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IFRS implementation issues

Date recorded:

The purpose of this session was to discuss the following:

  • Accounting policy changes (Amendments to IAS 8) – Proposed threshold and timing challenge: AP 12A
  • Availability of a refund (Amendments to IFRIC 14) and Plan amendments, curtailment or settlement (Amendments to IAS 19) – Effects of IFRIC 14 amendments and finalising IAS 19 amendments: AP 12B
  • Annual Improvements to IFRS Standards 2015-2017 Cycle – Due Process Steps: AP 12C

Accounting policy changes (Amendments to IAS 8) – Proposed threshold and timing challenge – Agenda Paper 12A

Background

In its June 2017 meeting, the Board tentatively decided to lower the threshold in the retrospective application of a change in accounting policy arising from agenda decisions from ‘impracticable’ to a cost/benefits assessment. The Board also asked the Staff to consider the timeframe within which an entity should apply the guidance in an agenda decision and to develop application guidance on the cost/benefits assessment. The Staff address these issues in this paper.

Staff analysis

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

The Staff believed that prescribing a timeframe within which an agenda decision should be applied would inappropriately imply that agenda decisions are authoritative and would contradict the voluntary nature of such a change in accounting policy (assuming the change is not a correction of error). Furthermore, what is considered ‘sufficient time’ to implement a change in accounting policy would depend on the nature of the change and would require judgement. Accordingly, the Staff recommended that the Board not prescribe a timeframe within which agenda decisions should be applied.

Guidance on cost/benefits assessment

In developing this guidance, the Staff considered the Board’s rationale for providing (or not providing) relief from retrospective application in recently issued Standards, amendments and proposed amendments, as well as the use of cost-benefits and similar thresholds in other existing Standards. The proposed guidance would include the following:

  • The cost/benefits threshold is not intended to be a low hurdle;
  • In assessing the benefits to users of retrospectively applying a change in accounting policy, an entity should assess:
    • The pervasiveness of the change in policy across the financial statements, e.g. does it affect one line item or many line items?
    • The number and significance of transactions affected by the change in policy;
    • Whether the change affects different reporting periods, e.g. users are less likely to benefit significantly from retrospective application for contracts that begin and end in the same reporting period;
    • The impact on trend information and consistency of accounting in future reporting periods, e.g. the benefits of retrospective application may be limited for one-off transactions. In contrast, for recurring and long-term contracts, the benefits of retrospective application are arguably more significant because it helps to preserve trend information and to ensure consistent accounting treatment in future years between contracts that were entered into before and after the change in accounting policy.

Staff recommendation

The Staff recommended that the Board:

  • not prescribe a timeframe within which an entity should apply an agenda decision;
  • 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:
    1. determining the period-specific effects or the cumulative effect of the change would be impracticable; or
    2. 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 apply the requirements in IAS 8.23-27 when transitioning to the new policy.
  • provide application guidance in IAS 8 on how an entity would assess the costs and benefits of applying a change in accounting policy retrospectively.

Discussion

The Board approved all the Staff recommendations.

On the issue of the timeframe within which an agenda decision should be applied, there were mixed views from the Board. Those who supported the Staff recommendation noted that the proposed amendment is premised on the fact that the Board did not want to treat agenda decisions any differently – they are non-authoritative and any changes in accounting policies arising therefrom are entirely voluntary. Any special guidance on how and when agenda decisions should be applied would inevitably elevate its status inappropriately.

On the other hand, the Board members who thought that more guidance is warranted reiterated that this is a significant issue for many entities, especially those in jurisdictions where the regulator expects entities to follow agenda decisions and would require any necessary changes to be made promptly. This had been burdensome for preparers and would continue to be so without help from the Board. However, opponents to this view believed that the Board should resolve this expectation gap by reaching out to the regulators concerned and communicating the Board’s expectation of how the guidance in an agenda decision should be applied. The Board also agreed to seek feedback from stakeholders on whether they think the Board should do more in this regard when exposing the proposed amendments.

