Background

The aim of the session is to ask the Board whether an interim review of the IFRS for SMEs Standard should commence this year in advance of the next comprehensive review which is expected to start in early 2019. The interim review will consider:

1. The fallback to IAS 39;
2. Changes to full IFRS Standards that have not yet been incorporated in the IFRS for SMEs Standard; and/or
3. Other urgent issues.

The Board will not be asked for their views on what the interim review should consider; they will be asked merely on the timing of when to consider making these changes.

Staff recommendation

The Staff recommends that no interim review should be performed based on cost/benefit reasons.

Disclosure Initiative: Principles of Disclosure — Comment period for the Discussion Paper — Agenda paper 11

The Staff is currently in the process of balloting the Principles of Disclosure Discussion Paper. The purpose of this session was to ask the Board whether they agree with the Staff’s proposal of having a comment period of 180 days for the Discussion Paper due to its length and other reasons.

Discussion

The IASB voted unanimously in favour of the Staff recommendation.

The Staff also revised the expected publication date of the Discussion Paper from mid-December 2016 to February 2017 in order to provide the Board with more time to focus on matters relating to the draft insurance standard.

Disclosure Initiative: Materiality — Cover paper — Agenda paper 11A

The Board published the exposure draft IFRS Practice Statement: Application of Materiality to Financial Statements in October 2015 (the ‘ED’) and the Staff provided a high level summary of the feedback received to the Board in its April 2016 meeting. The purpose of this session was to discuss the following issues raised by respondents to the ED and to ask the Board what changes, if any, should be made to the final Practice Statement (‘PS’) in light of the comments received:

• Audience, focus and definition - Agenda paper 11B
• Primary users’ needs and expectations - Agenda paper 11C
• The Materiality Process - Agenda paper 11D
• Primary financial statements versus notes and aggregation / disaggregation of information- Agenda paper 11E
• Accounting policy disclosures - Agenda paper 11F
• Comparative versus corresponding approach and conflicts with local regulations - Agenda paper 11G
• Interim reporting - Agenda paper 11H
• Publicly available information - Agenda paper 11I

Disclosure Initiative: Materiality — Audience, focus and definition — Agenda paper 11B

Guidance proposed in the ED and feedback received

Audience: The ED is addressed only to the preparers of financial statements. Most respondents suggested broadening the audience of the PS to include other stakeholders such as auditors, regulators and enforcers because their policies and procedures affect the materiality judgements of preparers. Furthermore, a respondent proposed replacing ‘management’ with ‘entity’ throughout the PS as the term ‘management’ is not defined in IFRS Standards.

Focus: The ED makes references to instances in which the concept of materiality is applied other than in the preparation of financial statements, e.g. materiality considerations for legal, regulatory, and audit purposes. Some respondents suggested that such references should be deleted as they are covered by other rules and regulations and are out of scope of the PS; yet others believed that preparers of financial statements and their auditors apply the concept of materiality similarly: both are focused on what information could influence the decisions of primary users.

Definition: The ED includes the definition of materiality as it is appears in the Conceptual Framework. The ED also refers to IAS 1 on how the phrase ‘could influence decisions that users make’ as used in the definition of materiality should be interpreted. Some respondents were concerned that the phrase ‘could influence’ sets the materiality threshold at a low level and that the definition is inconsistent with that proposed to be adopted by the FASB.

Staff analysis and recommendation

The Staff recommended the following:

Audience:

1. Retaining the proposal in the ED to address the PS only to those involved in the preparation of financial statements, but acknowledging that the PS may benefit other parties involved in the financial reporting process. This would be consistent with the Board’s stated objective for the ED which is to provide guidance to assist entities in applying the concept of materiality in preparing financial statements, as well as to help other parties understand the application of materiality in the preparation of the financial statements.
2. Replacing the term ‘management’ with ‘entity’ throughout the final PS. This would be consistent with the terminology used in IFRS Standards and would avoid any confusion as to which level of management the PS is directed at.

Focus:

1. Limiting the PS’s reference to the concept of materiality to the preparation of financial statements only. This is because other applications of the materiality concept are beyond the scope of the PS and might cause confusion.

Definition:

1. Including in the PS the interpretation of materiality in IAS 1.7, i.e. it should take into account how a user ‘could reasonably be expected to be influenced’. The Staff believes that this would address the concern of the low materiality threshold in that almost anything ‘could’ influence a decision.
2. That no change be made to the existing definition of materiality within this project as that was not part of the scope of this project.

Discussion

The Board approved all of the Staff’s recommendations.

