received. The staff recommended that the IASB proceed with the amendments because the majority of respondents agreed with the IASB proposal and highlighted the fact that principal versus agent considerations were a matter of judgement and the proposed amendments provide a good framework for entities to exercise judgement and apply the requirements.

In addition, the staff proposed to eliminate the credit risk indicator because of the feedback obtained which indicated, for example, that credit risk was not considered a strong indicator of control.

The proposed amendments derived from issues discussed by the TRG regarding the guidance in IFRS 15 and the IASB proposed add clarifying amendments in the application guidance, in the illustrative examples and to add additional examples.

Discussion

The Boards (FASB and IASB) approved the staff recommendations and no significant issues were raised during the joint session which was significantly brief. 

The comments raised from the IASB Board members were focused on the following:

1. the guidance added in paragraph B35A which related to the assessment of control when an entity provided significant service of integrating goods or services.  In that regard, there was concern as to whether the concept of integrating good or services was a control indicator; the staff responded that the integration existed before the entity transferred the good or service to the customer and accordingly was not a control indicator; and
2. the use of specific concepts considered new terms such as a right to a service. There was some concern about having new terms which were not defined.  The staff responded that the terms “specified good or service” and “right to a service” were not new because they were used in the application examples and they had been used consistently in the guidance. 

The FASB Board members indicated that they were very pleased with the feedback received which was encouraging. They pointed out that the area (principal vs agent assessment) would still involve significant judgement and they did not expect to eliminate that with the proposed guidance. Some questions raised to the staff related to the following:

1. The comment letters indicated that there was demand to receive more guidance to understand the issues; particularly, with the ability to distinguish specified good or services and right to a service. The staff responded that with the objective of maintaining convergence, they would incorporate the factors discussed in the memo (FASB Memo)  in the illustrative examples and/or in the Basis for Conclusions; and
2. Also, the comment letters indicated that the examples did not include references to the control indicators, one Board member asked whether this would be acceptable and whether the examples would be updated. The staff responded that they tried to emphasise that the most important factor was to apply the principle and that not all the control indicators would be relevant in every decision; and that the indicators were helpful to support the analysis rather than being the key factor in the decision; one Board Member suggested adding in the examples the indicators and explaining which ones were not relevant for the decision.