Cover Paper (Agenda Paper 30)

The Board is undertaking its 2019 Comprehensive Review of the IFRS for SMEs Standard. At this meeting the Board will be asked to decide whether the Request for Information (RFI), which will be issued as part of the 2019 Review, should seek views on whether and how the requirements of the IFRS for SMEs Standard should be aligned with Standards that have been issued since the IFRS for SMEs Standard was issued.

The discussions focused on IFRS 3, IFRS 10, IFRS 11, IFRS 15 and IFRIC Interpretations and some of the amendments to IFRS Standards issued after the 2012 Comprehensive Review of the IFRS for SMEs Standard commenced.

New IFRS Standards — IFRS 3 Business Combinations (Agenda Paper 30A)

Staff recommendations

The staff recommends that the RFI on whether and how the IFRS for SMEs Standard could be aligned with IFRS 3 asks:

• whether there is a need to introduce requirements for step acquisitions—supported (13/14 Board members)
• whether those requirements should be aligned with IFRS 3—supported (10/14 Board members)
• whether acquisition-related costs should be recognised as an expense at the time of the acquisition—supported (11/14 Board members)
• whether contingent consideration should be measured on initial recognition at fair value, and whether the undue cost or effort exemption should be extended to apply to the fair value measurement of the contingent consideration—supported (11/14 Board members)

The staff also recommend that the Board clarifies that it does not intend to amend the IFRS for SMEs Standard to:

• introduce the option to measure non-controlling interests (NCIs) at fair value
• remove the reliability of the measurement threshold for recognising intangible assets
• clarify that an assembled workforce must not be recognised
• provide additional guidance in relation to reacquired rights

—All supported (14/14 Board members)

Board Discussion

Board members noted the principle is different between IFRS 3 and Section 19 of the IFRS for SMEs Standard. IFRS 3 is fair value-based while the IFRS for SMEs Standard is cost-based. If the alignment is not to switch entirely to fair value, then it is hard to select parts from IFRS 3 to apply. Other Board members mentioned that they could keep the cost-based approach but possibly make an exemption in a few areas.

Some Board members mentioned the amendment could increase complexity for the entity to apply the Standard. Also, it is possible that the recommended alignment would have limited improvement. Board members mentioned that introducing new accounting standards would be a big change. If aligning creates too many changes then that may be too burdensome.

As regards contingent consideration, one Board member argued that they should keep the cost model because of the uncertainty with regard to the performance of the entity. For example, there is uncertainty about the value of the contingent consideration at the time of acquisition. One Board member mentioned that cash flow and liquidity is more important for SMEs than fair value. However, it would be worth getting feedback from stakeholders.

Board members suggested that equity instruments acquired from non-listed companies need more guidance on how to measure a fair value.

The Board also discussed the need to have the same definition of a business (as recently amended in IFRS 3). The Board would need to try and align the definition of a business between IFRS 3 and the IFRS for SMEs Standard. The Board voted on this aspect and supported to include a discussion in the RFI about the alignment of the definition of a business.

New IFRS Standards — IFRS 10 Consolidated Financial Statements (Agenda Paper 30B)

Staff recommendations

The staff recommends that the Board seeks views in the RFI on whether and how the IFRS for SMEs Standard could be aligned with IFRS 10. The Board should ask in the RFI whether it should:

• align the definition of control—supported (10/14 Board members)
• introduce a simplification whereby when an entity concludes it has power over an investee directly and solely from the voting rights which allow it to control the relevant activities of the investee, it should be permitted to consolidate the investee without having to assess the remaining elements of the definition—supported (12/14 Board members)
• address the accounting for investment entities—supported (11/14 Board members) modified to “seeking views in the RFI on not applying the investment entity exception in the IFRS for SMEs Standard”.

Board Discussion

Most Board members agreed that the IFRS for SMEs Standard should be aligned with IFRS 10.  However, the wording in the recommendation is slightly obscure as a result, and people will reject changes if it is communicated to say that it will not affect many people.

As regards the simplification, Board members agreed that it is a good idea and helpful. However, some of the wording in the paragraph is slightly obscure, for example, the entity is ‘permitted’ to consolidate but it actually means if they do have a majority control they ‘will’ consolidate.

As regards investment entities, Board members hold different views on alignment. Some Board members were concerned that if the investment entities exception is not extended to SMEs, this would add complexity to the boundaries and, also, it would create too much complexity in the IFRS for SMEs Standard. As a result, there should be an exception for investment entities. One Board member mentioned that they have to seek information about the possible exemption. They would not suggest any point of alignment and would not suggest any alignment without the result of the RFI.

New IFRS Standards — IFRS 11 Joint Arrangements (Agenda Paper 30C)

Staff recommendations

The staff recommends that the RFI the IFRS for SMEs Standard should be aligned with IFRS 11. The Board should ask in the RFI whether it should:

• align the definitions of IFRS 11 and Section 15
• retain the accounting policy election in Section 15 (i.e. cost model, equity method or fair value model)
• introduce requirements on how to account for the acquisition of an interest in a joint operation that constitutes a business

Board Discussion

The Board members noted that the change in definition has brought clarification to IFRS 11 but this change had been difficult in implementation. For example, ‘too interpretative in nature’. It seems it is too early to align with IFRS 10 and it is better to wait.

Board members mentioned that one of the main objectives of IFRS 11 was to eliminate proportionate consolidation and it has been difficult to implement; thus, it would be best to retain proportionate consolidation in the IFRS for SMEs Standard until the post-implementation review of IFRS 11 is finished.

Board members noted that IFRS 11 is a very difficult Standard to apply. If it only picks up the definitions and alignments recommended by the staff, it might not have a big effect. The staff should ask in the RFI as to whether this assumption is correct. This would be to gather information rather than proposing changes.

The Board voted to retain the current requirements in the IFRS for SMEs Standard for this particular topic. This was supported by 8 of the 14 Board members.

New IFRS Standards — IFRS 15 Revenue from Contracts with Customers  (Agenda Paper 30D)

Staff recommendations

• The staff recommends that the RFI propose that the IFRS for SMEs Standard be aligned with IFRS 15 using one of the following three alternatives:
  • Alternative 1—modifying Section 23 to remove the clear differences in outcomes between Section 23 and IFRS 15 without a wholesale reworking of Section 23;
  • Alternative 2—fully reworking Section 23 to reflect all IFRS 15 principles and language; and
  • Alternative 3—not amending Section 23 as part of the 2019 Review.
  • Alignment was supported (13/14 Board members)
• The staff prefer Alternative 1—supported (10/14 Board members)
• The staff also recommends that the Board seek views on whether, if it proceeds to an Exposure Draft using either Alternative 1 or Alternative 2, to provide transition relief by permitting an entity to continue its current revenue accounting treatment for any contracts already in progress at the transition date or scheduled to be completed within a set period of the transition date—supported (10/14 Board members)

Board Discussion

One Board member suggested that the Board may want to consider retaining the current requirements at this stage. According to this Board member, IFRS 15 is lower on the priority list. Recognition and measurement applying IFRS 15 has been concentrated in relatively few SMEs.

Board members noted that Alternative 1 is a simple way of solving the issue as it would not be very invasive. Some jurisdictions have a ‘carve out’ in place for construction contracts which could be a solution for the IFRS for SMEs Standard as well to have some alignment.

Board member said that Alternative 3 is difficult from a change management perspective. In essence, it is saying go part way for some time and then make a change later. These are tentative steps.

Board members suggested that if the Board would prefer retaining the current requirements, it would be worth taking advantage of the RFI to inquire as to whether there have been issues with comparability.

The discussion did not mention Alternative 2. 

Amendments to IFRS Standards and IFRIC Interpretations (Agenda Paper 30E)

Staff recommendations

The staff recommends the Board seek views in the RFI on whether and how the IFRS for SMEs Standard could be aligned with new IFRIC Interpretations and recent amendments to IFRS Standards.

The staff recommend the following alignments:

• Amend Section 3 for Definition of Material (Amendments to IAS 1 and IAS 8)
• Amend Section 7 for Disclosure Initiative (Amendments to IAS 7)
• Amend Section 16 for
  • Annual Improvements to IFRS Standards 2011–2013 Cycle (Amendments to IAS 40)
  • Transfers of Investment Property (Amendments to IAS 40)
• Amend Section 17 for Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38)
• Amend Section 18 for Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38)
• Amend Section 26 for
  • Annual Improvements to IFRS Standards 2010–2012 Cycle (Amendments to IFRS 2)
  • Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2)
• Amend Section 29 for
  • IFRIC 23 Uncertainty over Income Tax Treatments
  • Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12)
• Amend Section 34 for Bearer Plants (Amendments to IAS 16 and IAS 41)

All supported (13/14 Board members).

The staff do not recommend any further alignments to new IFRIC Interpretations or recent amendments—supported (13/14 Board members)

Board Discussion

The Chairman recommended that some of the items under the table in the agenda paper (e.g. IFRIC 21 and 22) could have some clarification questions to be asked that need to be separated from other items listed in the table; some of the items in the table would need to be removed due to them not being applicable to SMEs.

IFRIC Update — June 2019 (Agenda Paper 12)

Back­ground

In this session the Board was invited to provide comments or ask questions on the decisions taken at the June 2019 Interpretations Committee meeting.

The Board did not make any decisions in this session.