As regards the audience of the ED, some Board members pointed out that the ED should emphasise the context in which the concept of materiality should be applied (i.e. from the perspective of preparing financial statements) rather than making the preparers of financial statements the sole addressee of the ED, as the latter appeared to exclude other stakeholders. The Board believed that this fine-tuning would help align the materiality assessment of management with that of auditors.

As regards the focus of the ED, one Board member asked whether the financial information included in the management commentary should be subject to the materiality concept in the PS as he believed that information contained in the management commentary should have the same quality as those included in the financial statements. However, other Board members and the Staff disagreed as they believed that the management commentary is outside the scope of IFRS and was thus not covered by the PS. Furthermore, there might be other regulations governing the disclosures in the management commentary. In the end, the Staff was asked to consider whether they should address this issue in a separate paper.

Disclosure Initiative: Materiality — Primary users’ needs and expectations — Agenda paper 11C

This paper proposed various changes to wordings as regards users’ needs and expectations in order to remove internal inconsistencies in the PS and to align the wording with that proposed in the Conceptual Framework ED.

Staff analysis and recommendation

The Staff recommended the following:

1. Emphasising in the PS that the ‘primary users’ of the entity’s financial statements include potential investors, lenders and other creditors. This would respond to the concerns raised that an entity might inappropriately focus only on its existing users’ information needs.
2. Removing any reference to the ‘special needs’ of primary users and references to ‘subsets’ or ‘classes’ of primary users from the PS. This is because identifying users’ special needs is inconsistent with the Conceptual Framework definition of general purpose financial statements, which focuses on the ‘common information needs’ of users. Furthermore, the Conceptual Framework focuses on the primary users group instead of emphasising the existence of ‘subsets’ or classes’ of primary users.
3. Emphasising what is meant by the concept of meeting ‘the maximum amount of common information needs’ of an entity’s primary users. This would entail identifying the information needs that are common within each category of primary users, the sum of which would meet the PS’s requirement. This would prevent the entity from identifying only those needs that are simultaneously common to all categories of an entity’s primary users (as this might inappropriately exclude information that is relevant only to a particular category of users), and an entity would not need to consider information needs that address unique requests.

Discussion

The Board approved all of the Staff’s recommendations.

Some Board members were uncertain as to how the term ‘common’ should be interpreted – is it common as in ‘usual’, or common as in ‘shared characteristics’? A Board member was also concerned that removing the references to ‘classes’ and ‘subsets’ might make it harder for users to understand the concept of ‘common’ that the Staff has expressed in the agenda paper. Nevertheless, in general the Board was in favour of the Staff’s intention and direction with the concept but asked that the Staff redraft the notion to make it more easily understandable.

Disclosure Initiative: Materiality — The Materiality Process — Agenda paper 11D

Many respondents requested that the PS include a decision-tree that describes the thought-process in applying judgement to materiality decisions (the ‘Materiality Process’).

Staff analysis and recommendation

The Staff recommended including the Materiality Process in the PS and recommended a 4-step Materiality Process as follows:

1. Step 1—identify potentially material information.
2. Step 2—assess whether information identified in Step 1 is material by considering quantitative, entity-specific qualitative and external qualitative factors in its assessment.
3. Step 3—organise the information identified in Step 2 in the draft financial statements in a way that communicates the information effectively and efficiently to the users of the financial statements.
4. Step 4—review the draft financial statements as a whole to determine whether all material information has been identified, including consideration of materiality from an aggregated perspective.

Discussion

The Board approved the Staff recommendation.

The Board agreed with the steps included in the Materiality Process; however, some members suggested re-characterising ‘The Materiality Process’ to a materiality process to highlight the fact that this was simply a reference tool and acknowledging explicitly in the PS that other processes (i.e. the order of performing the above steps) might be appropriate. A Board member also asked the Staff to state explicitly in the PS that information would be material as long as it met either the quantitative assessment or the qualitative assessment. The Board further suggested that the discussion of whether a related party transaction was material as was included in the ED should be illustrated in the form of an example rather than being a separate section in the PS. This was because the latter put undue focus on related party transactions which might be misconstrued as being automatically qualitatively material. Furthermore, this would contradict with the overriding principle of the PS that an entity should apply the same materiality assessment to all transactions. The Staff were also asked to consider including other examples to illustrate the application of qualitative factors in a particular context to accompany the example of related party transactions.

Disclosure Initiative: Materiality — Primary financial statements versus notes and aggregation / disaggregation of information — Agenda paper 11E

Guidance proposed in the ED and feedback received

The proposed wording in paragraph 30 of the ED raised many concerns on whether different levels of materiality should be applied for the primary financial statements versus the notes. Furthermore, some respondents also requested a decision tree to illustrate the process that should be followed when considering an item for aggregation and disaggregation.

