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IFRS implementation issues

Date recorded:

IFRS Implementation Issues — Agenda paper 12

The purpose of this session was to discuss the following:

  • Fees included in the ‘10 per cent’ test for the purpose of derecognition — IC tentative decisions: AP 12A
  • Amendments to IAS 19 and IFRIC 14 — Minor plan events, transition and effective date: AP 12B
  • Amendments to IAS 19 and IFRIC 14 — Due process steps — AP 12C
  • Amendments to IFRS 3 and IFRS 11: Previously Held Interest — Analysis of feedback on the proposed amendments — AP 12D
  • Amendments to IFRS 3 and IFRS 11: Previously Held Interest — Clarification of ‘previously held interest’ — AP 12E

The Staff asked the Board whether they agreed with the Interpretation Committee’s (IC) recommendations. See the previous IC and Board meeting minutes for further details on each topic.

Discussion

The Staff briefed the Board on the tentative and final agenda decisions included in the March IFRIC Update. The Board did not have any comments on the final agenda decisions. Apart from a few Board members voicing their agreement with the conclusion reached by the IC with regard to the Ecuadorian IAS 19 discount rate issue, no substantive discussion took place as regards the other tentative agenda decisions.

Fees included in the ‘10 per cent’ test for the purpose of derecognition — IC tentative decisions — Agenda Paper 12A

Background and IC recommendation

The IC previously discussed which fees and costs an entity should include in the ‘10 per cent’ test for the purpose of derecognition of a financial liability. In May 2016, the IC concluded that an entity should include only fees paid or received between the entity and the lender, including fees paid or received by either the entity or the lender on the other’s behalf, and published a tentative agenda decision to this effect. In light of the comments received on the tentative agenda decision, the IC reconfirmed its technical conclusion in September and November 2016 but recommended that the Board propose an amendment to IFRS 9 to clarify the accounting as part of the next Annual Improvements Cycle.

Further Staff analysis

The Staff further analysed whether the same amendment should be proposed for IAS 39 but decided against it. This is because they believed that the cost of such an amendment would outweigh the benefits, given that:

  • IAS 39 has a remaining effective period of less than one year, except for insurance entities under certain circumstances,
  • the proposed amendments to IFRS 9 are clarifying in nature, meaning that insurance entities can apply the clarification without an amendment to IAS 39 being made, and
  • the predominant current accounting treatment in applying the 10 per cent test is consistent with the IC’s technical conclusions, so it is unlikely that the amendment will have a significant impact on most entities.

Furthermore, the Staff recommended prospective application of the proposed amendments to IFRS 9 based on cost/benefit reasons.

Discussion

The Board approved the IC and the Staff recommendations.

One member disagreed as he believed that the use of the 10 per cent test is rare and that the inclusion of fees and costs in the test is even rarer, so the proposed amendment will only have a tiny impact in the whole scheme of things. He believed that it is not optimal to be proposing such an amendment to IFRS 9 now when it will be effective after IFRS 9 as that could disrupt the change management process of many entities. He would rather the proposed amendment be considered in the post-implementation review of IFRS 9. None of the other Board members shared his concerns.

Amendments to IAS 19 and IFRIC 14 — Minor plan events, transition and effective date, and due process steps — Agenda Papers 12B and 12C

Background

At its December 2016 meeting, the Board tentatively decided to finalise the amendments to IFRIC 14 IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction and the amendments to IAS 19 Remeasurement on a Plan Amendment, Curtailment or Settlement/ Availability of a Refund from a Defined Benefit Plan, subject to the IC reconsidering the implications of not excluding minor plan events from the scope of the amendments.

IC recommendation

The IC discussed this issue in its March 2017 meeting, and recommended that:

  1. the Board not exclude minor plan events from the scope of the amendments to IAS 19;
  2. an entity apply the amendments to IFRIC 14 retrospectively (with an exemption for adjustments to the carrying amount of assets outside the scope of IAS 19);
  3. an entity apply the amendments to IAS 19 prospectively;
  4. no transition relief be provided to first-time adopters; and
  5. an entity apply the amendments for annual reporting periods beginning on or after 1 January 2019, with earlier application permitted.

Staff recommendation

The Staff asked the Board whether it agreed with the IC’s recommendations. They also intended to seek the Board’s permission to ballot the amendments to IFRIC 14 and IAS 19 without re-exposure.