Board discussion

One of the Board members said that she disagreed with the tentative agenda decision on IFRS 16 (Lease Term and Useful Life of Leasehold Improvements—click here for the tentative agenda decision on the IASB website). Her main concern was that the tentative agenda decision quotes paragraphs from the Basis for Conclusions on IFRS 16 that are unrelated to the issue. She said that an agenda decision should not add to the Standard, which this one does. The staff acknowledged her concerns and said that they would include her points in the comment letter analysis that will be presented to the Committee after the comment period for the tentative agenda decision has expired.

Cover Paper (Agenda Paper 29)

Background

The Exposure Draft Classification of Liabilities published in February 2015 (ED) proposed amendments to the requirements in IAS 1. Those requirements relate to the classification of liabilities as current or non-current.

The papers for this meeting discuss two remaining areas of the ED proposals. The two areas are:

• a) Classification of liabilities with equity-settlement features (a focussed consultation on practical consequences of proposed clarifications).
• b) Proposals for transition and early application.

Liabilities with equity-settlement features (Agenda Paper 29A)

Feedback on practical implications of proposed changes on classification of liabilities with equity settlement features

• Respondents to the ED noted that in some jurisdictions where there is diversity in practice, the clarifications would reduce the diversity. At present some ignore a holder conversion option only if it is separately classified as an equity component of a compound instrument. Others currently ignore any holder conversion option, irrespective of its classification as equity or liability.
• The staff also consulted with members of the IFRS Interpretations Committee. One Committee member noted that the clarifications would result in some entities reclassifying debt from non-current to current which could jeopardise compliance with loan covenants. As such, enough time should be given before the effective date to allow entities to re-negotiate covenants.
• Committee Members noted a gap in the ED for holder conversion options, in particular those recognised as embedded derivatives.
• Two Committee members felt there was no underlying principle behind the amendments. They suggested that without an underlying principle the amendments would not achieve the clarity the Board is aiming for, instead entrenching an existing inconsistency.

In summary there where mixed options on the tentative decisions. One member suggested the Board should consider re-exposing as the extent of comments on the current draft demonstrated that the concepts are generally not well understood.

Staff analysis

Staff analysis focused on responses to comments around the underlying principle of proposed clarifications and the comment around allowing enough time before the effective date to allow affected entities to re-negotiate covenants.

Underlying principle of the proposed amendments (and effect on embedded derivatives)

Staff think that the Board should clarify the requirements by making clear that IAS 1:69(d) applies only to counterparty conversion options recognised separately to the liability as an equity component. Any other feature (such as an embedded derivative) does not affect the classification of the liability as current/non-current.

Effect on covenants

Staff note these concerns and think the Board could address these by giving entities enough time to renegotiate covenants before implementing proposed amendments.

Staff recommendation

IAS 1:69(d) states that terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification as current or non-current.

The staff recommend clarifying in IAS 1 that this statement applies only to a counterparty conversion option recognised separately from the liability as an equity component of a compound financial instrument. Otherwise, extinguishing a liability by transferring equity instruments to the counterparty constitutes settlement of the liability for the purpose of classifying it as current or non-current.

Board discussion

The agenda papers were discussed together. See discussion below.

Transition and early adoption (Agenda Paper 29B)

Feedback on proposed amendments

• Most respondents to the ED agreed with the proposal to require retrospective application. Most stated that retrospective application would not require the use of hindsight as the requirement would be to classify liabilities by reference to the rights as at the reporting date and not management expectation of future events.
• A few respondents questioned whether the benefits of retrospective application would be sufficient to justify the cost and effort. An accounting firm suggested the information obtained by retrospective application might not be relevant, particularly if a liability was reclassified as non-current at the end of the previous period and then settled during the current period (or reclassified as current and then not settled). One group representing users of financial statements said its members would not be very interested in the amounts classified as short-term in prior periods.
• Some respondents disagreed with the analysis in the Basis for Conclusions to the ED. They disagreed that a change in classification resulting from initial application of the proposed amendments would be more in the nature of a change in an accounting estimate than a change in accounting policy.

Staff analysis and conclusion

Comments on the proposed transition arrangements are opinions on the relative costs and benefits of retrospective application. The balance of opinion supports the Board’s view that the benefits would exceed the costs. On this basis, the staff conclude that the Board should require retrospective application.

Staff think a reclassification resulting from the initial application of the proposed amendments would be the result of a change in accounting policy, not a change in accounting estimate, as a change in accounting estimate is defined within IAS 8 as a “an adjustment to the carrying amount of an asset of liability that results from new information or new developments”. The proposed amendments would not lead to any such adjustments.

Staff recommendation

The staff recommend that, as proposed in the ED, and for the reasons set out in the Basis for Conclusions on the ED, the Board should require entities to apply the amendments retrospectively in accordance with IAS 8.

The Board was asked:

1. whether they agree that, as proposed in the ED, the Board should require entities to apply the amendments retrospectively in accordance with IAS 8
2. whether they agree that, as proposed in the ED, the Board should provide no exemptions for entities adopting IFRS Standards for the first time
3. whether they agree that, as proposed in the ED, the Board should permit early application, requiring entities that apply the amendments early to disclose that fact

Board discussion

The agenda papers were discussed together. A number of Board members agreed with the recommendations of the staff. Many Board members noted the principle of ‘less is more’ highlighting that this narrow-scope project should only look to provide further explanation of the current wording of IAS 1 and it is not intended to feed into the discussions on the Financial Instruments with Characteristics of Equity project in this area. One member noted that inclusion of the examples as set out in the paper would aid application in practise of the principal.

A Board member noted the importance of clarifying only what the Board intended when making the amendment to IAS 1, to make the distinction between instruments which have an equity derivative feature in accordance with the classification requirements in IAS 32, and not to provide other guidance on what settlement features should be ignored and which should be assessed. They felt the most important clarification point needed is that this only applies to the derivative components which are separated under IAS 32 and are classified as equity. This view was supported by other members of the Board.

Board decision

The Board agreed with the recommendations of the staff as stated above.

Due process steps and permission to begin the balloting process (Agenda Paper 18)

Back­ground

The Board is currently assessing whether it could improve the accounting for goodwill. The Board plans to publish a Discussion Paper (DP) towards the end of 2019, with a view to potentially amending IFRS 3 and IAS 36.

Staff questions

In this session the staff will ask the Board:

• 1. to confirm that it wants to go ahead with a DP for all of the issues it has discussed (rather than issuing an Exposure Draft (ED) for selected items).
• 2. to confirm that all of the due process steps have been taken, so that the formal balloting of the DP can start.
• 3. what comment period it would like to allow .
• 4. whether it has any comments on the title of the DP, given that the project title ‘Goodwill and Impairment’ may not be fully representative of the content the Board is proposing to include in the DP.

Board discussion

On Question 1, Board members acknowledged that initially they had hoped to go directly to an ED, but given the discussions over the past few months, a DP would be the more appropriate consultation document. However, one Board member still preferred going directly to an ED for the items where the discussions are advanced enough. One Board member asked whether the DP would touch on acquired intangible assets, given the number of times the issue was raised during the post-implementation review of IFRS 3. The staff confirmed that there will be a section on intangible assets.

There was no significant discussion on the other questions.

Board decisions

13 of the 14 Board members supported the staff recommendation to issue a DP on all issues (Question 1 above). On Question 2, the Board confirmed unanimously that all due process steps had been taken. On Question 3, all Board members supported a comment period of 180 days for the DP. There was no vote on Question 4. The Board suggested that the staff find an appropriate title for the DP and the Board would subsequently approve or amend the title.

Cover Paper (Agenda Paper 15)

Back­ground

The Board formally added a project to revise its Management Commentary Practice Statement (Practice Statement) to its agenda in November 2017. The next project step will be an Exposure Draft, however, the Board is still considering individual parts of the Practice Statement.

Approach to guidance on qualitative characteristics (Agenda Paper 15A)

Background

The Board previously agreed that the objective of management commentary should be to give context for the financial statements by providing primary users with the historical financial and operational information and analysis that is useful in assessing the prospects for the entity’s future net cash inflows and in assessing management’s stewardship of the entity’s economic resources. The staff assert that information in the management commentary must possess the qualitative characteristics identified in the Conceptual Framework in order for management commentary to meet its proposed objective to provide useful information.

The Practice Statement just lists the qualitative characteristics and says that they are used in the Practice Statement with the meanings specified in the Conceptual Framework. It does not provide any guidance on how to consider the qualitative characteristics in preparing management commentary. The staff think that it is important to provide more guidance on the qualitative characteristics in the revised Practice Statement to improve preparers’ understanding of what makes information in management commentary useful and help address gaps in practice.

The staff anticipate that the revised Practice Statement should:

• a) include a brief description of each qualitative characteristic based on its description in the Conceptual Framework, instead of just listing them and referring to the Conceptual Framework. Because some preparers of management commentary may not be familiar with the concepts and principles in the Conceptual Framework.
• b) provide specific guidance on considering particular qualitative characteristics where such guidance is needed due to the nature of information included in management commentary.

At this meeting, the staff present their recommendations for guidance on considering the qualitative characteristic of relevance, and specifically on making materiality judgements, in preparing management commentary (see Agenda Paper 15B). At a future meeting, the staff will present their recommendations for guidance on the fundamental qualitative characteristic of faithful representation and the enhancing qualitative characteristics.