Staff analysis and recommendation

The Staff recommended the following:

1. Stating that a single assessment of materiality is applied to all information included in the financial statements. Materiality is not assessed differently for information that is presented in the primary financial statements from information that is disclosed in the notes.
2. Explaining that the decision about where material information should be disclosed (i.e. primary financial statements versus notes) is a question of how to organise the information in a way that communicates the information effectively and efficiently. Step 3 of the proposed ‘Materiality Process’ (see Agenda Paper 11D) provides further guidance and the Principles of Disclosure project will consider this issue further.
3. In determining the level of detail in which an entity needs to disclose information in its financial statements, the assessment should be made from the perspective of how far to disaggregate the entity’s information (as opposed to how much information should be aggregated). This approach is better aligned with how primary users tend to analyse an entity’s financial statements. Nevertheless, the PS would acknowledge that either an aggregation or a disaggregation approach is acceptable and both approaches should give the same results if the same approach to assessing materiality is used.

Discussion

No vote was taken on this issue.

The Staff was asked to redevelop the paper for future discussion. The gist of the discussion was that many Board members struggled with determining where to place material information in the financial statements, and how much information should be disclosed in the notes. One Board member raised the point that many of the note disclosures might not be material on an individual basis, and asked the Staff how this could be reconciled to the concept of applying the same materiality assessment to the financial statements as a whole. The Staff were asked to clarify the functions that the notes served in a set of financial statements (e.g. disclosing judgements, assumptions, events post reporting date, etc.) and to present the discussion in the context of the notes providing more information on items already presented on the primary financial statements, which was one of the functions served by the notes, in order to focus future Board discussions

Disclosure Initiative: Materiality — Accounting policy disclosures — Agenda paper 11F

Guidance proposed in the ED and feedback received

The ED does not contain a specific section on the application of materiality to accounting policies. Various respondents highlighted a number of practical issues in the absence of such guidance.

Staff analysis

The Staff assessed whether additional guidance should be provided in the PS based on whether accounting policies are capable of influencing primary users’ decisions.

View A: No. Accounting policies only provide the context for understanding the information included in the financial statements. As they are not capable of influencing primary users’ decisions, the concept of materiality does not apply.  Furthermore, the Principles of Disclosure Discussion Paper (‘POD DP’) states that significant accounting policies, which are those that are necessary for an understanding of the financial statements, should be disclosed and includes guidance on what information should be disclosed. Accordingly, the PS should not include further guidance but should refer to the POD DP.

View B: Yes. The information about accounting policies is capable of influencing the primary users’ decisions and so the concept of materiality applies. The Staff believes that assessing whether an accounting policy relating to material information is itself material involves assessing whether that accounting policy is a ‘straightforward’ accounting policy. An accounting policy is straightforward if it is applied without having to use significant judgement or having to make a choice in accordance with an option permitted by an IFRS Standard.

View A (i.e. the POD DP) differs from view B in the perception of primary users’ knowledge of IFRS Standards. According to the POD DP, straightforward accounting would still need to be disclosed for users to understand the information in the financial statements if they relate to material items.

The Staff believed that an accounting policy is capable of influencing primary users’ decisions when: (a) the accounting policy is related to material information; and (b) an entity makes an accounting policy choice, or uses significant judgement to apply or develop the accounting policy. The Staff further believed that users are expected to have a reasonable knowledge of business and economic activities and thus they are expected to be able to understand an entity’s financial statements without the disclosure of straightforward accounting policies.

Staff recommendation

The Staff recommended view B for the reasons set out above.

Discussion

This paper was not discussed and no vote was taken at the request of the Chairman.

The Chairman believed that the Board should not reopen discussions on this topic when a conclusion had already been reached in the POD DP which was currently being balloted. Since the POD DP would provide guidance on the disclosure of accounting policies, no discussion of this matter would be carried out in the Materiality project.

Disclosure Initiative: Materiality — Comparative versus corresponding approach and conflicts with local regulations — Agenda paper 11G

Guidance proposed in the ED and feedback received

The Exposure Draft provides some guidance on how to apply materiality to prior period information; however, it does not distinguish between the ‘comparative’ approach and ‘corresponding’ approach to prior period information, which imposes different auditor responsibilities. Under the corresponding approach, the auditor’s opinion on the financial statements refers to the current period only; in contrast, under the comparative approach, the auditor’s opinion refers to each period for which financial statements are presented. In the absence of a clear basis to disclosing prior period information, some respondents questioned the extent of prior year information that should be provided when that information is no longer material in the current period, or when information that was not disclosed in the prior period is material to an understanding of the current year financial statements.  

