Primary Financial Statements – Agenda Paper 21

Background

The Board is exploring potential changes to the structure and content of the primary financial statements, with a focus on the statement(s) of financial performance. A DP or ED is expected in 2019.

At this meeting the Board discussed clarifying the requirements for management performance measures (MPMs) and requirements for management-defined adjusted earnings per share (adjusted EPS) in the financial statements.

Clarifying requirements for management performance measures (MPMs) – AP21A

Staff analysis

This Agenda Paper seeks the Board’s views on clarifying the requirements for management performance measures (MPMs).

At the February 2018 Board meeting, the Board asked the staff to develop a simplified approach for MPMs for a future meeting. Board were concerned that:

Because additional subtotals presented by entities in accordance with paragraphs 85-85A of IAS 1 are required by IFRS, rather than refer to ‘subtotals or totals required in IFRS Standards for the statement(s) of financial performance’ for the purposes of the MPM requirements it would be better to specify exact subtotals or totals (for example, by making reference to a list of specific subtotals that are required in IFRS Standards).

The Board could appear to be ‘elevating’ MPMs (ie requiring more MPMs to be presented as subtotals compared to today) if specific requirements for MPMs to be presented as subtotals were introduced. Some Board members wondered whether paragraphs 85-85A of IAS 1 are well understood, are being applied well in practice or might benefit from clarification/improvement.

The focus should be on requiring the reconciliation described in paragraph 8(c), rather than including more MPM subtotals in the statement(s) of financial performance and that the MPM reconciliation should be presented in the notes.

They need to address a scenario when an entity identifies more than one MPM.

The requirements appear to mandate that all entities identify a MPM, even if they don’t currently communicate any to users. An entity might communicate only subtotals or totals specifically listed in IFRS Standards, for example profit.

The requirements should clarify that entities should use their own labels for their MPM(s), for example ‘recurring profit’, rather than using the label ‘MPM’.

Staff recommendations

The staff are recommending that the Board modify the tentative decisions reached in December 2017 and January 2018 and propose that:

(a) All entities be required to identify a measure (or measures) of profit or comprehensive income that is (are) relevant to an understanding of the entity’s financial performance and, in the view of management, best communicate(s) to users the financial performance of the entity.

(b) If the identified measure is a subtotal or total required by paragraph 81A of IAS 1 the entity should identify this measure and explain why it best communicates management’s view of the entity’s financial performance.

(c) If the identified measure is not a subtotal or total required by paragraph 81A of IAS 1 the entity must:

(i) Provide a reconciliation in the notes between that measure and the most directly comparable subtotal or total required by paragraph 81A of IAS 1;

(ii) Ensure that the measure is labelled in a clear and understandable way so it is not misleading;

(iii) Explain how the measure provides relevant information about an entity’s financial performance; and

(iv) Make a statement that the measure provides management’s view of the entity’s financial performance and is not necessarily comparable with other entities.

Although there are no specific constraints on how management determines the measure, it must relevant to an understanding of the entity’s financial performance.

Paragraph 81A of IAS 1 would include the existing subtotals in that paragraph and the proposed new subtotals developed as part of this project.

The staff recommendation is that the MPM reconciliation be disclosed in the notes, rather than below the statement(s) of financial performance (consistent with the Board’s tentative decision at its January 2018 meeting). At the March 2018 CMAC meeting, some CMAC members said that it is important for the MPM reconciliation to be easy to locate. Some CMAC members said that it would be easier for users to locate the MPM reconciliation if it is provided below the statement(s) of financial performance, rather than in the notes.

The staff are therefore asking a follow-up question as to whether, in light of the feedback received by CMAC members and also the evolution of the proposals, the Board wishes to revisit its tentative decision to require the MPM reconciliation to be disclosed in the notes to the financial statements rather than be provided below the statement(s) of financial performance.

Board discussion

Several Board members raised concerns that in their current form the proposals would require entities to create and disclose MPMs if they are not already doing so. Further concerns were raised in relation to ensuring that the MPMs are not presented as being equivalent, or superior, to IFRS measures. Most Board considered that these concerns could be addressed through redrafting.

It was suggested by one Board member that the proposal could include an upfront expectation that the MPM will ordinarily be an IFRS measure rather than a non-IFRS measure. In this context the Chairman commented that the phrase ‘best communicates’ in terms of selecting an MPM would encourage entities to use non-IFRS measures.

One Board member commented that the Appendix which appears to state that MPMs should only be changed if IFRS standards change. Staff clarified that this is no longer a proposal and whilst MPMs are expected to be consistent year on year they should be updated if they are not aligned to the perspective of management. The Board agreed with this.

The columnar format, which has previously been rejected by the Board, was discussed as the proposals suggest that this could be used. Staff were asked to clarify the use of this format and a Board member commented that its use is in decline but still being used for a change in year end.

In relation to IAS1.85, one Board member asked if the staff had considered deleting this paragraph given that it allows MPMs to be on the face of the financial statements which may give them undue prominence compared to those that are only disclosed in the notes. The member suggested that IAS1.85A could be strengthened to produce an enriched note on MPMs. Staff noted that they have not considered this but may look at it separately. The Vice Chair added later in the meeting that nothing in the proposals was expected to change paragraph 85 but in parallel to consultations for this project staff could seek feedback on the effectiveness of paragraph 85.