Board discussion

The Board acknowledged that the Practice Statement should be a stand-alone document as the objective of management commentary is different to that of financial statements and both preparers and users of the management commentary are different to those of financial statements. One Board member said that even though the Practice Statement is a stand-alone document, materiality should not be incorporated as the concept is already present in IFRS Standards. Another Board member said the language should be detached from the Conceptual Framework as otherwise the user group for the management commentary could be alienated. The Vice-Chair said that the Practice Statement should not only focus on projected cash inflows, but also on projected cash outflows. This would be especially relevant for start-ups which might have a prolonged period of cash outflows. One Board member said that it will be challenging to keep the management commentary tied to the financial statements as the discussion in the management commentary can become quite broad.

Making relevance and materiality judgements (Agenda Paper 15B)

Background

The staff analysed in Agenda Paper 15A that it is important to provide more guidance on the qualitative characteristics in the revised Practice Statement to improve preparers’ understanding of what makes information in management commentary useful and help address gaps in practice.

This paper discusses what guidance should be included in the revised Practice Statement on considering the qualitative characteristic of relevance, and specifically on making materiality judgements, in preparing management commentary and asks the Board for decisions.

Staff analysis

The staff think that the revised guidance on management commentary should remain principles-based rather than prescribe a detailed list of requirements or industry-specific or subject-matter-specific disclosures or metrics. This is because information in management commentary should be specific to the entity and reflect its unique facts and circumstances while meeting information needs of primary users of management commentary.

The staff have developed recommendations for guidance on making materiality judgements in preparing management commentary using the Materiality Practice Statement as a starting point.

Staff recommendations

Recommendation 1:

The staff recommend introducing in the revised Practice Statement guidance on making materiality judgements in preparing management commentary that would:

• (a) incorporate key elements of the guidance from the Materiality Practice Statement supported, where necessary, by cross-references to further guidance in the Materiality Practice Statement;
• (b) provide additional guidance where it is necessary because the nature of management commentary differs from the nature of financial statements; and
• (c) focus on explaining the materiality process, in particular on identifying material information.

Recommendation 2:

Further, the staff recommend that the guidance on identifying material information in the revised Practice Statement would:

• (a) recognise the guidance on content elements in the Practice Statement as a general source of identifying such information;
• (b) provide the following guidance on considering primary users’ common information needs in identifying material information:
  • (i) make an explicit link between identification of material information and the objective of management commentary—i.e. providing information that is useful in assessing the prospects for future net cash inflows to the entity and in assessing management’s stewardship of the entity’s economic resources; and
  • (ii) describe practical sources that could help management identify matters that may need to be discussed in management commentary; and
• (c) explain how to consider what information about the matter needs to be provided in each content element to deliver a coherent narrative.

Recommendation 3:

Finally, the staff recommend including in the revised Practice Statement guidance on the other steps of the materiality process that would prompt management to:

• (a) consider the likelihood of the matter crystallising, not just the size of the impact, in assessing the quantitative factors when making materiality judgements;
• (b) consider the appropriate level of aggregation when assessing what information an entity needs to provide in management commentary; and
• (c) highlight the links between different pieces of information when organising the information within management commentary.

Board discussion

The Board broadly agreed with Recommendation 1, however one Board member said that materiality should not be included in the Practice Statement as preparers are generally aware of the materiality concept and often the preparers of the management commentary are the same as the preparers of financial statements. Some Board members disagreed with this view as it could be the investor relations department or the legal department preparing the management commentary, however one Board member acknowledged that most people are aware of the materiality concept, even if they are not accountants, so suggested to keep the section brief. He also suggested to refrain from using any accounting jargon in the Practice Statement.

As regards the diagram in the agenda paper, many Board members found that helpful and agreed that this could be adapted and included in the Practice Statement. Some of the Board members stated that the concept of narrative coherence in the diagram would enhance the Practice Statement.

On Recommendation 2, the Board agreed with the overall direction. The Board members found the examples in the agenda paper helpful, however some thought the examples were not balanced enough. The examples focused on what the entity was trying to achieve, but did not touch on what could go wrong. Also, the examples do not show how the entity would transition from the status quo to the aspired status. One Board member suggested to add the concept of obscuring to the Practice Statement.

As regards Recommendation 3, one Board member found that the guidance on future developments was too precise as it would be difficult to predict the future in such a precise manner. It should moreso address the big picture. Some of the Board members agreed with this view and stated that the guidance for past and future information needs to be different or at least it should be acknowledged that for future information an entity would not be expected to provide granular information.

Board decision

13 out of 14 Board members voted in favour of Recommendation 1.

All Board members voted in favour of Recommendations 2 & 3.

Cover Paper (Agenda Paper 23)

Background

The Board is examining how companies should account for combinations of businesses under common control (“BCUCC”), which are currently outside the scope of IFRS 3. The staff are working towards publishing a discussion paper in the first half of 2020.

Potential equity investors in BCUCC (Agenda Paper 23A)

Background

At its March and April 2019 meetings, the Board discussed information needs of lenders and other creditors of the receiving entity, and of potential equity investors in a group restructuring in preparation for a sale of the combining entities in an initial public offering (IPO). The Board noted that the outcome of the credit analysis would not depend greatly on whether a current value approach or a form of predecessor approach is applied to account for a business combination under common control and tentatively decided that it does not need to pursue a single measurement approach for all transactions in the scope of the project. Specifically, the Board could pursue:

• a current value approach based on the acquisition method for some or all transactions that affect non-controlling shareholders of the receiving entity; and
• a different approach, such as a form of predecessor approach, for transactions that do not affect such shareholders.

Staff analysis

Transactions that affect non-controlling interests

The staff’s research and outreach indicate that information needs of potential equity investors do not differ from information needs of existing equity investors. This is because all equity investors are, or could be, exposed to risks and benefits arising from claims on the reporting entity’s residual net assets and that determines both their information needs and analytical approaches. Moreover, an entity or an individual can simultaneously be both an existing and potential equity investor if that entity or individual is considering whether to increase its existing equity investment in a particular entity.

The staff’s research and outreach further indicate that in estimating total return on the investment, equity investors and analysts employ a variety of equity valuation models, including discounted cash flow-based models, economic profit-based models, adjusted present value models, multiples-based models and real options models. An equity investor can select one or more of those models to price a share that it holds or a potential new share or rely on price target reports prepared by equity analysts based on those valuation models. The output from valuation models can often be combined with qualitative analysis to determine the expected total return for a security. However in all cases, the same information is used in each particular valuation model regardless of whether valuation is performed by a retail investor or a professional institutional investor or an analyst and regardless of whether those parties focus on publicly traded or private equity instruments or on a particular industry. 

The Board has already decided in developing IFRS 3 that the acquisition method provides most useful information about business combinations that are not under common control. That conclusion was reaffirmed in the post-implementation review (PIR) of IFRS 3 that stated that ‘comments received confirm that fair value is the best approach for measuring the assets acquired and the liabilities assumed in a business combination’.

Transactions that do not affect non-controlling interests

The question arises what information would be useful for potential equity investors for transactions within the scope of the project that do not affect non-controlling shareholders of the receiving entity.

Information needs of potential equity investors in transactions that do not affect non-controlling shareholders were already discussed in March 2019. That paper argued that a form of predecessor approach would provide useful information in the context of a group restructuring between wholly owned entities in preparation for an IPO.

The staff note that transactions between wholly owned entities in preparation for a sale, for example in an IPO, represent a sub-set of transactions that do not affect non-controlling shareholders of the receiving entity. The staff analysed transactions undertaken in preparation for an IPO as an example to illustrate why a form of predecessor approach would provide useful information to potential equity investors about transactions between wholly owned entities. However, the staff did not suggest that the use of a predecessor approach should be limited to transactions between wholly owned entities undertaken in preparation for an IPO.

In June 2019, the staff provided further analysis of transactions that do not affect non-controlling shareholders. The staff argued that:

• transactions that do not result in non-controlling shareholders of the receiving entity acquiring residual interest (equity claim) in transferred entities or businesses are different from both: (i) transactions within the scope of the project that result in non-controlling shareholders acquiring such residual interest; and (ii) business combinations not under common control; and
• a current value approach based on the acquisition method may not work well for those transactions.

In June 2019, the staff reviewed national requirements and guidance on business combinations under common control and group restructurings, guidance published by accounting firms and responses received in recent consultation on the topic. The staff noted that the effect of the transaction on ownership interests or rights of owners was a common condition in determining the appropriate accounting treatment for business combinations under common control and group restructurings. The staff also noted that the concept of ‘looking through’ the combining entities onto the effects on their owners is already adopted in the application guidance in IFRS 3 on identifying the acquirer.

Based on the staff’s research and analysis presented in June, the staff argued that if non-controlling shareholders do not acquire a residual interest (equity claim) in the transferred entities or businesses, the transaction is not an acquisition. Therefore, if a current value approach based on the acquisition method were applied to such transactions, identifying an acquirer would not always be possible or would not result in useful information. Instead, a form of predecessor approach would provide useful information about those transactions.

The staff further note that IFRS 3 generally does not deal with cases where the controlling party is the sole existing shareholder and potential equity investors are the only ‘equity type’ primary users that rely on the information provided in general purpose financial statements. Therefore, applying the requirements of that Standard may be not appropriate in the absence of non-controlling shareholders.