Furthermore, some respondents were concerned that the disclosure of immaterial information (assessed in terms of the PS) required by local regulations would not be in compliance with the requirements of the PS.

Staff analysis and recommendation

The Staff recommended the following:

1. Acknowledging in the PS the existence of the ‘corresponding’ and ‘comparative’ approaches to previous period information as defined in ISAs.
2. Focusing on the ‘corresponding’ approach in the PS, on grounds that this approach is consistent with IAS 1.38 which states that an entity should include prior period information if it is relevant to understanding the current period’s financial statements. This would mean that prior period information which is necessary to the understanding of the current period financial statements should be included even if that information was not disclosed in prior periods; whereas prior period information disclosed in the past should not be automatically included in the current period.
3. Clarifying that the PS is not a Standard and its application is not required in order to state compliance with IFRS Standards, and that the provision of additional information to meet local regulatory requirements is not prohibited by IFRS Standards even if that information is not material for IFRS Standards.

Discussion

No vote was taken on this issue. The Staff was asked to redevelop the paper for future discussion.

One Board member strongly disagreed with the Staff analysis on the grounds that the issue of ‘corresponding’ v. ‘comparative’ was a significant issue in practice and these terms were not addressed in IFRS. The Board member pointed out that IAS 1 very clearly used the word ‘comparative’ and if the PS were to advocate the use of the ‘corresponding’ approach, not only would this be contrary to the term used in IAS 1, the Board would also be including guidance/interpretation in a non-authoritative PS in relation to terms used in authoritative IFRS literature. Moreover, ‘corresponding’ prior period information is not an existing concept in IFRS. The Board member pointed out further that no consultation was made on the ‘comparative’ v. ‘corresponding’ issue and it would be wrong of the Board to discuss these approaches and draw a conclusion in the PS.

The Staff was asked to explore ways to address disclosures regarding prior period information without reference to these two terms and bring it back to the Board for further discussion.

With regard to the interaction of local regulations with IFRS, the Board commented that the PS should emphasise what was the objective of the PS rather than what was not the objective of the PS, as the latter would create a precedent and an expectation that the Board would insert a list of what was not the objective in other standards when things were unclear. Another Board member asked the Staff to state explicitly in the ED that local regulations could not override the materiality assessment of IFRS.

Disclosure Initiative: Materiality — Interim reporting — Agenda paper 11H

Given the short section on interim reporting provided in the ED, the respondents raised various questions as regards how materiality should be applied to interim reporting.

Staff analysis and recommendation

In response to the questions raised by the respondents, the Staff recommended the following:

1. Emphasising that an entity should apply the Materiality Process (see agenda paper 11D) in the application of materiality to the interim financial reports. The Staff believes that the Materiality Process does not change when applied to the interim financial statement.
2. Specifying that an entity needs to apply the Materiality Process taking into account that the context and purpose of an interim financial report are different from those of an annual report, i.e.:
   1. information in the interim financial report is assessed in relation to the interim period financial data, not forecast annual data;
   2. in the case of quarterly reporting, the Materiality Process is applied to both the current interim period data and the cumulative period-to-date data;
   3. information that is material to the interim financial report, but not material to the annual financial statements, need be disclosed only in the interim financial report;
   4. information that is not material to the interim financial report but is expected to be material to the annual financial statements need not be disclosed in the interim financial reports; and
   5. information that is material to the interim period, but was already presented and disclosed in the latest annual financial statements does not need to be reproduced in the interim financial report, unless something new occurs or an update is needed.

Discussion

The Board approved all the Staff’s recommendations subject to editorial changes.

Disclosure Initiative: Materiality — Publicly available information — Agenda paper 11I

Guidance proposed in the ED and feedback received

Some respondents found the existing wording in paragraphs 57 and 58 of the ED unclear as to whether publicly available information should affect the materiality assessment.

Staff analysis and recommendation

The Staff recommended clarifying that:

1. An entity needs to assess whether information is material to the financial statements regardless of whether it has already been made public. This is because by definition, material information is information that could reasonably be expected to influence primary users in making economic decisions; therefore, information should not be assessed as not material because it has already ‘had the chance’ to influence primary users’ decisions.
2. Having publicly available information does not relieve the entity of the obligation to disclose material information.

Discussion

The Board approved the Staff’s recommendations.

Conceptual Framework — Agenda paper 10

The IASB is continuing its discussion of the comments received on the Conceptual Framework exposure draft. The topics for this meeting are: testing the proposed asset and liability definitions (agenda paper 10B); testing the proposed asset and liability definitions — Illustrative examples (agenda paper 10); executory contracts (agenda paper 10D); unit of account (agenda paper 10E); asymmetry in treating gains and losses (agenda paper 10G) and materiality (agenda paper 10H). In addition, the tentative decisions made to date are summarised in agenda paper 10A.