Discussion

The Staff started off by postponing the discussion of the effective date and the permission to ballot to a future Board meeting in order to bring back an effects analysis of the amendments to IFRIC 14 for discussion.

Apart from the above, the Board approved all of the IC’s recommendations without any significant discussion. The Staff and a few Board members spent some time trying to convince one Board member in particular on how removing the exclusion of minor plan events from the scope of the amendments would remove complications and align the assessment of the applicability of the amendments with general materiality considerations.

Amendments to IFRS 3 and IFRS 11: Previously Held Interest — Analysis of feedback on the proposed amendments — Agenda Paper 12D

Background and IC recommendation

In its March 2017 meeting, the IC discussed the feedback on the proposed amendments to IFRS 3 and IFRS 11 included in the Definition of a Business and Accounting for Previously Held Interests exposure draft.

The proposed amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, the entity applies the requirements for a business combination achieved in stages, including remeasuring its previously held interest in the joint operation at fair value. The proposed amendments to IFRS 11 clarify that when an investor obtains joint control of a business that is a joint operation, the entity does not remeasure its previously held interest in the joint operation.

In short, the IC recommended that the Board finalise the amendments with no substantive changes, except for what constitutes previously held interest in a joint operation. The IC could not reach a conclusion on that matter and referred it to the Board for further discussion – see AP 12E for the Staff analysis.

Discussion

The Board approved the IC’s recommendation. One Board member believed that it would be beneficial if the Standards could explicitly state that one should only remeasure previously held interests if one obtains control over a business. Nevertheless, she acknowledges that this statement might have unintended consequences and urged the Staff to work through other fact patterns to enable the Board to finalise its position in this regard.

Amendments to IFRS 3 and IFRS 11: Previously Held Interest — Clarification of ‘previously held interest’ — Agenda Paper 12E

Background

As mentioned in AP 12D, in its March 2017 meeting, the IC could not conclude on what constitutes ‘previously held interest’ (PHI) in a joint operation that needs to be remeasured when the entity obtains control over a joint operation. The IC referred the matter to the Board and the Staff presented their analysis in this paper.

Staff analysis

The IC proposed three views as follows:

View 1: an entity remeasures only the individual assets that it had rights to, and liabilities that it had obligations for, relating to the joint operation that it had recognised immediately before it obtains control. This would exclude any unrecognised identifiable assets and liabilities or unrecognised goodwill relating to the joint operation.

View 2: an entity remeasures all identifiable assets and liabilities relating to the joint operation immediately before it obtains control. This would include any identifiable but unrecognised assets and liabilities relating to the joint operation. However, unrecognised goodwill relating to the joint operation would not be remeasured.

View 3: an entity remeasures its overall PHI in the joint operation. This includes any unrecognised assets and liabilities as well as unrecognised goodwill relating to the joint operation.

The Staff used a numerical example to illustrate the outcome of each view. The only difference between each view is the amount of gain (loss) recognised on remeasuring the PHI and the amount of goodwill recognised upon the business combination.

The Staff believed that view 3 is consistent with IFRS 3’s characterisation of a step acquisition as a disposal of the PHI and an acquisition of the new controlling interest. This is because remeasuring the PHI as a whole would result in a gain (loss) that an entity would recognise if it were to dispose of its interest in the joint operation in an orderly transaction between market participants. This, in turn, is because the price that an entity would be expected to receive on disposing of its interest in a joint operation would be determined based on its overall interest in the joint operation, which includes any unrecognised assets, liabilities and goodwill.

Given that an entity could use the price that it has paid for the other party’s interest in the joint operation as a basis for determining the fair value of its PHI in the joint operation, the Staff believed that applying view 3 would not result in an entity’s having to incur any significant additional costs.

Staff recommendation

The Staff recommended that the Board clarify that an entity remeasures its overall previously held interest in a joint operation (that is a business) when it obtains control of that joint operation.

Discussion

The Board approved the Staff’s recommendation. The Staff confirmed that this decision is final and will not be re-debated by the IC.

There was not much technical discussion during the session. Most of the time was spent by the Staff addressing how one would determine the fair value of the PHI in a joint operation when it did not represent a proportionate share of all the assets and liabilities in the joint operation. The Staff understood from their informal discussions with stakeholders that it is rare that such situations would constitute a business in practice and that it is unlikely to give rise to significant additional costs in terms of valuation.

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