The staff did not make any recommendations and the Board is not asked for a decision in this session.

How measurement approaches could apply (Agenda Paper 23B)

This paper provides the Board with an overview of how alternative measurement approaches could apply, and of the questions the Board will need to consider in developing those approaches. The paper is for information only and is intended to provide context for the Board’s decision at a future meeting on when alternative measurement approaches should apply.

Board discussion

The Board discussed the papers together. The intention of this meeting was to bring possible scenarios and different outcomes to the discussion, as the Discussion Paper will not be published until the first half of 2020.

Amongst different elements in the area of business combinations, non-controlling interests (NCI) was highlighted by the majority of the Board members. They all agreed that NCI should be preserved by making the purpose and possible consequences of the transaction clearer.

Some Board members were happy with the paper presented, whilst others mentioned the need to increase the clarity around equity holders (reference was made to IFRS 3:10).

Another Board member mentioned the relationship between entities under common control before the transaction, as it quite often brings synergy to the new combined business. In this regard, other Board members have mentioned that better analysis was needed in order to clarify whether the outcome of the BCUCC would impact on the subsequent business. Ultimately, the presentation in the face of the financial statements and in the notes needs to be clear so not to mislead investors.

The meeting was open to comments and considerations and Board members debated the importance of fair value compared to the consideration paid and ultimately challenged the gain as a result of the transaction, in the sense that this needs to be supported by the future economic benefits of the business and therefore the basis and rationale need to be clear to the investors (equity or non-equity).

No decisions were made.

Back­ground

At this meeting, the Board held an entire day of educational sessions with the US Financial Accounting Standards Board (FASB). The purpose was for the boards to update each other on individual projects that partially or entirely overlap with a project of the other board.

The following topics were on the agenda:

• Segments
• Primary Financial Statements / Financial Performance Reporting
• Financial Instruments with Characteristics of Equity / Distinguishing Liabilities from Equity
• IBOR reform
• Goodwill and Impairment / Identifiable Intangible Assets and Subsequent Accounting for Goodwill
• Disclosure Initiative / Disclosure Framework
• Implementation: Revenue and Leases

As this is an education session, the boards were not asked to make any decisions in this session.

The discussions that were held in this session are not summarised. The agenda papers for this session are available on the IASB website.

Cover Paper (Agenda Paper 5)

Background

The Board is currently discussing the feedback received on the Discussion Paper Financial Instruments with Characteristics of Equity (DP) that was published in June 2018. In this session, the staff will provide a detailed summary of the feedback received on presentation, disclosures, contractual terms, objective, scope and challenges.

The Board is not asked to make any decisions at this meeting and hence, the papers do not contain any staff recommendations.

This summary does not repeat the contents of the DP. For a detailed summary of the DP, please refer to our IFRS in Focus.

Summary of feedback—presentation of financial liabilities (Agenda Paper 5A)

Key messages from respondents

Statement of financial position

Although many of the respondents that commented on the question about presentation in the statement of financial position disagreed, some agreed with presenting separately the carrying amounts of certain financial instruments (see DP).

Statement of financial performance

Some of the respondents that commented on the question about presentation in the statement of financial performance, agreed with presenting income and expenses arising from certain financial instruments (see DP) in other comprehensive income (OCI) without subsequent reclassification. However, many respondents disagreed and their views can be categorised as follows:

• a) not in favour of non-recycling of OCI.
• b) concerns expressed on the proposals related to partly independent derivatives. Mainly, they suggested that:
  • the proposals should only apply to liabilities that are solely dependent on the entity’s available economic resources;
  • there is a concern with the criterion that derivatives where the only independent variable is a foreign currency need to have an external factor imposing the denomination in the foreign currency; or
  • a disaggregation approach is better.
• c) not supportive of presentation in OCI. In summary, these respondents preferred either:
  • separate presentation in profit or loss;
  • disclosures in the notes to the financial statements.

Separation of embedded derivatives

Regarding the proposal to require separation of embedded derivatives from hybrid instruments measured at fair value through profit or loss for presentation purposes, most respondents supported Alternative A, i.e. the separate presentation requirements should apply only to embedded derivatives that are separated from the host and hybrid instruments that do not contain any obligation for an amount independent of the entity’s available economic resources. They believe Alternative B, i.e. applying the separate presentation requirements to all embedded derivatives, is too complex, costly and would negate the 'practical relief' under the fair value option in IFRS 9 to measure the entire instrument at fair value through profit or loss.

Board discussion

Agenda Papers 5A, 5B and 5C were discussed together.

Board members were surprised with some of the feedback received on the DP. Especially the lack of support for the separate presentation of financial liabilities was questioned, as respondents stated that the classification of a financial instrument would provide sufficient information for users.

Many items of concern for respondents were based on the rejection of the amount feature. Board members asked whether those who rejected the amount feature have also commented on subsequent issues that are based on the amount feature. The staff confirmed this and said that respondents made clear they rejected the amount feature, but then went on to comment on other topics under the assumption that the Board would continue with the amount feature.

One Board member suggested to analyse more granularly why respondents rejected the amount feature. In her view, this could be a problem with articulation or also the fact that the Board stated that introducing the amount feature would be a limited amendment, with which many respondents disagreed. The Board member acknowledged that given the feedback of respondents, introducing that feature could result in a significant rewrite of IAS 32.

With regards to attribution of total comprehensive income, one Board member said that he was not surprised by the lack of support amongst respondents as the Board itself had been struggling with this issue in the discussions leading up to the DP.

One Board member suggested that the staff analyse the feedback based on a table or flow chart as the feedback from respondents was very fragmented. That Board member said they would like to see the arguments that flowed through the comment letters.

Disclosures and presentation of equity instruments (Agenda Paper 5B)

Key messages from respondents

Would the attribution of total comprehensive income to equity instruments other than ordinary shares provide useful information?

Many respondents agreed with the Board that it would be useful for investors to have information about the distribution of returns among the different types of equity instruments and supported the objective of the presentation proposals for equity instruments. However, most respondents were not supportive of any of the attribution approaches for derivative equity instruments proposed in the DP because they believed the benefits of the resulting information would not outweigh the cost of preparation. Many respondents’ feedback on this topic focused on the proposals for derivative equity instruments. Out of the respondents who provided specific feedback on the attribution proposals for non-derivative equity instruments, some supported the proposals for non-derivative equity instruments. Most respondents who supported the proposals for non-derivative equity instruments did so despite not supporting the proposals for derivative equity instruments.

What do respondents propose instead to improve information provided about financial instruments issued?

Many respondents suggested that rather than developing an attribution approach for derivative equity instruments, the Board pursue a disclosure solution instead. In their view, the disclosures proposed in the DP, along with the information already required by IAS 33 would be sufficient in meeting the Board’s objective of providing useful information about equity instruments. However, some respondents also suggested that IAS 33 requirements could be improved and encouraged the Board to do some further work in this regard.

Do respondents support the proposed disclosures for financial liabilities and equity?

Most respondents were broadly supportive of the disclosure proposals for financial liabilities and equity. However, some highlighted potential challenges and suggested solutions for the Board to consider.

Feedback summary—Contractual Terms (Agenda Paper 5C)

Key messages from respondents

Should economic incentives be considered when classifying a financial instrument as a financial liability or an equity instrument?

Most respondents agreed with the Board’s preliminary view that economic incentives that might influence the issuer’s decision to exercise its rights should not be considered when classifying a financial instrument as a financial liability or an equity instrument.

Should the IAS 32 requirements on indirect obligations should be retained?

Most respondents agreed with the Board’s preliminary view that the requirements in IAS 32:20 for indirect obligations should be retained.

Should classification of financial instruments be based on the contractual terms without considering the effects of laws and regulations?

Most respondents agreed with the Board’s preliminary view that an entity shall apply the Board’s preferred approach to the contractual terms of a financial instrument consistently with the existing scope of IAS 32.

In addition, many respondents highlighted practice challenges that exist in these areas and recommended the Board analyse the challenges further and provide clarification or guidance. In fact, regardless of whether respondents agreed or disagreed with the Board’s preliminary views set out in the DP, they requested clarification or additional guidance on these areas.

Summary of feedback: users of financial statements (Agenda Paper 5D)

Overall comments on the DP

• A few users acknowledged that there will be a trade-off between costs and benefits, i.e. complexity vs transparency in making changes to IAS 32.
• Most users supported the additional disclosures proposed in the DP, particularly the disclosures relating to terms and conditions of financial liabilities and equity instruments
• There was limited support for the attribution of total comprehensive income to classes of equity instruments, in particular derivative equity instruments, with most users citing complexity as the main drawback.
• Most users supported the separate presentation of financial liabilities that have equity-like returns but there were mixed views on whether these returns should be presented in OCI or within profit or loss using a separate line item and if presented in OCI, whether gains or losses should be recycled to profit or loss when these liabilities are settled.
• Limited feedback was provided on the classification proposals.
• A few users questioned the scope of the project and its interaction with other IFRS Standards.

Comments on specific sections of the DP

Users also commented on the following specific items:

• Presentation: Attribution of total comprehensive income to equity instruments
• Presentation: Financial liabilities with equity-like returns
• Disclosure: Priority of claims on liquidation
• Disclosure: Terms and conditions
• Classification: non-derivative financial instruments
• Classification: Other issues

For the detailed feedback on those items, please refer to the agenda paper.