The Board will discuss at their next meeting in November 2016 the following topics: a) the definition of a liability and the concept supporting that definition; b) derecognition; c) measurement; d) capital maintenance; e) business activities and long-term investment; f) the effect of the revised Conceptual Framework on preparers ; and the Exposure Draft  Updating References to the Conceptual Framework.

Conceptual Framework — Testing the proposed asset and liability definitions — Agenda paper 10B

Background

The staff will present in this session their analysis of the testing performed on the proposed definitions of assets and liabilities. The staff discussed illustrative examples with participants at the World-Standard-setters meeting in September 2016. The examples are included in agenda paper 10C. The Board will not be asked to make technical decisions. The Board is scheduled to redeliberate in November the proposed liability definition and supporting concepts. The staff will be asking the Board to consider the meaning of ‘arisen from past events’ and concepts on existence uncertainty. The staff set out in the agenda paper the examples that were the cause of those concerns. The staff believes that the proposed concepts on the meaning of the phrase ‘arisen from past events’ could be improved and that the Board should add concepts on existence uncertainty.

On the other hand, the staff believe that the following concepts do not require further discussion by the Board: a) the subjectivity of the ‘no practical ability to avoid criterion’; and b) obligations to refrain from particular activities.

Conceptual Framework — Executory contracts — Agenda paper 10D

Background

The purpose of this agenda paper is to discuss the comments received and the staff analysis on executory contracts.

Staff analysis

The ED did not include a question on executory contracts. However, some respondents agreed with the ED proposals whereas others disagreed because they view an executory contract as giving rise to a separate right and a separate obligation. They also expressed different views on whether the separate right and obligation should be treated as a separate unit of account. The staff indicates that the Board has already addressed this concern and stated that both the right and obligation under an executory contract are conditional upon each other. The Board also noted that there is a net inflow or outflow of economic resources when the parties perform their obligations. Accordingly, the right and the obligation cannot be separated. The staff also believes that the Conceptual Framework should not specifically address recognition of executory contracts because the Conceptual Framework does not address specific recognition requirements. The staff indicates that the Basis for Conclusions already indicates that the current practice of not recognising an asset or a liability for many executory contract is expected to continue.

Staff recommendations

The staff recommends that no changes be made to the ED proposals. Accordingly, the staff recommends confirming the ED proposals that state the following: (i) an executory contract establishes a right and an obligation to exchange economic resources; (ii) that right and the obligation to exchange economic resources are interdependent and cannot be separated; and (iii) the combined right and obligation constitute a single asset or liability.

The staff also considers that the chapter should not contain any further discussion on this topic and the discussion proposed in the Basis for Conclusions should not be moved to the main body of the Conceptual Framework.

Conceptual Framework — Unit of account — Agenda paper 10E

Background

This paper discusses whether any changes are needed to the proposed concepts on the unit of account in the light of the comments received on the Exposure Draft In particular, this paper considers whether: (a) the proposed concepts should be expanded or shortened; b) the unit of account should be selected before or after considering how recognition and measurement would apply; (c) it may be appropriate to select one unit of account for recognition and a different unit of account for measurement; and d) the cost constraint should be identified as a separate factor to consider in selecting the unit of account.

Staff analysis

The staff indicates that about a half of the respondents explicitly agreed that the unit of account for a particular item must be considered at the Standards-level based on the concepts included in the Conceptual Framework. Some of these respondents suggested that the Conceptual Framework should require the Board to identify the unit of account in the Standards and explain the rationale for the selected unit of account in the Basis for Conclusions on the Standard in question. The staff also noted that some responded indicated the following concerns:

• The proposed concepts are insufficient or unclear and do not provide a clear direction to the Board in selecting a unit of account when setting Standards. The staff believes that the proposed thought process for the Board to follow in selecting the unit of account and the examples included in the ED are appropriate.
• The proposed concepts need to be shortened. The staff disagrees with this proposal because the discussion was already expanded in response to comments received from the DP.
• The unit of account should be selected before or in conjunction with determining recognition and measurement. The staff believes that the selection of the unit of account and consideration of how to apply recognition and measurement requirements are interrelated and accordingly should be considered at the same time rather than sequentially. The staff noted that when it develops Standards the Board will be considering both the unit of account and recognition and measurement requirements for a particular item at the same time.
• Sometimes it might be appropriate to select different units of account for recognition and measurement. The staff agrees with this view because it is possible for items to qualify for recognition on an individual basis and to be measured on a group basis.