A Board member suggested that the information relating to MPMs should be presented in a consistent location across all financial statements and suggested a specific note e.g. “Note 2”. Whilst some MPMs will be on the face, as they fall within paragraph 85 and within the structure of Statement of Profit and Loss, all MPMs could be required to be included within this note with equal prominence.

One Board member suggested that the MPMs could be flagged on the face of the financial statements. Another member strongly disagreed with this suggestion but asked if IAS1.81 could be updated to include additional subtotals such as EBITDA or PBT.

A Board member questioned whether the word ‘relevant’ was required in section 1.1 and it was agreed by some Board members that this was not required given that the measure must be such that it best communicates the financial performance of the entity. Furthermore, paragraph 85 already acts as a constraint and the removal of the word ‘relevant’ could prevent unnecessary discussions in practice.

Board decisions

In relation to the main recommendation, the Board unanimously supported the staff recommendation, subject to comments on wording updates from the Board.

In relation to the follow up question, 13 members voted to not reconsider the location of MPM disclosures.

Management-defined adjusted earnings per share (adjusted EPS) – AP21B

Staff analysis

The staff say that users have told them that MPMs can provide useful information about how management views and drives the entity’s financial performance, and about the persistence or sustainability of an entity’s financial performance. For the same reasons, some users find management’s adjusted EPS useful for their analysis. But some users say that many entities currently present adjusted EPS outside the financial statements with little or no explanation and they would prefer that they be required to be presented in the financial statements and subject to appropriate IFRS requirements/disclosures.

Other users expressed concern about giving adjusted EPS (and other ‘non-IFRS’ information) undue prominence by including these measures in the financial statements. Some users say it is difficult to see whether an entity’s MPM and adjusted EPS are calculated consistently.

The staff states that many users want to make further adjustments to make that measure suitable for their analysis and for comparison with other entities. Some users have said that they need information about the effect of tax and NCI on each of the adjustments made in determining adjusted EPS. If users are given information about the effect of tax and NCI on the share-based payment expenses, they can calculate their own EPS measure.

Staff recommendations

The staff are recommending that:

(a) If an entity identifies a management performance measure (MPM), it is required to:

(i) disclose an adjusted EPS that is calculated consistently with that MPM. To calculate the numerator of adjusted EPS an entity must make only the following adjustments to the MPM:

1. Add/deduct all income/expenses between:

a. the most directly comparable subtotal/total required by paragraph 81A of IAS 1 under our proposals in Agenda Paper 21A; and

b. profit or loss attributable to ordinary equity holders of the parent entity (ie the numerator of EPS).

2. If the MPM is a pre-tax and/or pre-NCI measure, make further adjustments for tax and/or NCI effects for the differences between the MPM and the most directly comparable subtotal/total required by paragraph 81A of IAS 1.

(ii) disclose the effect of tax and NCI separately for each of the differences between the numerator of adjusted EPS and the numerator of EPS.

(b) If an entity identifies more than one MPM, this requirement would apply to each MPM.

(c) An entity be prohibited from presenting adjusted EPS in the statement(s) of financial performance.

(d) An entity be prohibited from disclosing any other adjusted EPS.

Board discussion

One Board member did not agree with the staff recommendation to require EPS to be calculated for MPMs. They considered it unreasonable to require entities to calculate an EPS figure when management were not using the MPMs in that way and the cost of doing so would outweigh the benefits. Another Board member agreed with the recommendation given that the MPM would otherwise hang in isolation rather than carrying through to EPS in a way that would be useful for users. They noted that as a sell-side user one is ordinarily guided by the management defined EPS number, however, as a buy-side user you would want the ability to disagree with management’s adjustments and to understand the affect they have on EPS.

It was noted that in practice a large number of entities do not disclose their MPMs through to EPS due to the significant cost in doing so and it would be for the Board to demonstrate that requiring this would be of significant benefit to users.

One Board member suggested that using MPMs should be an alternative way of looking at a business and in doing so management should be able to quantify the EPS impact even though this would require a more disciplined approach.

One Board member suggested that there were areas that would need to be clarified in the illustrative disclosures, such as when shares only vest if a profit is made and a profit is made only on an adjusted basis, should an entity assume these had vested in their adjusted EPS calculation?

The Board agreed that multiple EPS measures should not be required and are not sought by users as it is too confusing.

One Board member was concerned that the discussion was centred on adjustments that exclude transactions but did not include issues around tailor-made accounting policies such as accelerated revenue which could cause difficulties in calculating the tax impact in particular.

A Board member suggested, as an alternative, that the numerator of adjusted EPS could be reconciled back to the MPM to give users further information without the calculation difficulties in the current proposals.

Board decisions

The Board approved all of the staff recommendations: Eight members supported (a)(i), subject to consultation in a discussion paper. Ten members supported (a)(ii). All members supported (b) and (c) and no members supported (d). 