Board discussion

The Board discussed hybrid instruments. The Vice-Chair acknowledged that respondents feared market disruption by new accounting requirements for hybrid instruments. Those instruments were designed in a way so that they achieve certain effects, for example with regard to ratings, tax, regulatory or accounting. She acknowledged that it would impact issuers if the accounting treatment for those instruments changed, but said that this fact alone should not influence any decisions made by the Board. She suggested to have a detailed discussion of the issues around hybrid instruments with investors. A Board member said it would already be an achievement to have all information on those instruments in one place.

One Board member appreciated the  from the fact that investors were very open in their comments on the topic. In particular, making it clear that they have difficulty in understanding the issues under discussion. That Board Member was concerned about the complexity that would be imposed on preparers.

Comment letter feedback—Overall objective, scope and challenges (Agenda Paper 5E)

Key messages

Do respondents agree with the challenges and their causes identified by the Board?

Almost all respondents agreed with the challenges identified by the Board. Many respondents also highlighted other challenges they think the Board should address in addition to those identified by the Board.

Do respondents agree that the challenges identified warrant standard-setting?

Almost all respondents supported the Board developing a standard-level solution to address the challenges identified. However, these respondents suggested a wide range of different directions for the project:

• a) Many respondents suggested making targeted improvements to IAS 32 by amending, clarifying or adding guidance to IAS 32.
• b) Some respondents suggested undertaking a fundamental review to develop an approach to distinguishing liabilities from equity.
• c) Some respondents supported the Board pursuing a principles-based solution. Some of these respondents suggested proceeding with the Board’s preferred approach to classification subject to clarification of the new terminology used or a closer alignment of terminology and/or the classification outcomes with IAS 32. Some other respondents suggested more significant modifications to the Board’s preferred approach to classification.
• d) A few respondents suggested a disclosure-only approach.

Board discussion

The Board discussed the different approaches suggested by respondents. The staff noted that additional disclosures were the only common ground between the approaches. The Board members, however, ruled out a disclosure-only approach. One Board member suggested a 2-step approach, i.e. developing disclosures first and then developing principles for classification. For classification, a Board member suggested to start with the definition of a liability and the recognition criteria in the Conceptual Framework, and then develop the principles for classification from there. It was also suggested to stop looking at any issues that are not fundamental.

Board members noted that if the amount feature is the problem, it should either be reworked, or, as the Vice-Chair suggested, use the logic behind the amount feature to develop sound classification principles, but not introduce the amount feature as a principle of its own.

One Board member said that it was evident from the comment letters that many respondents are afraid of having to analyse their entire stock of financial instruments in the course of which many instruments would have to be reclassified. That is why there is a strong call for targeted improvements. Board members noted that there was no common understanding of what targeted improvements could mean. If the Board could have fixed the issues through narrow-scope amendments, it would have done so. Instead, the Board decided that it would have to start a comprehensive project, which includes the introduction of new principles, at least for some of the issues under discussion. When questioned by the Board as to which were the most pressing issues, the staff confirmed that the fixed-for-fixed condition, NCI puts and contingent settlement requirements proved most difficult. The Vice-Chair added that work needs to be done in the area of hybrid instruments.

Board members said that the clear mandate for standard-setting should be enough for the Board to continue the project. It was clear that the scope of the DP was too comprehensive for respondents, but that a common ground would have to be found. Board members suggested that staff provide a more thorough analysis of the feedback once the Board has decided which approach it would like to pursue.

Cover note (Agenda Paper 9)

Background

The purpose of this meeting was:

• (a) to provide additional analysis in response to the questions raised by the Board members in previous meetings (matters dealt with in Agenda Papers 9A and 9B) and on a matter subsequently identified by the staff (Agenda Paper 9C);
• (b) to ask the Board to publish an Exposure Draft (ED) rather than a second Discussion Paper (DP) to obtain feedback on the accounting model for regulatory assets and regulatory liabilities (the model); and
• (c) to ask Board members for permission to begin the balloting process for the consultation document.

Interaction with IFRS 3 Business Combinations (Agenda Paper 9A)

Background

In this session, the Board explored the interaction between the model and the requirements of IFRS 3, and to consider whether an exception to the recognition and measurement principles of IFRS 3 should be provided for regulatory assets and regulatory liabilities acquired in a business combination.

Staff analysis

The staff explore the differences between the model and fair value and conclude that the differences are such that an exception to IFRS 3 is required. Requiring fair value measurement for regulatory assets and liabilities would incur costs that are not outweighed by the benefits.

Staff recommendation

Staff recommend that, as an exception to the recognition and measurement principles of IFRS 3, an entity should recognise and measure a regulatory asset acquired or regulatory liability assumed in a business combination in accordance with the measurement principles in the accounting model for regulatory assets and regulatory liabilities.

Board discussion

Most of the Board members agreed with the staff recommendation. They found that there is a balance between the cost and the expected benefits that justifies the exception from IFRS 3.

Those who disagreed with the staff recommendation agreed with the alternative provided by the staff, which suggests that an exception to the recognition and measurement principles of IFRS 3 should be provided for those regulatory assets and regulatory liabilities that arise when an item of expense or income will be included in or deducted from future rates when cash is paid or received. They think the exceptions provided in IFRS 3 are different in nature, as they are very isolated areas of accounting.

There was also some discussion around whether the regulatory rate on initial recognition would be reset on acquisition.

Board decision

10 of the 14 Board members supported the staff recommendation.

The regulatory agreement period (Agenda Paper 9B)

Background

In this session the Board will discuss how the model would be applied if the term of the regulatory agreement is shorter than the period over which timing differences would reverse.

Staff analysis

The staff analyse relevant requirements in the Conceptual Framework as well as precedents IFRS 17, IFRS 16, IAS 38 and IFRS 15.

The staff conclude that, in applying the model, an entity would need to consider not only the legal form, but also the economic substance of the terms of the regulatory agreements in determining the period for which the agreement is binding and thus gives rise to enforceable rights or obligations which would result in the recognition of regulatory assets or regulatory liabilities. If items are due to be recovered or fulfilled outside of the regulatory agreement boundary, then they are not enforceable and thus would not be recognised as regulatory assets or regulatory liabilities.

As the Board is not asked to make any decisions in this part of the session, the staff did not give any recommendations.

Board discussion

The Board members discussed what an entity should consider when determining whether regulatory rights and obligations are recoverable. The discussion evolved around topics like ‘existence uncertainty’ and the concept of ‘more likely than not’. It was also noted that some cancellation rights might not be substantive as often, the business involves big infrastructural assets that are very difficult to transfer.

The Board members examined whether there should be explicit guidance in the Standard on this issue or whether it should be covered in the Basis for Conclusions. A majority of Board members thought that it needs to go into the Standard as Application Guidance, however there were mixed views as to whether it should be in the form of examples, or, for example, as a list of indicators. One Board member suggested to look to the Conceptual Framework to determine whether an asset or a liability exists.

The Board members welcomed that the staff reach out to other project teams with similar issues. There was some concern, however, that words from other Standards might not be directly transferrable. The staff should therefore cautiously choose the best wording, without causing any unforeseen consequences.

The Board suggested that this topic be brought back as a sweep issue at a future meeting.

Incentive schemes (Agenda Paper 9C)

Background

A regulatory agreement may provide an entity with performance incentives for achieving (or failing to achieve) indicated performance criteria (e.g. targeted levels of service quality or reliability, customer satisfaction, etc.). Once an entity becomes entitled to such a bonus or penalty, these amounts will generally be included as an adjustment to the rates charged to customers in the same or a subsequent period. The terms and conditions of the regulatory agreement covering such performance incentives are referred to as ‘incentive schemes’ by the staff.

The Board will discuss in this part of the session how the model would apply when, at the financial reporting date, it is not yet certain whether an entity will become entitled to such a bonus (or liable for such a penalty).

Staff analysis

The staff analysed the issues that arise when uncertainty is present and concludes that the principles of the model are sufficient to enable entities to account for the uncertainties arising from incentive schemes.

As this part of the session is for information only, there are no staff recommendations and no decisions are asked of the Board.

Board discussion

The Board members discussed the examples in the agenda paper. Board members struggled with the post-balance sheet example. One Board member suggested an Illustrative Example on the issue without the post-balance sheet discussion. The Vice-Chair suggested the staff only refer to IAS 10 when drafting.

The consultation document—an Exposure Draft or a Discussion Paper (Agenda Paper 9D)

Background

In this session, the Board will be asked whether it plans to publish an ED or a DP as the next consultation document to obtain feedback on the model.

Staff analysis

After the last consultation document (the 2014 DP) the Board was informed that there were complexities in the interaction between the project and the Conceptual Framework and IFRS 15. Based on this, the Board tentatively decided that the next step should be a second DP. However, the staff think that the Board should now move directly to an ED as it has now gathered sufficient information from previous consultation documents and outreach with stakeholders, duly considered alternative approaches and developed specific requirements for accounting for activities that are subject to defined rate regulation.

Staff recommendation

The staff recommend that the Board publish an ED rather than a DP.

Board decision

There was no significant discussion on this issue. All of the 13 Board members present voted in favour of the staff recommendation and also voted that IFRS 14 should be replaced with the new Standard.

