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IFRS implementation issues

Date recorded:

The purpose of this session was to discuss the following:

  • Amendments to IAS 28: Transition requirements for first-time adopters and due process steps: AP 12A
  • IAS 8: Accounting policy changes resulting from agenda decisions - Initial consideration: AP 12B

Amendments to IAS 28: Transition requirements for first-time adopters and due process steps – Agenda Paper 12A

Background

In its May 2017 meeting, the Board discussed the feedback received on the proposed amendments to IAS 28 in relation to the accounting for long-term interests and tentatively decided to reaffirm those amendments.

The purpose of this paper is to discuss the transition requirements for first-time adopters. The Staff also plan to seek the Board’s permission to ballot.

Staff recommendation

The Staff recommended that:

  • No specific transition requirements be provided to first-time adopters. This is because IFRS 1 paragraphs B8 to B8G already provide relief from retrospective application of the classification and measurement requirements of financial assets upon transition to IFRS.
  • The Board grant permission to ballot the final amendments.

Next steps

The Staff plan to start the balloting process in July and expect to issue the amendments in September 2017.

Discussion

The Board approved the Staff recommendation without any discussion.

One Board member indicated his intention to dissent as he believed that the proposed amendments would give rise to double counting.

IAS 8: Accounting policy changes resulting from agenda decisions - Initial consideration – Agenda Paper 12B

Note: this paper is identical to Agenda Paper 5 for the Interpretations Committee’s June 2017 meeting.

Background

This paper deals with changes in accounting policies resulting from agenda decisions, and addresses two central issues:

  1. Whether the change is a correction of error or a voluntary change in accounting policy; and
  2. Lowering the impracticability threshold for exemption from retrospective adjustments to a cost/benefit threshold.

The IC discussed this paper in its June 2017 meeting. The IC’s comments were sought as the publication of agenda decisions falls within its ambit. When the IC receives a request and considers that the requirements in existing Standards provide an adequate basis on which to account for the issue, it issues an agenda decision which typically includes explanatory material outlining the IC’s view on how to apply the applicable requirements.

Agenda decisions are non-authoritative. Neither the Board nor the IC can specify transition requirements or an effective date for the information contained in an agenda decision. If an entity changes its accounting policy as a result of an agenda decision (be it as a correction of error or a voluntary change in policy), it is required to apply the new policy retrospectively unless it is impracticable to do so. ‘Impracticability’ is a high hurdle. It is often seen as deterring entities from voluntarily changing an accounting policy for the better because of the efforts involved in restating comparatives. This undermines the value of agenda decisions.

Accordingly, the paper explores a cost/benefit approach as an alternative to the impracticability approach for exemption from retrospective application of a voluntary change in accounting policy.

Staff analysis

Correction of error or voluntary change in accounting policy?

The Staff believe that it would not be appropriate to characterise all changes resulting from agenda decisions as corrections of errors or as changes in accounting policies.

Matters that are submitted for consideration by the IC are generally complex and require extensive analysis and discussion by the IC members. The resulting explanatory information that is published in an agenda decision is therefore, arguably, new information that was not available previously and could not reasonably have been expected to be obtained by an entity. Accordingly, the accounting policy applied by an entity prior to the publication of the agenda decision could not always be said to be an error.

On the other hand, an entity could simply have applied a Standard incorrectly. This would meet the definition of an error. The characterisation of a change in accounting practice resulting from an agenda decision depends on the specific facts and circumstances of each case.

Cost/benefit threshold

The Staff considered adding a cost/benefit threshold to the existing impracticability threshold for exemption from retrospective application to:

  1. all voluntary changes in accounting policies; or
  2. only voluntary changes in accounting policies resulting from agenda decisions.

The Staff analysed the pros and cons of each alternative and, on balance, recommend alternative 2 as its limited scope could help avoid unintended consequences arising from lowering the threshold for all voluntary changes in accounting policies.

The Staff also propose that the costs of retrospective application would outweigh the benefits if the incremental costs that an entity would incur or the additional effort that would be required to determine the effects of the change substantially exceeds the expected benefits for users from retrospective application. The paper includes elaboration on the factors that an entity should consider when assessing the cost/benefit threshold.