Business Combinations under Common Control – Agenda Paper 23

Background

The Board is examining how companies should account for combinations of businesses under common control, which are currently outside the scope of IFRS 3. A DP is expected in the first half of 2019.

The purpose of this session was to provide an update to the Board on the approaches being developed by the staff for BCUCC transactions.  It is an education session, which means that Board members are not being asked to make any decisions.

Staff analysis

The Board has previously decided to use the acquisition method in IFRS 3 as the starting point in developing proposals for transactions within the scope of the BCUCC project. (See the February 2018 meeting summary).

The staff use a simple scenario of a parent with two subsidiaries. The parent does not own all of the shares in one of the subsidiaries, which means that there is a non-controlling interest in the consolidated financial statements. The subsidiary without the non-controlling interest is “acquired” by the subsidiary in which there is a non-controlling interest so that the group comprises the parent, the subsidiary with the NCI and its subsidiary.

The staff ask two questions. What information about the transaction is useful for the holders of the NCI, and is there anything special about a BCUCC that needs to be reflected in the financial reporting?

Information for the NCI

In this scenario the resources of the NCI are affected because the entity with the NCI has acquired another entity. The staff conclude that the financial reporting should “use the fair values exchanged” and reflect the transaction by measuring the acquired subsidiary’s identifiable net assets and the consideration transferred at fair value.

Anything special about a BCUCC?

The staff assessment is that that a BCUCC transaction could include a transaction with owners acting in their capacity as owners (i.e. a contribution to, or a distribution from, a subsidiary).

The staff look at a range of exchange “values”, comparing the consideration transferred with the fair value acquired. If the fair value of the consideration is higher than the fair value of the business acquired it would be a distribution from the acquirer. If the fair value of the business is higher than the consideration it would be a contribution to the acquirer (and therefore not a bargain purchase). Any difference between the fair value of the net assets and the fair value of the business would be recognised as goodwill. The staff describe this as the full fair vale approach.

They also consider whether the transaction should be bounded by the consideration transferred, in which case the contribution (bargain purchase) would not be recognised. They call this the ceiling approach.

Other transactions

The staff will look at transactions between wholly owned entities with external debt and transfers of a business to a Newco at future sessions. 

Board discussion

One Board member agreed with the thinking of the ‘gap’ as either a contribution or distribution and that the focus should be on the needs of NCI for information.

Several Board members agreed that there was a high risk of measurement uncertainty in these types of transactions. A key difference to IFRS 3 is that in that standard the fair value of the consideration and business are assumed to be the same whereas in a BCUCC transaction this will not always align. The transaction is assumed to be undertaken at arms-length and IFRS 3 also gives primacy to the consideration transferred. In practice it is difficult to measure the value of the business acquired.

One Board member suggested that the same accounting approach should be used for all BCUCC transactions as, in practice, it is too difficult to distinguish between transactions and draw a line. Staff reminded the Board that there is already a line to be drawn between accounting under IFRS 3 using acquisition method and accounting for BCUCC using an alternative method. The question they are asking is where the line should be drawn. Staff also noted that they have found a way to reduce measurement uncertainty and will present this to the Board in the future.

One Board member reflected that in a business combination the consideration normally reflects the value of the business plus synergies from the combination. In this case should synergies be considered separately given that the synergy already exists and will be encouraged by the parent and known to NCI? Staff commented that synergies will be considered further in a future board meeting.

One Board member questioned whether it was a realistic scenario that fair value of the business will be higher than the consideration paid as this is prohibited in certain jurisdictions. However, another Board member said this is not true in all jurisdictions, adding that the valuation should be a careful exercise to ensure that an overpayment is not reflected when in reality the business value includes both the business and synergies.

Another Board member suggested that question 2, on whether there is anything different in BCUCC transactions compared to other transactions, should be considered before question 1 on whether information is useful for NCI. In considering the questions in this order the first objective would be to determine whether the transaction contains a contribution or distribution, as there is a common control relationship, and then question how to account for that.

One Board member asked whether the needs of the NCI are different to those of the controlling party as these are not distinguished in the Conceptual Framework. Staff clarified that there are many primary users and they were only considering NCI as the parent has a different perspective on the transaction to NCI. From a parent’s perspective this would not be an acquisition but a moving of an entity to a different pocket. Furthermore, the parent has access to additional information.

The Board members thought the project was heading in the right direction and that it would be important to streamline the advantages and disadvantages of the full fair value and ceiling methods.

Staff concluded that the key takeaways were:

• Overall support for the general direction;
• Measurement uncertainty and how to ensure synergies are taken account of;
• Order of analysis, consideration of whether there anything special about a BCUCC that needs to be reflected in the financial reporting and then what is useful information for the holders of the NCI; and
• Consideration of all primary users.

Board decisions

The Board was not asked to make any decisions.

The Board continued its discussions on the goodwill and impairment research project. At this meeting the Board was asked whether it wants to change the requirement to recognise all identifiable assets acquired in a business combination separately from goodwill and whether the next stage in the project should be to issue a Discussion Paper or an Exposure Draft.