Effect analysis (Agenda Paper 9E)

Background

In this session, the Board will be presented with an initial assessment of the likely effects the Board has been considering as it has been making tentative decisions about the model.

The staff will touch on the requirements of an effects analysis in the Due Process Handbook, the problem the Board is trying to solve (i.e. unrecognised present rights and obligations), the purpose of the model, assessing how the financial statements are likely to change and the likely effects of the proposals.

As this part of the session is for information only, there are no staff recommendations and no decisions are asked of the Board.

Board discussion

There was no significant discussion on this paper.

Due process and permission to begin the balloting process (Agenda Paper 9F)

Questions for the Board

In this session, the Board will be asked whether:

• it agrees with the staff recommendation to allow 120 days for comment on the ED.
• it is satisfied that the staff has complied with the applicable due process steps.
• the staff should initiate the balloting process for the ED.
• any Board member intends to dissent from the publication of the ED.

Board discussion

With regard to dissents, two Board members touched on the issue. Both Board members thought that the proposed Standard goes beyond the objective that the Board had when it started the project. Both of those Board members cited the exceptions to the model as the main issue (including the IFRS 3 exception above). On Board member said that from a current standpoint, he would not dissent, but this could change based on the drafting of the ED. The other Board member would dissent based on the current state of discussions.

As regards the boundary issue (see above), one Board member said that her permission to ballot would be subject to a re-discussion of the issue. The Vice-Chair said that the permission to ballot should be given, however, the issue around boundary should be resolved before signing the ballot form.

There was also some discussion around whether 120 days would be enough, given that it is a completely new concept and the intricacies could only be understood after dedicating some time to them. Some Board members, however, thought that 120 days would be enough as it worked with other complex EDs as well.

Board decision

All of the 13 Board members present agreed to grant permission to ballot with the caveat that the boundary issue should be re-discussed. With regards to the comment period, 10 of the 13 Board members present agreed with a comment period of 120 days.

Targeted Standards-level Review of Disclosures—IAS 19 Disclosure Objectives—Defined Benefit Plans (Agenda Paper 11B)

Background

Agenda Paper 11 is a cover paper and Agenda Paper 11A is a summary of the staff recommendations for this session and are consequently not summarised.

In Agenda Paper 11B, the staff present an analysis and recommendations on how the disclosure objectives for defined benefit plans in IAS 19 could be amended.

IAS 19 requires that for defined benefit plans an entity is required to use an actuarial technique to estimate the ultimate cost to the entity of the benefits that employees have earned for their service in current and prior periods. The entity assumes actuarial and investment risk.

Staff analysis

The staff have identified and analysed the following user needs with regard to disclosures about defined benefit plans:

• (a) understand the effect of a defined benefit plan on the amounts recognised in the primary financial statements;
• (b) understand the economics of an entity’s defined benefit plans and the risks to which the plans expose the entity;
• (c) evaluate the impact of the defined benefit obligation on an entity’s future cash flows;
• (d) understand the time period over which the defined benefit obligation is expected to wind down;
• (e) determine the value of the defined benefit obligation to input into analyses for forecasting;
• (f) assess the appropriateness of the assumptions and amounts underlying an entity’s valuation of its defined benefit obligation;
• (g) understand the sensitivity of the defined benefit obligation to different actuarial assumptions;
• (h) forecast future defined benefit obligations.

Staff recommendations

Staff recommend that the Board include a high-level, catch-all disclosure objective in IAS 19 requiring an entity to:

• (a) disclose information that helps users of financial statements to evaluate the risks and uncertainties associated with the entity’s involvement in the defined benefit plans and to assess the effect that those plans have on the financial performance, financial position and cash flows of the entity.

—supported (13/13 Board members present, 1 absent)

• (b) aggregate or disaggregate information provided to meet the specific disclosure objectives so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have substantially different features or characteristics.

—supported (13/13 Board members present, 1 absent)

Furthermore, staff recommend that the Board include the following specific disclosure objectives in IAS 19:

• (a) An entity shall disclose information that enables users to understand the amounts, including the components of those amounts, in its statements of financial performance, financial position and cash flows arising from its defined benefit plans

—supported (14/14 Board members)

• (b) An entity shall disclose information that enables users to understand the:
  • nature of the benefits provided by its defined benefit plan(s);
  • nature and extent of the risks, in particular the investment risks to which those plan(s) expose the entity; and
  • strategies that the entity has in place to manage the plan(s) and the associated risks.

—supported (14/14 Board members)

• (c) An entity shall disclose information that enables users to understand the expected effects of any defined benefit obligation on the entity’s future cash flows that are reasonably known to the entity at the reporting date.

—supported (13/14 Board members)

• (d) An entity shall disclose information that enables users to understand the time period over which the defined benefit obligation for plans that are closed to new members is expected to mature.

—supported (14/14 Board members)

• (e) An entity shall disclose information that enables users to understand the most significant assumptions used in determining the defined benefit obligation.

—supported (14/14 Board members)

• (f) An entity shall disclose information that enables users to understand the drivers of changes in the net defined benefit liability or asset from the beginning of a reporting period to the end of that period.

—supported (14/14 Board members)

The staff also recommend that the Board does not develop disclosure objectives to explicitly address user information needs about:

• (a) alternative defined benefit plan valuations to that required by IAS 19.

—supported (14/14 Board members)

• (b) sensitivity of the defined benefit obligation to different assumptions.

—supported (13/14 Board members)

• (c) forecasting future defined benefit obligations.

—supported (14/14 Board members)

Board discussion

Board members expressed support for adding a specific disclosure objective to IAS 19 requiring an entity to disclose information that enables users to understand the amounts, including the components of those amounts, in its statements of financial performance, financial position and cash flows arising from its defined benefit plans. However, some were concerned that this objective would be too specific and could, in turn, result in too detailed disclosures. One Board member highlighted that disclosure objectives are also for the Board to develop appropriate detailed requirements, so the objective would not have to be very detailed in of itself. He also would not include an explanation as to why users need this information as different users would use the information for different purposes.

There was also support for the objective to disclose information that enables users to understand the nature of the benefits provided by an entitys defined benefit plans, the nature and extent of the risks, in particular the investment risks to which those plans expose the entity to and strategies that the entity has in place to manage the plans and the associated risks. Board members discussed whether actuarial risk should be included as well, to which the staff replied that it is included in other disclosure objectives about measurement uncertainty. The Vice-Chair noted that risk should be understood to be downside as well as upside risk. One Board member was concerned that aggregation could eliminate information about heavily overfunded or underfunded plans, which was, in her view, important information for users.

Board members broadly agreed with the proposed disclosure objective to provide information that enables users to understand the expected effects of any defined benefit obligation on the entity’s future cash flows that are reasonably known to the entity at the reporting date. One Board member highlighted that this was the most desired disclosure by investors. There was some debate as to how far into the future cash flows would have to be projected and disclosed. Board members thought that it should only be short to medium term. Also, the question arose which cash flows should be included and whether they should be presented net or gross. There was also discussion around what ‘reasonably known’ could mean. Board members thought it meant ‘knowable’, instead of what the entity decides to know and also, the disclosure should only include information on current plans and not any future plans the entity might plan to set up. Board members found that the disclosure objective should be more specific to result in the intended level of information. On the other hand, it should not be too prescriptive.

Board members supported the specific disclosure objective in IAS 19 requiring an entity to disclose information that enables users to understand the time period over which the defined benefit obligation for plans that are closed to new members is expected to mature. Board members discussed what ‘expected to mature’ would mean in that context. A majority thought it meant the point at which investors do no longer have to worry about the plan. This could be when the youngest member is expected to die or when the bulk of members are expected to die. There was also discussion around whether this information would also be relevant for open plans, which was confirmed by the staff, however there are practical restrictions. The information would change every year with new members joining and hence, the staff only recommend this disclosure objective for closed plans. One Board member said that there should be some consideration about whether, for this disclosure objective, the entity should base the information on the gross or net obligation.

On the high-level, catch-all disclosure objective, the Board questioned whether the end of the disclosure section would be the best placement or whether it would not be better placed at the beginning. The part about aggregation and disaggregation was perceived as too generic for many. As that part is relevant for every standard, it would be better to put it in one place rather than in every standard.

Targeted Standards-level Review of Disclosures—IAS 19 Disclosure Objectives—Employee Benefits other than Defined Benefit Plans (Agenda Paper 11C)

Staff analysis

In this part of the session, the staff presented an analysis of user information needs with regard to defined contribution plans, multi-employer plans and group plans, and other employee benefit plans.

Staff recommendations

Defined contribution plans

Staff recommend that the Board include a high-level, catch-all disclosure objective in IAS 19 requiring an entity to disclose information that enables users to understand how defined contribution plans affected the entity’s statements of financial performance and cash flows.

—supported (12/14 Board members)

Multi-employer and group plans

Staff recommend that the Board require:

• (a) an entity that accounts for its multi-employer plan or a group plan as a defined benefit plan to comply with the disclosure objectives for defined benefit plans recommended above.

—supported (14/14 Board members)

• (b) an entity that accounts for its multi-employer plan as a defined contribution plan to comply with the disclosure objective for defined contribution plans recommended above.

—supported (14/14 Board members)

For an entity that accounts for its share of a defined benefit multi-employer plan or group plan as if it were a defined contribution plan to, staff recommend that the Board:

• (a) require the entity to comply with the disclosure objective for defined contribution plans recommended above.