Staff recommendation

The staff recommend that the Board: a) does not provide additional guidance on the unit of account in the Conceptual Framework; (b) does not shorten the discussion of the proposed concepts on the unit of account; (c) clarifies in the Conceptual Framework that the unit of account is selected for an asset or a liability when considering how recognition and measurement will apply; (d) confirms that sometimes it may be appropriate to select one unit of account for recognition and a different unit of account for measurement; (e) confirms that the selected unit of account may need to be aggregated or disaggregated for presentation and disclosure purposes; and (f) does not identify the cost constraint as a distinct factor in selecting the unit of account.

Conceptual Framework — Asymmetry in treating gains and losses — Agenda paper 10G

Background

The Board tentatively decided in September 2016 that the main body of the Conceptual Framework should acknowledge that in some cases income/ expenses and assets/liabilities may be treated differently. The purpose of this session is to discuss the staff proposed wording.

Staff analysis

The staff analysed two possible options: (a) to include the proposed wording in chapter 2 and/or; b) to include the wording in the recognition and/or measurement chapter. If the first option is selected, the staff believes that it would help clarify the distinction between prudence and asymmetry and emphasise that asymmetric treatment can be selected only when it is necessary to provide a faithful representation of relevant information. The wording proposed by the staff is included in the agenda paper and states the following: “The exercise of prudence does not imply a need for asymmetry, eg more persuasive evidence to support the recognition of assets than of liabilities or of income than of expenses. Nevertheless, such asymmetry may sometimes arise as a consequence of providing relevant information that faithfully represents what it purports to represent.”

In relation to the second option, the staff noted that asymmetry is most commonly associated with recognising losses earlier than gains so it could be useful to include a more prominent observation on the role of asymmetry in the recognition chapter. In terms of measurement, the staff believes that asymmetry is most commonly associated with the selection of measurement bases that includes losses at an earlier stage than gains. The staff noted that many respondents view historical cost as an example of asymmetry in financial reporting. The staff believes that the ED already made it clear that that the Board has no preference for any measurement basis.

Staff recommendation

The staff recommends including the acknowledgement of possible asymmetry both in chapter 2 and the recognition chapter. The staff does not propose any changes to the measurement chapter.

Conceptual Framework — Materiality — Agenda paper 10H

Background

This agenda paper remains unchanged from Agenda paper 10F posted in September 2016 which was not discussed at such date.

The ED proposed that no amendments be made to the concept of materiality in the Conceptual Framework except to clarify that decisions about materiality reflect the needs of the primary users, not the needs of any other group.

Staff analysis and recommendation

The staff noted that few respondents made comments on this topic. Respondents suggested that after the work on materiality is completed as part of the Disclosure Initiative, the Conceptual Framework should be revised to reflect it.

The staff indicates that the Principles of Disclosure Discussion Paper will suggest a number of changes to the existing definition of materiality in IAS 1 and IAS 8. Their assessment is that the proposed definition in the Principle of Disclosure project is consistent with the ED. However, the discussion paper will suggest clarifying the threshold at which information becomes material by replacing “could influence” with “could reasonably be expected to influence” and including reference to “obscuring” information, not only omitting and misstating it. The staff recommends retaining the definition of materiality proposed in the ED.

Clarifications to IFRS 8 Operating Segments arising from the post-implementation review — Two sweep issues: consistent information about reportable segments and increasing the number of line items — Agenda paper 27

Background

The Staff is in the process of drafting the ED of the proposed amendments to IFRS 8 in response to the feedback received in the post-implementation review (‘PIR’) of IFRS 8. The purpose of this session is to discuss two issues that surfaced during the course of drafting.

Issues and staff analysis

Consistent identification of reportable segments: The original proposed amendments merely remind preparers of the benefits of consistency between the management commentary and the operating segment disclosures — there is no requirement to mandate such consistency. The Staff believes that in order to address the concerns raised in the PIR, and in light of the fact that the management commentary falls outside of the ambit of IFRS Standards, an entity should be required to explain in the financial statements any differences between the reported segments included in the financial statements and those included in the management commentary.

Increasing the number of reported line items: The Staff identified the following issues during drafting:

1. Is it permissible for segment information to include additional information that is not reviewed by or regularly provided to the chief operating decision maker (‘CODM’)?
2. Should an entity be permitted or required to disclose such additional information if it helps to meet the core principle of IFRS 8?