Recognising identifiable intangible assets acquired in a business combination– Agenda Paper 18A

Staff analysis

IFRS 3 requires an acquirer to recognise, separately from goodwill, all identifiable intangible assets acquired in a business combination. An intangible asset is identifiable if it (a) is capable of being separated or divided from the acquiree and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability (the separability criterion); or (b) arises from contractual or other legal rights (the contractual-legal criterion). The previous version of IFRS 3 included two additional conditions for recognition of an intangible asset—the fair value of the asset can be measured reliably and it is probable that any associated future economic benefits would flow to the acquirer. When revising IFRS 3 in 2008, the Board deleted the two additional conditions because the Board concluded that those conditions will always be met in a business combination.

The staff paper summarises the relevant feedback from the PIR and undertaken since then.

Investor feedback was mixed. Some supported the current requirements because it helps them understand what the entity has acquired and the sources of potential future cash flows; has predictive value; encourages an entity to analyse the acquisitions; and permits comparison of accounting estimates made by different entities. Other investors do not think that recognising all identifiable assets and liabilities acquired and measuring them at fair value is helpful. But that view seems to apply to all components of the business combination, not just intangible assets. They said they have concerns about the fair values attributed to them, ignore amortisation do not like differences between internally generated and acquired assets.

The staff assessment is that the main concerns investors have is the lack of information about the disaggregation of amortisation and the carrying amount of assets acquired in past business combinations.

Auditors and preparers had similar views, although the reasons for holding those views were not clear. The staff assessment is that these stakeholders are more concerned about the costs of identifying and measuring these assets.

The UK FRC undertook some work and suggested that it would be helpful to distinguish between wasting and organically-replaced intangible assets. They would only separate wasting assets from goodwill. ESMA published a report that identified customer-related intangible assets as the most prevalent. In 2009 the IFRS Interpretations Committee recommended that the Board remove the distinction between contractual and non-contractual customer relationships.

Staff recommendation

The staff recommend that the Board should pursue allowing indefinite-lived intangible assets acquired in a business combination to be included within goodwill, if those assets are not already generating cash inflows from continuing use that are largely independent of those from other assets or groups of assets.

To address the potential loss of information to investors, some additional qualitative disclosures should be required.

Board discussion

One Board member agreed with the proposals as they exclude finite life intangibles and so there is no effect on consequential measurement. They also note that this would work with the headroom approach because it would reduce the burden of the rebuttable presumption. Another Board member supported the view that the treatment in the balance sheet and income statement is effectively the same and as such there is little value in splitting goodwill and indefinite life intangibles.

Another Board member asked for clarification on what motivated the proposal. The staff said that feedback from auditors and preparers suggested that there was a high cost to identifying and measuring intangible assets. The proposed approach could reduce the cost. It was noted by the Board that the GPF did not consider costs to be burdensome and that this could be a result of differences in views when the PIR was undertaken 5 years ago. Those concerns may have reduced since then.  

The Chairman asked if the impairment problem is exacerbated if indefinite-life intangibles are included within goodwill. This issue was debated widely among the board members and the Vice Chair commented that by consolidating the two figures the goodwill number would be muddied and the ability to impair becomes more challenging. Given this challenge the Board would need to be convinced further on the benefit for preparers and the users. Staff added that the challenge in relation to impairment would be the ability to allocate goodwill to separate CGUs rather than the mechanics of the IAS 36 impairment test.

In relation to the benefits of reducing cost and complexity for prepares the Vice Chair commented that it would also result in a loss of information and granular analysis for users and several Board members stated that there did not appear to be sufficient evidence that there was a cost burden on preparers.

One member did not support the proposal and suggested instead support for allowing or requiring to be included in goodwill identifiable intangible assets that would not have been recognised in financial statements if generated internally. This would apply to both indefinite and finite lived intangibles. This is on the basis that analysts do not consider the value of intangible assets on the balance sheet and that there is inconsistency of recognition between internally generated intangibles and those that are acquired. Another Board member stated that this issue of mismatching should be considered as a separate issue as it is considering acquisition accounting more broadly.

Another Board member was not in favour of the proposal as it appears to be against the trend of what the market wants to be recognised. Furthermore, the recognition of intangibles increases the accountability for acquisitions as it is clearer to see what has been acquired.

One Board member disagreed with the proposal on the basis that IAS 38 sets out clear criteria for recognition of intangibles and if these criteria are met then an intangible should be recognised and not included in goodwill. Any changes would need a sound reason as they may not be in line with IAS38.

One Board member noted that information in relation to separated intangibles in the annual report was useful and staff could consider how to make this more useful. The proposal increases what is in the black box of goodwill.

In summary staff are to consider whether there is sufficient evidence of a cost burden on preparers and if that outweighs the loss of information for users. Additionally, they are to consider whether the amalgamation of goodwill and indefinite life intangibles will exacerbate and make more difficult the ability to impair goodwill.

Board decisions

The Board did not support the proposal, with 10 members voting against the recommendation and only 4 in favour.