—supported (14/14 Board members)

• (b) require the entity to comply with a specific disclosure objective to disclose information that enables users to understand:
  • the nature of the benefits provided by its defined benefit plan(s);
  • the nature and extent of risks, in particular the investment risks to which those plan(s) expose the entity; and
  • the strategies that the entity has in place to manage the plan(s) and the associated risks.

—supported (14/14 Board members)

• (c) explain in IAS 19 that users need the information in (b) above to:
  • assess how the entity intends to deliver the benefits promised to members of its defined benefit plan(s); and
  • evaluate how the risks associated with those plan(s) might affect the entity in future.

—supported (14/14 Board members)

Other employee benefits

Staff recommend the Board include a high-level, catch-all objective in IAS 19 requiring an entity to disclose information that enables users to understand:

• (a) the nature of termination benefits and other long-term employee benefits; and
• (b) how those benefits affected the entity’s statements of financial performance, financial position and cash flows.

—supported (10/14 Board members)

Finally, the staff recommend that the Board include a high-level, catch-all disclosure objective in IAS 19 requiring an entity to disclose information that enables users to understand how short-term employee benefits affected the entity’s statements of financial performance and cash flows.

—supported (10/14 Board members)

Board discussion

On defined contribution plans,Board members said that as there is no investment risk and, hence, disclosures would not have to be as detailed as for defined benefit plans. The impact of defined contribution plans on the statement of financial position would be low. Therefore, some Board members thought it would be sufficient if entities made a one-line disclosure similar to short-term employee benefits or no disclosure at all. However, some said that hybrid or accelerating plans would need more than just a one-line disclosure.

On multi-employer plans one Board member said that the risk was increased compared with other schemes as there is a risk that an employer terminates their participation in the scheme.

On other employee benefits, Board members thought that termination benefits only need to be disclosed when they affect the statement of financial position. This would only be the case for accumulating benefits or complex termination schemes that involve, for example, stock options. A staff member added that salary is arguably the largest part of short-term employee benefits and there would be some merit to disclose that, even if it does only affect the statement of financial position.

Amendments to IAS 34 Interim Financial Reporting (Agenda Paper 21A)

Background

This paper considers the possible amendments to IAS 34 to reflect the Board’s tentative decisions in the Primary Financial Statements (PFS) project.

Staff analysis

The staff think that Management Performance Measures (MPMs) presented in the interim financial statements will provide users with transparent information on a timely basis. Some preparers have said that it could be costly to provide the information about the income tax and non-controlling interest (NCI) effects. However, the staff believe that interim financial statements should include a full set of MPM disclosures because tax and NCI effects are useful information and the Board has already provided some relief for determining the effect of tax of MPM adjustments. The staff think that applying the new requirements of the PFS project in preparing interim financial statements could result in transition issues because the annual financial statements of the entity in the year before the new requirement may not contain any subtotals in the statement(s) of financial performance or may contain additional subtotals which may be defined differently from the new proposed subtotals.

Staff recommendations

The staff recommend that the Board amend IAS 34 to require entities, in their condensed interim financial statements, to provide the set of financial information about MPMs that will be provided in their annual financial statements and to apply subtotals in their condensed interim financial statements during the first year of application of the new requirements.

Board discussion

Board members agreed with the staff’s proposal to require entities to include information about MPMs in their condensed interim financial statements because if MPMs were only presented on an annual basis, the timing of information provided may be too far apart. As MPMs have to be consistent with what the entity communicates externally, the Board asked the staff to clarify which set of external communication that requirement refers to when presenting MPMs in the interim financial statements. The question is whether this should be the latest set of external communication of MPMs made by the entity or whether this would be the set of external communication of MPMs made in the last available annual financial statements.

Some Board members would prefer not to have different treatments for the presentation of MPMs and the presentation of subtotals for the interim financial statements. However, the staff said that the entity has the option of applying the requirements of the new Standard immediately in their interim financial statements or prepare a set of condensed interim financial statements in accordance with IAS 34 that does not contain the subtotals. This is because IAS 34 requires to include the same subtotals as in the most recent annual financial statements, which is unlikely to have the newly defined subtotals. The Board agreed that this should be made clear in the drafting of the Standard.

Board decision

10 of 14 Board members agreed to require entities to provide, in their condensed interim financial statements, the set of financial information about MPMs that will be provided in their annual financial statements. 8 of 14 Board members agreed to require entities to apply subtotals in their condensed interim financial statements during the first year of application.

Management performance measures and subtotals similar to gross profit (Agenda Paper 21B)

Background

This paper discusses whether subtotals similar to gross profits (e.g. net interest income or net rent income) that meet the definition of MPMs should be exempt from the disclosure requirements for MPMs.

Staff analysis

The Board have tentatively decided that MPMs are subject to disclosure requirements which include a reconciliation between an MPM and the most directly comparable subtotal or total defined by IFRS Standards, disclosure of the income tax and NCI effect and narrative disclosures. The staff considered that the MPM disclosures may not be useful because for all subtotals, the line items in the statement(s) of financial performance provide a reconciliation to a subtotal or total defined by IFRS Standards. Similarly, for some subtotals, there is no comparable subtotal or total defined by IFRS Standards to reconcile to and for some subtotals, the purpose of the subtotal is clear and therefore narrative disclosure may not be useful information. Therefore, the staff considered three approaches: state that subtotals presented in the statement(s) of financial performance in accordance with IAS 1: 85 are not MPMs; or add specific subtotals to the list of subtotals that are not MPMs; or add “subtotals similar to gross profits” to the list of subtotals that are not MPMs. The staff proposed the last approach as this is principle-based and the risk of unintended consequences is likely to be lower.

Staff recommendations

The staff recommend that the Board add “subtotals similar to gross profit” to the list of subtotals that are not MPMs; describe such subtotals as “typically representing the difference between (a type of) revenue and directly related expenses incurred in generating that revenue” and provide a non-exhaustive list of examples of subtotals “similar to gross profits” and for subtotals that are not considered “similar to gross profits.”

Board discussion

Some Board members expressed preference for the first approach, which is to state that subtotals presented in the statement(s) of financial performance in accordance with IAS 1:85 are not MPMs. However, the staff have said that the intention was not to define these subtotals but to describe the types of subtotals that are already in use, which would be subject to this exemption. The Board suggested that this thought process should be made clear in the basis for conclusions (BC).

Board decision

13 of the 14 Board members agreed with the staff’s proposal to add “subtotals similar to gross profit” to the list of subtotals that are not MPMs.  

Classification of interest and dividends in the statement of cash flows (Agenda Paper 21C)

Background

This paper analyses the suggestion made by the Board at its February 2019 meeting on the classification of interest and dividend in the statement of cash flows and discusses whether the Board should amend its tentative decision made at its December 2017 meeting.

Staff analysis

The Board tentatively decided to require non-financial entities to classify each type of cash flow in a single section of the statement of cash flows that would result in a classification in the statement of cash flows that is generally consistent with the classification of the related income or expense in the statement(s) of financial performance. Furthermore, the Board also tentatively decided to propose an approach for financial entities to determine the classification of interest and dividend cash flows that if the entity presents related income or expense in a single section of the statement(s) of financial performance, the entity presents the related cash flows in that section. If the entity presents related income or expense in more than one section of the statement(s) of financial performance, the entity can make an accounting policy choice regarding the section of the statement of cash flows in which to present the related cash flows. In a previous meeting, one Board member suggested an alternative approach which would require both financial and non-financial entities to classify dividend received, interest paid and interest received in operating cash flows and dividends paid in financing cash flows. The staff considered both pros and cons of the suggested approach but ultimately recommend against it because the amendment would be a fundamental change to IAS 7 which could have unintended consequences.

Staff recommendations

The staff recommend that the Board retain its tentative decision regarding the classification of interest and dividend in the statements of cash flows without amendment.

Board discussion

Board members have said that the focus of the users of the financial statement is less on where dividends and interest are presented in the cash flow statements (i.e. operating, financing or investing activities)  but rather that the presentation of these are clear and done on a systematic basis.

Board decision

11 of 14 Board members agreed with the staff’s proposals to retain its tentative decision regarding the classification of interest and dividend in the statement of cash flows without amendment.

Management performance measures and adjusted earnings per share (AP 21D)

Background

This paper discusses whether to amend IAS 33 to restrict what can be used as the numerator in an adjusted earnings per share (EPS) figure, to amounts based on IFRS-defined subtotals or MPMs.

Staff analysis

IAS 33 requires entities to disclose the basis on which the numerator of an adjusted EPS figure is calculated and, if the numerator is not reported as a line item in the statement(s) of financial performance, a reconciliation between the numerator and a line item in that statement. However, in applying the Board’s tentative decisions, entities may choose to disclose an adjusted EPS figure rather than an MPM because there are fewer disclosure requirements for an adjusted EPS figure. Not all MPMs can be disclosed on a per share basis as MPMs do not have to be calculated in accordance with IFRS Standards per IAS 33:73. The staff considered whether to require same disclosures for adjusted EPS figures as for MPMs or to require a reconciliation between the numerator of the adjusted EPS figure and the entity’s MPM. The staff rejected both approaches and agree that by restricting what can be used as a numerator in an adjusted EPS figure would be the best approach as it allows the users to receive the same information about adjusted EPS figures as for MPMs and clarifies whether all MPMs can be used as a basis for the numerator used in the calculation of an adjusted EPS figure.