The Staff believes that IFRS 8 sets out the minimum requirements needed to meet the core principle of the Standard and that an entity may include additional information that is not reviewed by or regularly provided to the CODM if such disclosure helps to meet the core principle of IFRS 8. Nevertheless, as the disclosure requirements of IFRS 8 are based on the management approach, requiring an entity to disclose information not reviewed by the CODM would be a departure from this approach.

Staff recommendation

The Staff recommends that the Board amend IFRS 8 to:

1. Require an entity to explain why the reported segments in the financial statements differ from those included in the management commentary; and
2. State that an entity can disclose additional information about its reportable segments if this helps to meet the core principle of IFRS 8, even if this information is not reviewed by or otherwise regularly provided to the CODM.

Agenda paper 24 summarises the Board’s 2015 Agenda Consultation process with the purpose of asking the Board for permission to publish Feedback Statement on the 2015 Agenda Consultation (the Feedback Statement).

Financial Instruments with Characteristics of Equity research project- Agenda paper 5

The purpose of this session is to continue discussions on the Financial Instruments with Characteristics of Equity (FICE) project. The staff will present the following agenda papers:

• (a) Summary of discussions to date- Agenda paper 5A
• (b) Alternative settlement outcomes within the control of the entity – Agenda paper 5B

The Board will be asked to comment on the staff analysis and their recommendations.

Financial Instruments with Characteristics of Equity research project - Summary of discussions to date - Agenda paper 5A

Recap

The research phase of this project involves evaluating potential ways to improve the classification of liabilities and equity, and the related presentation and disclosure requirements.

The Board has explored the features to distinguish liabilities and equity: (i) the type of economic resources required to settle the claim; (ii) the timing of the transfer; (iii) the amount required to be transferred; and (iv) the priority of the claim relative to other claims.

The Board has been developing an approach (labelled Gamma, see discussion in February 2016), which distinguishes claims based on a combination of these features and would lead to outcomes broadly aligned with IAS 32. In September 2016, the Board discussed approaches to applying the separate presentation requirements to derivatives on ‘own equity’ that are neither completely independent nor solely dependent on the residual amount, as well as disclosures of financial instruments with characteristics of equity.

Appendix A summarises three approaches and Appendix B summarises classification outcomes for some simple instruments under the proposed approaches.

Financial Instruments with Characteristics of Equity research project - Alternative settlement outcomes within the control of the entity - Agenda paper 5B

Background

This paper discusses whether economic compulsion should be considered when classifying as liability or equity claims that grant the issuer the right to choose between two settlement alternatives. The paper looks at some issues that have come to the Board or Interpretations Committee, such as a convertible bond that is convertible into a fixed number of shares at the issuer’s option (‘a reverse CB’). The paper assesses whether economic incentives can be so persuasive that an instrument should be classified in a particular way. The paper assumes that there are no legal or regulatory barriers to consider so that the discussion can focus solely on economic compulsion.

Staff analysis

View A—economic incentives should not be considered. This is consistent with the IAS 32 principle of classifying as equity those claims where the entity has an unconditional right to avoid transferring cash or other financial assets based on an assessment of the entity’s contractual rights and obligations. In response to the counterintuitive point raised by the proponents of view B, the Staff believes that the existing guidance in IAS 32.20 covers cases where the cash alternative is structurally always favourable to the equity settlement alternative from the issuer’s perspective: IAS 32.20 requires such claims to be classified as a financial liability.

View B— economic incentives should be considered. Although this is inconsistent with IAS 32’s underlying principles, the Staff notes that some parties continue to believe that it is counterintuitive to classify as equity a reverse CB that is highly likely to be settled in cash (e.g. when the fair value of the share settlement alternative significantly exceeds that of the cash alternative), and vice versa for a CB that is convertible at the holder’s option. Furthermore, the Conceptual Framework ED proposes that an entity has an obligation to transfer an economic resource if the entity has no practical ability to avoid the transfer, an example of which is if any action to avoid the transfer would have economic consequences significantly more adverse than the transfer itself (the interpretation of ‘practical ability to avoid’ will be redeliberated at a future Board meeting), potentially supporting a view that a sufficiently favourable liability settlement outcome as compared to the equity alternative might establish a financial liability. However, this view begs the following questions:

1. How significant does an economic incentive need to be for the entity to be ‘economically compelled’ to transfer economic resources?
2. When should the assessment of economic compulsion be performed and how often, if at all, should it be reassessed, bearing in mind the significance of the economic incentive will change in response to market changes?
3. Should the assessment be made based on the economic conditions existing at assessment date, or should it take into account expected future changes to those economic conditions?
4. Should economic incentives also be considered for the classification of claims where the holder of the instrument has the choice of settlement?

Staff recommendation

The Staff recommends view A.