Next stage in the research project– Agenda Paper 18B

Staff analysis

The Board has decided:

• (a) not to reintroduce amortisation of goodwill;
• (b) to consider improving the application of IAS 36 by:
  1. making impairment of goodwill more likely by adjusting for pre-acquisition “headroom” when assessing goodwill.
  2. removing the requirement to exclude from the calculation of value in use those cash flows that would result from a future restructuring or from a future enhancement.
  3. removing the explicit requirement to use pre-tax inputs in calculating value in use, and to disclose pre-tax discount rates used. Instead, an entity would be required to use internally consistent assumptions about cash flows and discount rates, and to disclose the discount rate(s) actually used.
• (c) to consider introducing requirements for an entity to disclose:
  1. each year, information about the headroom in a cash-generating unit (or groups of units) to which goodwill is allocated for impairment testing.
  2. each year, a breakdown of goodwill by past business combination, explaining why the carrying amount of goodwill is recoverable.
  3. the reasons for paying a premium that exceeds the value of the net identifiable assets acquired in a business combination, key assumptions or targets supporting the purchase consideration and, then subsequently each year, a comparison of actual performance with those assumptions or targets.
• (d) at this meeting, the Board will consider whether some identifiable intangible assets acquired in a business combination could be allowed to be included within acquired goodwill.

Staff recommendation

The staff are recommending that the Board issue:

• (a) an Exposure Draft proposing amendments to IAS 36 to:
  1. remove the explicit requirement to use pre-tax inputs in calculating value in use, and to disclose pre-tax discount rates used; and
  2. instead, require an entity to use internally consistent assumptions about cash flows and discount rates, and to disclose the discount rate(s) actually used.
• (b) a Discussion Paper inviting comments on the Board’s preliminary views on all other matters considered in the research project.

Board discussion

There were mixed views from the Board in relation to whether a discussion paper was appropriate for the other matters considered in the project. Several Board members considered that a focused request for information provide a better way of reaching a more informed decision before a discussion paper is released. This was on the basis that there have already been a lot of negative comments about the headroom approach from the outreach work done so far which could not all be blamed on a lack of understanding by those providing feedback. One Board member commented that being able to explain the approach may help and should be combined with a simplification of the value-in-use calculation.

It was also noted by a Board member that a discussion paper would not be appropriate as they are not in a position to have sufficiently clearly articulated views and there has not been sufficient consideration of the negative comments already received. Those providing feedback may be frustrated that they have not been heard.

The Board discussed the headroom approach and one member suggested changing the name. Another member supported a discussion paper that covered all of the approaches to impairment of goodwill.

Several Board members agreed with recommendation (a) that an exposure draft should be proposed and could include other areas of the project such as possible additional disclosure requirements. This would require a two phase approach but would enable the items that are easy wins to be combined in to a shorter term project.

One member strongly objected to the inclusion of the exposure draft alongside the agriculture amendment as part of annual improvements. This is a deliberate decision to reverse a previous approach and therefore should stand alone. It was also recommended that rather than releasing a separate exposure draft all of the proposals should wait to go out together as a package.

The Chairman proposed showing a measure in the financial statements of equity less goodwill which would reflect the real equity position if cashflows on which equity relies do not materialise.

Board decisions

The Chair recommended that the staff develop a new paper for the Board to consider based on their discussions. All Board members supported this recommendation.  

Dynamic Risk Management [Macro-hedging] – Agenda Paper 4

Background

When the IASB issued IFRS 9, it did not replace the requirements in IAS 39 for portfolio fair value hedge accounting for interest rate risk (often referred to as the ‘macro hedge accounting’ requirements). The Board has been assessing how to replace those requirements. A Discussion Paper was issued in April 2014. In the light of the comments received, the IASB decided to develop a second discussion paper, which it expects to publish in the first half of 2019.

Summary of discussions to date – AP4A

This paper provides details of the Board’s discussions to date and is for information only. See the March IAS Plus meeting summary.

Target Profile: Designation and Qualifying Criteria– AP4B

This paper sets out qualifying criteria for the financial liabilities used to determine an entity’s target profile. It also discusses designation and de-designation of financial liabilities within the Dynamic Risk Management (DRM) model and corresponding documentation requirements.

Staff preliminary views

The staff set out their preliminary views:

(a) Financial liabilities designated at fair value through profit or loss should not be eligible for the purpose of determining an entity’s target profile.

(b) An entity’s risk management policies and procedures will ultimately define when fixed rate financial liabilities with a demand feature are treated as core demand deposits within the DRM accounting model. However, core demand deposits must be financial liabilities with a demand feature and must not re-price with changes in market interest rates over time. Additionally, qualifying criteria focused on the estimation of the core portion of a demand deposit portfolio could be arbitrary and potentially inconsistent with the objective of the DRM model to not govern, but reflect the impact of risk management activities in financial reporting. Since the aim of the model is to faithfully represent, in the financial statements, the effect of DRM activities undertaken by an entity, the effects of when an entity inappropriately treats deposits as core demand deposits should be captured in performance assessment.

(c) Designation of financial liabilities and future transactions should occur on a portfolio basis. This is consistent with the asset profile designation mechanics agreed at the February 2018 Board meeting, which in turn is consistent with one of the goals of the DRM accounting model to reduce operational complexities associated with the application of the current hedge accounting guidance to dynamic portfolios. Designation of financial liabilities on a portfolio basis would allow for a faithful representation of DRM in the financial statements. In particular, this would align the designation mechanics with the way risk management considers interest rate risk.