Staff recommendation

The Staff recommended that the Board:

  • not characterise a change in policy resulting from agenda decisions as either a correction of error or a change in accounting policy;
  • propose a narrow-scope amendment to IAS 8 to require an entity to apply a voluntary change in an accounting policy resulting from an agenda decision retrospectively, unless:
    • a) determining the period-specific effects or the cumulative effect of the change would be impracticable; or
    • b) the cost of determining those effects would outweigh the benefits that users would receive from a retrospective application of the new policy.

If either (a) or (b) above applies, an entity would be required to apply the requirements in IAS 8.23-27.

The Staff further recommended including application guidance in IAS 8 on how to determine whether the costs of retrospective application would outweigh the expected benefits.

Feedback from the June 2017 IFRS IC meeting

The IC members were generally supportive of the Board addressing the matter and the Staff’s recommendation to lower the impracticability threshold. However, some IC members were concerned with the practical application of the cost/benefit threshold, especially with regard to how to determine the benefits of adopting a new accounting policy. There were also mixed views with regard to whether a change in accounting policy arising from an agenda decision should be treated differently from other voluntary changes in accounting policy.

Several IC members also explicitly agreed with the Staff recommendation that the Board not undertake standard-setting activities with respect to assessing whether a change resulting from an agenda decision is a correction of error or a change in accounting policy.

Discussion

The Board approved all of the Staff recommendations.

The Board were generally supportive of this initiative. They saw that there is an increasing need to clarify what the impact of an agenda decision is. The Staff will bring back a paper on how to assess cost/benefit in relation to a change in accounting policy and on how soon an entity should apply the guidance contained in an agenda decision.

Changes arising from an agenda decision: is it an error or a change in accounting policy?

There was not much discussion on this. All but one Board member agreed that the Board should not undertake standard-setting activities in this regard.

Lowering the impracticability threshold

Eight members agreed with lowering the impracticability threshold for changes in accounting policies arising from an agenda decision.

There were mixed views as to whether the lower threshold should apply to all voluntary changes in accounting policies or only to those arising from agenda decisions. Those who supported lowering the threshold for all changes in policies were concerned that treating agenda decisions differently would unduly elevate its status. It would also be practically challenging to distinguish which changes arise from agenda decisions, especially when the guidance is applied by analogy. In the most extreme case, ‘pure’ voluntary changes in accounting policy may disappear.

Those who supported limiting the relief to changes arising from agenda decisions view agenda decisions as a well-defined population of educational material that provides objective pieces of new information. As such, they can be distinguished from other voluntary changes in accounting policies and it is justified to have such a distinction. These members also believe that lowering the threshold for all changes could lead to potential abuse.

Two members were not supportive of lowering the threshold at all. They were uncomfortable to put the onus of the cost/benefit assessment on the preparers when the Board has traditionally carried out that assessment. One member observed that all companies are subject to different circumstances and they will assess costs and benefits differently. This in turn would result in different transition approaches being adopted by different companies. It will also be difficult for an auditor to audit management’s cost/benefit assertions.

The other member who objected to lowering the threshold believes that an agenda decision serves to eliminate accounting practices that have developed that may not necessarily comply with the Standards. To her, the core issue is whether a change resulting from an agenda decision is a correction of error and not how the consequential change should be accounted for.

How soon should the guidance in an agenda decision be applied?

A couple of Board members asked how soon an entity should apply the guidance in an agenda decision. For example, for agenda decisions that are issued just before 30 June, are they applicable to interim periods ending 30 June, to annual periods beginning on or after that date or to some other periods? Many stakeholders are concerned about this because in some jurisdictions, compliance with agenda decisions are not quite so voluntary because of regulator involvements or expectations. The Staff agreed to explore this issue further.

Guidance on cost/benefits assessment

Similar to the IC’s June 2017 discussions, the Board acknowledged that it would be difficult to assess the benefits arising from a change in accounting policy. A move to undue costs and efforts might present a similar challenge because what is ‘undue’ also requires an understanding of the context in which the costs were spent, which implicitly requires an assessment of the benefits obtained.

The Staff agreed to bring back a paper for future discussion. The Board asked the Staff to consider the following in that paper:

  • When using terms that have been used elsewhere, e.g. undue costs and efforts is used in IFRS for SMEs, consider how the proposed application guidance would affect the assessment required by other Standards using the same terms.
  • To distinguish between the costs and benefits of (1) changing an accounting policy, and (2) applying the change retrospectively.
  • To consider the possibility of including in each agenda decision whether retrospective application of the guidance would be beneficial.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.