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IFRS implementation issues

Date recorded:

IFRS Implementation Issues - Agenda paper 12

The purpose of this session is to discuss the following:

  • Amendments to IAS 12: Income tax consequences of payments on financial instruments classified as equity – Analysis of feedback on the proposed amendments: AP 12A
  • Amendments to IAS 23: Borrowing costs on completed qualifying assets – Analysis of feedback on the proposed amendments: AP 12B
  • Amendments to IAS 19 and IFRIC 14 – Possible effects of amendments to IFRIC 14: AP 12C

Amendments to IAS 12: Income tax consequences of payments on financial instruments classified as equity – Analysis of feedback on the proposed amendments – Agenda Paper 12A

Background

This paper analyses the feedback received on the proposed amendments to IAS 12 included in Annual Improvements to IFRS Standards 2015–2017 Cycle. The Board proposed to amend IAS 12 to clarify that an entity should recognise all income tax consequences of dividends (i.e. distribution of profits) in profit or loss, OCI or equity depending on where the entity had originally recognised the transactions that generated the distributable profits. This applies regardless of how the tax arises.

Staff analysis of feedback received

A large number of respondents agreed with the proposed amendments. The main issues raised by the respondents are discussed below.

How to determine whether payments are distributions of profits

Many respondents suggested that the Board provide guidance on how to determine whether payments on financial instruments classified as equity are distributions of profits. They believe that without such guidance, there will continue to be diversity in practice on where to recognise the related tax consequences.

The Staff point out that the Board has already explained its reasons for not providing guidance on how to determine what constitutes a distribution of profits in BC6 to the proposed amendments. BC6 explains that this is a judgemental area and that providing additional guidance would go beyond the scope of the amendments and might lead to unintended consequences. The objective of the amendments is simply to clarify that the requirements of IAS 12.58 regarding whether to recognise a tax consequence in profit or loss, OCI or equity applies to all tax consequences of a distribution of profits, and not merely to situations where there are different tax rates for distributed and undistributed profits (as interpreted by some people in practice).

The Staff also note that the respondents did not provide any new arguments which the Board has not already considered in this regard.

Retrospective application

The Board proposed retrospective application of the proposed amendments. Some respondents said that it would be challenging to try to trace the origins of the transactions that gave rise to dividends in prior years and suggested that the Board require prospective application instead.

The Staff acknowledge these concerns. In their view, since the effect of the amendments is limited to reclassifications between equity components, the costs of retrospective application would outweigh the expected benefits.

Staff recommendation

The Staff recommend that the Board:

  • reaffirm the proposed amendments to IAS 12 without adding any guidance on how to determine what constitutes a distribution of profits; and
  • require prospective application of the amendments to dividends recognised on or after the beginning of the earliest period presented.

Amendments to IAS 23: Borrowing costs on completed qualifying assets – Analysis of feedback on the proposed amendments – Agenda Paper 12B

Background

This paper analyses the feedback received on the proposed amendments to IAS 23 included in Annual Improvements to IFRS Standards 2015–2017 Cycle. The Board proposed to amend IAS 23 to clarify that when a qualifying asset is ready for its intended use or sale, an entity treats any outstanding borrowings made specifically to obtain that qualifying asset as part of the funds that it has borrowed generally.

Staff analysis of feedback received and IFRS IC recommendation

A large number of respondents agreed with the proposed amendments. There were no substantive comments other than to clarify the points set out in the Staff recommendation below. Point (b) of the recommendation has been discussed and reconfirmed by the Board and the Interpretations Committee in 2009.

The Interpretations Committee discussed the feedback received in its June 2017 meeting and agreed with the Staff recommendations.

Staff recommendation

The Staff recommend that the Board finalise the proposed amendments to IAS 23, and in doing so, clarify:

  • a) the rationale for the amendments in the Basis for Conclusions; and
  • b) that an entity includes funds borrowed specifically to obtain a non-qualifying asset as part of general borrowings.

Amendments to IAS 19 and IFRIC 14 – Possible effects of amendments to IFRIC 14 – Agenda Paper 12C

Background

This paper analyses how the proposed amendments to IFRIC 14 will affect the measurement of the economic benefit available as a refund from a defined benefit plan to an entity. The analysis is done purely in the context of a UK defined benefit plan with specific characteristics (UK DB plan) as the Staff observed that this matter is not prevalent in other jurisdictions.

The Board will not be asked to make any decisions in this session.

Staff analysis

Currently, entities generally measure the economic benefits available as a refund from UK DB plans on a gradual settlement basis. This means that the anticipated costs of settling plan liabilities are not taken into account when measuring the refund (IFRIC 14.13). However, paragraph 12A to the proposed IFRIC 14 amendments could result in the refund from such plans being measured assuming full settlement of plan liabilities in a single event. This means that the costs of settling plan liabilities are taken into account when measuring the refund (IFRIC 14.14). This change could result in the net defined benefit asset’s being measured at a significantly lower amount.

Furthermore, in some situations, an entity may have an obligation to pay contributions under a minimum funding requirement to cover an existing shortfall in respect of services already received (MFR contribution). The reduction in the asset ceiling caused by the application of proposed paragraph 12A as described above might in turn result in some portion of the MFR contribution’s not being recoverable once paid. If this is the case, an entity may have to recognise an additional liability for the portion of the MFR contribution that it cannot recover.

The Staff used four examples to assess the potential impact of the proposed amendments. All four examples confirmed the expected outcome as described above.

Next steps

The Staff plan to (a) consult with stakeholders to understand how the proposed amendments will affect plans in other jurisdictions, and (b) confirm that the amendments will have the effects that the Board envisaged during their development. The Staff will update the Board on the outcome of their consultations at a future meeting.

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