(d) The DRM accounting model should allow for designation of a percentage of a portfolio of existing financial liabilities and future refinancing, provided that:

(i) the designated percentage is consistently applied to all expected cash flows within the portfolio;

(ii) the same percentage of a portfolio of financial liabilities is applied to a related portfolio of future refinancing; and

(iii) designation of a percentage of a portfolio is consistent with an entity’s risk management strategy.

Additionally, an entity can designate a proportion of growth in the target profile provided the designated percentage is consistent with the risk management strategy, and the designated amount is the same as the amount of growth designated as part of the asset profile.

(e) Financial liabilities and future transactions should be de-designated from the target profile if the financial liabilities are derecognised in accordance with IFRS 9 or the qualifying criteria are no longer met. In addition, the DRM model should not allow voluntary de-designation of portfolios within the target profile when the risk management objective for a particular portfolio of financial liabilities remains the same and all other qualifying criteria are still met.

(f) Formal documentation of items designated within the target profile should be required. In particular, an entity should document the following upon designation:

(i) The portfolio(s) of financial liabilities and amounts designated under the DRM accounting model. The level of detail of the documentation should provide sufficient specificity such that when new financial liabilities are originated it is clear to which portfolio they should be allocated;

(ii) A description of the methodology and key assumptions used by the entity to estimate the core and non-core portions of its demand deposit portfolio;

(iii) The methodology used by the entity to determine the amount of future transactions and how designation as part of the target profile is consistent with risk management policies and procedures. For example, if the entity designates future transactions related to refinancing and growth, the entity should document the methodology used to forecast the amount considered highly probable and how the designated level of future transactions is consistent with the entity’s risk management strategy; and

(iv) Evidence supporting the high probability of future transactions occurring. This is consistent with the documentation requirement applicable to the asset profile when an entity would prepare a cash flow maturity schedule, including the effects of the resetting of interest rates for financial assets and liabilities, showing that there are sufficient levels of expected cash flows to establish that the future transactions are highly probable to occur. This schedule can be supported by past practice of reinvesting cash inflows and refinancing cash outflows as well as observable data used to estimate the expected growth of a designated portfolio. In addition, the time period during which the portfolio of future transactions is expected to occur should be documented within a reasonably specific and generally narrow range of time from a most probable date, as a basis for assessing performance.

The documentation should be supported by an entity’s risk management procedures and objectives. Changes in documentation should be infrequent and consistent with the entity’s risk management practices.

Board discussion

Preliminary View (a)

The Board members agreed that there must be qualifying criteria. One member found the terms ‘forecast transactions’ and ‘firm commitment’ confusing as one was based on probability and one not.

One Board member noted that a hedge cannot be eligible if already designated for interest rate risk, however, it could be if designated for foreign currency risk and this should be considered more. Furthermore, when a liability in the past has been designated as FVTPL, on transition this can be amended to amortised cost so the liability can fall under these criteria but own credit risk cannot be recycled under IFRS 9. This should be considered further by Staff.

The Vice-Chair and other Board members questioned whether liabilities that have a variable rate and an interest swap to fix the interest could be included. Staff commented that they did not think so given that the risk should not be managed on both an individual and portfolio basis although the issue was more practical than conceptual. The Vice-Chair asked Staff to confirm this approach.

Preliminary View (b)

One Board member agreed with the proposal and agreed that if an entity treats a deposit as core it should be captured in the performance assessment. Additionally, there is a definition of a demand deposit but it would be helpful to also have principle based qualifying criteria to determine what is ‘core’. Another Board member and the Vice Chair agreed that it is important to consider what is core from management’s perspective based on future economics and that this should be based on available and supportable information and this should be included in the proposal.

The Chair added that ordinarily what is core is based on contractual rights and it would need to be explicit that this is based on future risk management.

Some Board members said that in their jurisdictions there were demand deposits available that are repriced that would not currently fall within the definition but are considered a core component. Staff agreed to consider how to address this issue.

Preliminary View (c)

One Board member commented that they could not see any alternatives to the portfolio basis. Another added that financial liabilities and future transactions, as at paragraph 37, should have similar risk characteristics if in the same portfolio.

One Board member reflected that they are happy with the proposals but find it hard to understand, prior to the performance discussion at a future meeting, the extent to which a target profile is a meaningful benchmark of the extent to which you achieve a goal. Additionally, there should be a further discussion on whether these proposals will be mandatory or elective, however, once there are designations and qualifying criteria they are effectively elective as an entity will be able to deliberately fail a test in practice.

The Vice Chair added that the comments on rebalancing in the paper do not appear to reflect how this is intended to work under IFRS 9 which is a very narrow concept rather than for a change in size of the overall group.

Preliminary View (d)

One Board member clarified that where in the example the liabilities had been split in to 2 parts, banking and equity, the words ‘designating 50% of liabilities’ meant designating 100% of the in scope liabilities.