Research Programme - Update - Agenda paper 8

This paper gives a general update on activities in the research programme and asks whether the Board has any comments on the programme. Appendix A lists the active research projects and those that are in the research pipeline.

The purpose of this session was to discuss the following:

• Foreign Currency Transactions and Advance Consideration — Ratification of the IFRIC Interpretation (Agenda paper 12A)
• IFRS 9 Financial Instruments and IAS 28 Investments in Associates and Joint Ventures — Long-term interests (Agenda paper 12B)
• IAS 16 Property, Plant and Equipment – Proceeds and costs of testing PPE: should net proceeds reduce the cost of PPE? (Agenda paper 12C)

Foreign Currency Transactions and Advance Consideration — Ratification of the Interpretation (Agenda Paper 12A)

Background

The purpose of the session was to ask the Board to ratify the Interpretation Foreign Currency Transactions and Advance Consideration. The Interpretation clarifies that in a transaction involving an advance payment or receipt of consideration, the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from advance consideration.

The Interpretation has an effective date of 1 January 2018, with earlier application permitted. Transition relief has also been provided for first-time adopters.

Staff recommendation

The Staff recommended that the Board ratifies the Interpretation.

Discussion

The Board approved the Staff’s recommendation.

IFRS 9 Financial Instruments and IAS 28 Investments in Associates and Joint Ventures—Long-term interests (Agenda Paper 12B)

Background

The IFRS Interpretations Committee had developed a draft Interpretation to address whether an entity applies IFRS 9, in addition to IAS 28, to long-term interests in an associate or joint venture that, in substance, form part of the net investment in the associate or joint venture, but to which the equity method is not applied (long-term interests). At the September 2016 Board meeting, the Board objected to the release of the Interpretation on grounds that it strayed into the mechanics of the equity method and went much further than the original question which narrowly focused on the scope of IFRS 9. Nevertheless, the Board agreed with the technical conclusions reached by the IC.

The purpose of this session was to discuss alternative ways to provide this clarification.

Staff recommendation

The Staff recommended the following:

1. Proposing an amendment to IAS 28 as part of the Annual Improvements Project to state explicitly that IFRS 9 applies to long-term interests;
2. Requiring retrospective application of the proposed amendments but permitting an entity not to restate comparative information unless the entity chooses to restate on initial application of IFRS 9 (same for insurance entities electing to apply the temporary exemption from IFRS 9); and
3. The amendment would include a tentative effective date of 1 January 2018 with earlier application permitted.

Discussion

The Board approved the Staff’s recommendation, subject to redrafting.

One Board member was reluctant to amend IAS 28 now when that standard was subject to a research project as it might give rise to unintended consequences. Furthermore, he disagreed with amending IAS 28 without addressing the more fundamental issue of equity accounting. A number of other Board members heard his concerns; however, they noted that stakeholders had asked the Board not to put off issuing necessary amendments on grounds that a particular standard was subject to a long term project intended to address bigger issues. Besides, as the proposed interpretation sought to interpret the existing requirements of IFRS 9 and IAS 8, as opposed to creating a new requirement, they agreed with the Staff’s recommendation.

IAS 16 Property, Plant and Equipment – Proceeds and costs of testing PPE: should net proceeds reduce the cost of PPE? (Agenda Paper 12C)

Background

The IFRS Interpretations Committee has held several meetings to discuss the issue of whether the net proceeds from selling items produced while testing an item of PPE under construction in excess of the cost of testing should be recognised in profit or loss or reduce the cost of PPE. Appendix I provides a summary of the IC’s meetings on this issue.

The Interpretations Committee’s recommendation

In the IC’s September 2016 meeting, the IC recommended the following:

• Proposing amendments to IAS 16 which would prohibit the deduction of proceeds from selling items produced while making an item of PPE available for use from the cost of that PPE as they believe that this is the most straight-forward way of addressing the diversity in practice;
• Requiring prospective application of the proposed amendments to items of PPE made available for use from the beginning of the earliest comparative period when first applying the amendments due to cost/benefit reasons; and
• Not providing transition relief for first-time adopters beyond the deemed cost exemption already in IFRS 1.

Staff recommendation

The Staff recommended that the Board develop the amendments as proposed by the Interpretation Committee.

Discussion

The Board approved the Staff’s recommendation.

One Board member was strongly against publishing the Interpretation without its giving further guidance on cost allocation for circumstances in which PPE and inventory were produced concurrently before the PPE was capable of operating in the manner intended by management. The Staff responded that this issue was discussed by the IFRIC and that the respondents from industries that were perceived to be most affected by this believed that there was sufficient guidance on cost allocation.