The Board unanimously agreed on the proposed cost/benefits threshold for voluntary changes in accounting policies arising from agenda decisions. They agreed with the explicit reference to benefits as opposed to just a consideration of costs and efforts, as they believed this would help focus the preparer’s assessment on the users’ needs and on what is important to them. Furthermore, if an entity believes that it has exercised significant judgement in deciding whether to apply the change in policy prospectively or retrospectively, then it should make the appropriate disclosures per IAS 1 regarding significant judgements. No comments were raised on the proposed guidance on the costs/benefits assessment.

Availability of a refund (Amendments to IFRIC 14) and Plan amendments, curtailment or settlement (Amendments to IAS 19) — Effects of IFRIC 14 amendments and finalising IAS 19 amendments — Agenda Paper 12B

Proposed amendments to IFRIC 14

In its July 2017 meeting, the Board considered how the proposed amendments to IFRIC 14 would affect the measurement of the economic benefits available as a refund from a defined benefit plan to an entity, specifically in the context of a typical UK defined benefit plan.

Further outreach undertaken by the Staff subsequent to July 2017 indicated that the proposed amendments are not expected to have a significant impact on defined benefit plans in other jurisdictions.

Nonetheless, the Staff did not believe that it would be appropriate to finalise the proposed amendments at this stage because the benefits may not exceed the cost of the amendments for all jurisdictions, particularly in the UK. Instead, the Staff suggested that further work be performed to refine the principle in IFRIC 14 that an entity must have an unconditional right to a refund of the surplus in the plan in order to recognise a net defined benefit asset. However, such a project would be broader in scope than the existing proposed amendments and any resulting amendments would need to be re-exposed for comments.

Proposed amendments to IAS 19

The Board had already tentatively decided to finalise the IAS 19 amendments in April 2017. Although exposed together, the IAS 19 amendments are unrelated to the IFRIC 14 amendments.

Staff recommendation

The Staff recommended that the Board:

  • perform further work to assess whether it can establish a more principles-based approach in IFRIC 14 for an entity to assess and measure its right to a refund of a surplus;
  • finalise the IAS 19 amendments separately from the IFRIC 14 amendments without re-exposure, with an effective date of 1 January 2019 and allowing earlier application.

Next steps

The Staff plan to begin the balloting process in October 2017 and expect to issue the IAS 19 amendments in December 2017.

Discussion

All but one Board member approved the Staff recommendation.

The dissenting member was uncertain about what the Staff plan to do in their further research and had doubts about the prospects of such a venture. However, another member believed that the Board’s previous discussions on the proposed amendments to IFRIC 14 were based on too narrow a reading of the requirements of IFRIC 14.11 and that the Board had lost sight of the overarching objective of determining whether an entity has an unconditional right to a refund. Accordingly, she agreed with exploring the issue further.

Annual Improvements to IFRS Standards 2015-2017 Cycle – Due Process Steps – Agenda Paper 12C

Background

The Staff sought the Board’s permission to ballot the Annual Improvements to IFRS Standards 2015-2017 Cycle. This Annual Improvements Cycle would include the following three amendments:

  • Amendments to IFRS 3 and IFRS 11—The amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, it remeasures previously held interests in that business. The amendments to IFRS 11 clarify that when an entity obtains joint control of a business that is a joint operation, the entity does not remeasure previously held interests in that business.
  • Amendments to IAS 12—The amendments clarify that all income tax consequences of dividends (i.e. distribution of profits) should be recognised in profit or loss, regardless of how the tax arises.
  • Amendments to IAS 23—The amendments clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalisation rate on general borrowings.

The Amendments to IFRS 3 and IFRS 11 were originally included in Exposure Draft Definition of a Business and Accounting for Previously Held Interests. However, the Staff believed that these amendments meet the criteria for annual improvements and suggested finalising them as such.

Furthermore, the Exposure Draft Annual Improvements 2015-2017 Cycle included amendments to IAS 28 regarding long-term interests in an associate or joint venture. Those amendments had been finalised separately as a narrow-scope amendment to IAS 28.

Staff recommendation

The Staff recommended that the Board finalise the Annual Improvements to IFRS Standards 2015-2017 Cycle without re-exposure, effective for annual periods beginning on or after 1 January 2019 with earlier application permitted.

Next steps

The Staff plan to begin the balloting process in October 2017 and expect to issue the Annual Improvements in December 2017.

Discussion

The Board unanimously approved the Staff recommendation without discussion.

Correction list for hyphenation

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