Other Board members clarified that the risk management strategy is a high level concept that encompasses the wider risk management policies and procedures.

Board decisions

The Board supported all of the preliminary views unanimously except for (b) which had one dissenting vote.

The Dynamic Nature of Portfolios – AP4C

Staff analysis

This paper demonstrates how the dynamic nature of portfolios affects the asset and target profiles, and their interaction, on the basis of the DRM accounting model as it has been developed by the Board.

Staff recommendations

This paper does not ask for any additional tentative decisions from the Board.

Board discussion

One Board member commented that it is important to draw out that the change in fair value will be split into the interest driver element, recognised as interest, and the remainder which will be recognised as a fair value movement. This must be explicit as it results in an amount in interest income/expense that is not a receivable or payable.

Furthermore, it is important to consider other drivers in change of value of derivatives. This has not yet been discussed by the Board and only interest rate swaps have so far been considered. Complex instruments should be considered, as it may not be appropriate to have all fair value movements go through OCI except for the interest element.

One Board member questioned the rolling strategy in scenario B when the DRM continues rather than has a new designation and when this would be appropriate. Staff commented that in this situation they had distinguished and separated a portfolio with a continuous nature as opposed to one with a finite nature.

One Board member questioned the use of the word ‘consider’ in paragraph 55 (“the DRM accounting model must consider the difference in contractual terms”) which staff clarified meant that the difference should be reflected. Furthermore, they discussed the wording in paragraph 39 (“The allocations to the respective time buckets within the asset and target profile do not reflect when the transactions are expected to occur. Rather they reflect the expected impact on the asset profile, and the objective the entity wants to achieve”). Staff clarified that this related to growth and repricing not to when it will be originated.

One Board member commented that the layering in the model may not make it less onerous on preparers and this will be discussed further in a future meeting when performance is discussed.

Staff plan to deliver a paper relating to derivatives on basis swaps and then on performance in the future.

Disclosure Initiative: Definition of Material – Agenda Paper 11

Background         

The IASB’s Disclosure Initiative is focused on identifying ways to ensure that financial statements provide information that is relevant to investors that is communicated effectively. The Board thinks that the main problem is that preparers have difficulty in applying judgment when deciding what information to include in, or exclude from, the financial statements and the most effective way to organise and communicate it.

In 2017 the IASB published a proposal to amend the definition of material in IAS 1 and IAS 8. The comment period closed in January 2018.

At this meeting the Board discussed a general summary of the comments received on the exposure draft to amend the definition of material in IAS 1 and IAS 8. The Board was not asked to make any decisions.

Comment letter feedback—Exposure Draft: Definition of Material – AP11A

Staff analysis

Almost all respondents supported the proposed amendments to IAS 1 and IAS 8. However, some concerns about terminology were expressed.

Support for the proposals

Almost all respondents supported aligning the definition of material across IFRS publications and emphasising that materiality decisions require the exercise of judgement.

Some respondents said that when the Board aligns the definitions it should use the term ‘general purpose financial statements’, and not general purpose financial reports’ as it does in the Conceptual Framework.

Some respondents did not support the proposal to replace ‘users’ with ‘primary users’, because this is too narrow and financial statements should provide information to a wider range of users such as regulators and internal stakeholders. Other respondents supported the change, because ‘users’ is too broad. Some respondents suggested that a reference to the definition of ‘primary users’ in the Conceptual Framework could be made instead of including a definition in the Standard.

Replacing the threshold ‘could influence’ with ‘could reasonably be expected to influence’

Many respondents agreed with the proposed replacement of ‘could influence’ with ‘could reasonably be expected to influence’, as this might address concerns that the expression ‘could influence’ is too broad. Some other respondents thought that this term might be interpreted differently, across different jurisdictions, and that this may result in inconsistencies in how the definition of material is understood and applied in practice if not further explained by the Board.

Incorporating ‘obscuring information’ into the definition of material

Some respondents were concerned that the proposals imply that the inclusion of immaterial information in financial statements automatically results in material information being obscured and that it is unclear how to judge whether material information is obscured by immaterial information resulting in inconsistent application.

A few respondents thought that ‘obscuring’ is a subjective and complex concept that might make it difficult to determine if information is material, and to assess compliance with the definition of material. The example was not always thought helpful as it defines obscuring by referring to obscuring and is consequently too vague to provide helpful application guidance. The Board should provide a clearer definition of ‘obscuring’ and supplement this with illustrative examples and application guidance. A few respondents thought that the Board should consider removing the term ‘obscuring’ altogether and define material information more directly because the term ‘obscuring’ relates to the principles of faithful representation or communication of information, and not to whether that information is material.

A few respondents added that the meaning of the terms ‘omitting’ and ‘misstating’ are also unclear and suggested that the Board provide further explanatory paragraphs for each of these terms as well.

Location of the definition of material and explanatory paragraphs

Many respondents thought that the definition of material should not be repeated in multiple locations across the Standards but only fully defined in IAS 1 which would avoid repetition and reduce the risk of possible inconsistencies arising as IFRS Standards are revised.

Amendments to the Materiality Practice Statement and the revised Conceptual Framework

Respondents agreed with aligning the definition of material across all published IFRS documents. It was suggested that it would be useful to have the Conceptual Framework refer to the Materiality Practice Statement for explanations on how to make materiality judgements and that it would be appropriate to include any explanatory paragraphs about the definition of material in the Conceptual Framework and Materiality Practice Statement instead of in IAS 1 and IAS 8.

Other comments on the proposed amendments

It was suggested that the effective date of the amendments align with the effective date of other changes being made to IAS 8. In addition, entities should not be required to disclose any early application of the proposals as they do not fundamentally change the concept of materiality and there should be no impact on judgements made in the preparation of financial statements.

A few respondents notes that the term ‘material’ is used in different contexts in Standards. It is not always used in relation to the financial statements as a whole, which is the meaning the amendments focus on. It is sometimes used in narrower contexts or with a different purpose in mind.

Some respondents also thought that the Board should review the use of the terms ‘immaterial’ and ‘not material’ throughout IFRS Standards and additional guidance and use one term consistently, or clarify that the terms ‘immaterial’ and ‘not material’ have the same meaning.

A few respondents also suggested that the Board liaise with the International Auditing and Assurance Standards Board (IAASB) as they have a more detailed definition of materiality and that it would be helpful if the two definitions aligned.

Other feedback on the Materiality Practice Statement

Some respondents think the proposed amendments, together with the Materiality Practice Statement, have the potential to help address the behavioural issues identified in the Principles of Disclosure project. They suggested that they might improve entities’ understanding of the concept of materiality and increase their confidence in making materiality judgements.

Staff recommendations

The Board is being asked for feedback, but is not being asked to make any decisions.

Board discussion

The focus of the discussion was around the feedback relating to the word ‘obscuring’ within the definition of material. Board members had mixed views including keeping it in the definition, moving it to the guidance only, or removing it completely, along with the references to omitting and misstating.

A number of Board members proposed keeping the word obscuring either in the definition or in the supporting guidance but recommended that more work be undertaken by staff to understand the feedback and ensure that people will be comfortable with the meaning of the word. One Board member noted that this is not a new concept as it is already included in IAS1.38. Other Board members agreed that the word was required to counter-balance the potential for including too much information within the financial statements. Staff noted that the feedback showed that the issue is elevating it into the definition rather than including it in the guidance. One member said that obscure means to “cloud or conceal” and this is behavior that they want to discourage. So some reference should remain.

Some Board members suggested removing the words obscuring, omitting and misstating from the definition and having a positive, rather than negative definition, albeit they conceded that it was probably too late to amend the definition in this way. It was noted by a Board member that standard setters and accounting firms have asked to move to a positive definition in the past and that there is appetite for this. Staff were asked to analyse the merits of this proposal and whether it is feasible in the framework of this project.

One Board member also commented on the notion of a ‘specific reporting entity’ and asked Staff to clarify further why this is different to a ‘reporting entity’. Additionally they asked if the term ‘general purpose report’ should be used instead of ‘general purpose financial statement’ as the definition should be broader than just the financial statements. Another Board member added that the difference between the two definitions in this regard can clearly be explained given that IAS 1 only relates to financial statements and it can be made clear that this does not impact the definition itself. This could be in the basis for conclusions.

One Board member noted that it was a shame that no users responded to the Exposure Draft but agreed that a sensible approach would be to only include the definition in one place and to cross refer elsewhere.

Board members requested staff to provide analysis of the changes in relation to the new Conceptual Framework as the Exposure Draft in its current form considers the old Conceptual Framework due to timing. No impact is expected but the Board wish to confirm that this is the case.

The staff plan to bring additional papers back in May.

Implementation – Agenda Papers 12, 12A, 12B, 12C

Background

Agenda Papers 12A and 12B are the IFRIC Updates for March and January 2018.

Agenda Paper 12C focuses on a discussion that took place at the March 2018 meeting of the Interpretations Committee. That discussion was motivated by comments received from a number of respondents to the Committee’s tentative agenda decisions on IFRS 15 Revenue from Contracts with Customers, published in September and November 2017. Many respondents raised concerns about the Committee providing technical responses to highly-specific fact patterns submitted.

Board members were asked if they have any comments on, or questions about, the Committee’s discussion at its March 2018 meeting.

Board discussion

The Board members thought that the level of help in the agenda decisions is useful and that it was appropriate to raise the question about the appropriate level of detail and specificity.

One member noted that when the decisions referred to “what the Board had in mind” this should be clearly supportable. The staff clarified that they would only lift words from the Basis of Conclusions and they do not include any views not put forward by the Board or Committee.

One Board member questioned if the agenda decisions have equal authority as the illustrative examples (which are signed off by the Board but not mandated). The Vice Chair confirmed that they were of equal authority. She said they have been through sufficient due process such as being published for comments for 60 days and the call for comments is highlighted on the front page of the website. She went on to say that agenda decisions only applied the guidance in the standard and that the first decision made by the Committee was whether there was sufficient guidance in the standard to answer the question. When questions move into the realm of standard setting this would be passed back to the Board for discussion and approval.