Staff recommendations

The staff recommended that the Board amend IAS 33 to restrict what can be used as a numerator in an adjusted EPS figure, to amounts based on IFRS-defined subtotals or MPMs.

Board discussion

The Board said that the staff should bear in mind that there could be some conflicting requirements of this proposal with the requirement with some regulators. For example, in South Africa, the regulators require the entities to calculate EPS using their guidelines.

Board decision

13 of the 14 Board members voted in favour the staff’s proposal to amend IAS 33 to restrict what can be used as a numerator in an adjusted EPS figure, to amounts based on IFRS-defined subtotals or MPMs.

Due process and permission to begin the balloting process (Agenda Paper 21E)

Staff questions

In this part of the session, the staff will ask the Board:

• to confirm that all of the due process steps have been taken, so that the formal balloting of the ED can start.
• what comment period it would like to allow. The staff have recommended 180 days.
• whether any Board members intend to dissent from the proposals in the ED.

Board discussion

Some Board members expressed intention to dissent but on an overall basis agreed with the proposals. A Board member raised concerns on the application of the presentation of share of profit of integral and non-integral associates. This is because there is a risk that positively performing associates could be classified as integral and non-performing associates could be classified as non-integral. Therefore, the Board suggested that the pros and cons be analysed as part of the ED. Another Board member said that MPMs should belong in the management commentary and by bringing MPMs into the financial statements could give them undue prominence and legitimacy. Lastly, a Board member suggested that 180 days as the comment period may be too long for this project.

Board decision

13 of the 14 Board members agreed with the staff’s proposal that the comment period should be 180 days and agreed to give permission to ballot the ED.

Cover Paper (Agenda Paper 14)

Background

The Board published the Exposure Draft Interest Rate Benchmark Reform (proposed amendments to IFRS 9 and IAS 39) (ED) in May 2019 with a 45-day comment period.

In this meeting, the staff will provide a summary of feedback from comment letters on the proposals in the ED.

The Board is not asked to make any decisions at this meeting and hence, the papers do not contain any staff recommendations.

This summary does not repeat the contents of the ED. For a detailed summary of the ED, please refer to our IFRS in Focus.

Summary of feedback from comment letters (Agenda Paper 14A)

Overview of feedback

Most respondents welcomed the Board’s timely response to address the pre-replacement issues and broadly supported the amendments proposed in the ED.

Nonetheless, some respondents said the Board should further specify the objective and extend the scope of the proposed exceptions in the ED. In particular, they suggested the Board extend the scope of the proposed exceptions beyond hedge accounting relationships of interest rate risk, for example to include hedge accounting relationships for currency risk and propose exceptions that would apply to hedges in the context of macro hedge accounting relationships.

In addition, when responding to the specific questions in the ED, many respondents suggested the Board reconsider its decision not to propose any exception for the effects of the reform on the ‘retrospective assessments’ required by IAS 39, simplify disclosure requirements and clarify how the transition requirements would apply in practice.

Most respondents also suggested that the Board addresses issues that might affect financial reporting when an existing interest rate benchmark is replaced with an alternative interest rate (ie replacement issues) as soon as possible and in parallel to the finalisation of the pre-replacement issues.

Additional issues for consideration before finalising the proposed amendments (Agenda Paper 14B)

Background

At the time of discussing the proposed exceptions to be included in the ED, the Board noted that a range of issues, that might affect financial reporting when existing interest rate benchmarks such as interbank offer rates (IBORs) are replaced with alternative interest rates (RFRs), could arise at different points in time due to the uneven timing of the replacement coupled with different approaches to replacement being considered in different markets. The Board therefore decided to monitor developments in this area and as more information becomes available, assess the potential financial reporting implications and determine whether it should take any action and, if so, what.

The staff have identified a number of matters that could have a significant impact on financial reporting as a result of the reform. In this session, the Board will discuss issues around the retrospective application of IAS 39, modification vs. derecognition of financial assets and liabilities and changes to the hedge documentation.

Board discussion

Disclosures

The Board agreed that for disclosures they should provide an objective for what they are trying to achieve and how they would like it to be applied. The objective of the disclosures is to show readers the extent to which the relief has been used. The Board will aim for the requirements to be easy to apply and to not create extra costs to preparers.

Scope

Some Board members were concerned about adjusting the scope as it may require re-exposure and would rather focus on getting the ED finalised quickly in order to allow preparers to use it for year-end. However, others were in favour of increasing the scope to include hedges of foreign exchange risk (where these hedges are a combination of foreign exchange risk and interest rate risk) and thought that this is a clarification of what was initially intended (hence would not require re-exposure). However, they do not want to increase the scope to all hedging relationships affected by the reform.

Retrospective assessment

Overall, the Board had some sympathy for the issue around retrospective assessment and would like to find a solution to help preparers. They understand that with no relief for retrospective effectiveness testing, many hedges will be discontinued due to IBOR reform, which undermines the purpose of the amendments. However, most Board members were not keen on providing a relief on the 80–125 % rule. They requested the staff to provide more analysis around possible solutions. One solution discussed could be to align the assumptions on IBOR reform for retrospective effectiveness testing with prospective effectiveness testing (i.e. to assume that the interest benchmark on which the hedged cash flows are based is not changed). However, for measurement purposes, actual cash flows would still be used.

Macro hedging

The Board will articulate the application of macro hedging in the amendments as a clarification, however they do not believe there is anything new or standalone.

Additional examples

Requests were made for more detailed examples. One Board member said there is no time for the staff to create these as an application guidance as the timeline on this is very short. Another Board member was reluctant to add these to the Standard and instead suggested publishing additional educational materials which will help illustrate certain examples.

Other points

Some respondents raised the point around relief on reliable measurement, however the Board agreed that they will not change or amend this.

Some respondents requested an overarching objective for the amendments, however the Board think they have clearly provided an objective.

At the August meeting, the staff will provide a paper to the Board on retrospective effectiveness testing and clarification on:

• Application of separately identifiable criteria for portfolio hedging,
• Disclosures with the aim to reduce the required quantitate disclosure requirement, and
• End of relief guidance and in particular whether it applies to both the hedged item and instrument or just the hedging instrument or item on its own and for portfolio hedging.

They will then ask permission to start the balloting process to finalise Phase 1.

The modification of financial assets and liabilities, hedge documentation and what happens at the end of relief will all fall into Phase 2, which will be discussed in a future Board meeting.

Cover note (Agenda Paper 4)

Agenda Paper 4A provides a summary of the objectives of Agenda Paper 4B.

Agenda Paper 4B contains a presentation that summarises the key decisions of the Dynamic Risk Management (DRM) Model and demonstrates how the model captures and communicates the impact of risk management through transformation.

Agenda Paper 4C explores possible approaches for operational simplifications to the DRM accounting model.

Agenda Paper 4D contains discussion on whether application of the DRM accounting model should be optional or mandatory and what areas of focus should be for the model’s disclosure requirements.

DRM model demonstration cover note (Agenda Paper 4A)

The paper summarises the purpose of the presentation in Agenda Paper 4B. The purpose of the presentation is:

• To summarise the key decisions concerning the DRM model;
• To demonstrate the mechanics of the DRM model and show how it achieves the objectives of the project;
• To explain what information the model provides and how the model captures and communicates the impact of risk management through transformation in the financial statements.

Staff recommendations

This paper does not contain any technical questions to the Board. The staff are seeking the Board’s feedback on the presentation.

DRM model demonstation (Agenda Paper 4B)

Not summarised. See the presentation on the IASB website.

Board’s feedback on Agenda Paper 4B

A question was raised on slide 12 Objective and outline of the model whether the objective is not too narrow. It was compared with IFRS 7:21A. It was indicated that the DRM model should not only improve the information about the risk management strategy of an entity but it should also explain the effects on entity’s financial position, performance, future cash flows and economic resources i.e. present the link between the risk management strategy and financial statements.  Similarly, other Board members commented on the wording within the same slide. It was indicated that even if the calculation shows throughout how an entity will take the total calculation of the fair value of the derivatives and identify a component as an ‘accrual’. It is not interest income even if that accrual will subsequently be reclassified and treated as net interest income. It is attribution of the change in  fair value to an interest element.

Another point was raised on the wording that the derivatives are transforming the loans but in fact, they do not transform the loans because the counterparty does not accept that change i.e. it is not part of the same instrument.

Another comment was raised in the case of wording used in respect of eligible hedged items on slide 13 Challenges the model tries to address. The Board member indicated that it should not be implied that no hedge accounting can be done now. It certainly cannot be applied directly to demand deposits but it can be applied to proxy hedging.

One Board member raised a question in respect of phase 1 and phase 2 of the DRM model (slide 15 Core Model) and whether the model will work for non-linear hedging relationships. The staff confirmed that it will add complexity. Another question was raised in respect of slide 30 Construction of a Target Profile, where the expression that ‘an entity should be confident’ seems to introduce a new definition of certainty. That Board member asked the staff to consider what existing definition of certainty could be used (rather than introducing a new definition).

Another Board member asked whether there are plans to test the model with investors and adapt the deck accordingly because they will be looking at this from a different perspective to preparers of financial statements. The staff replied that it is up to the Board to decide  how the outreach will be done. However, from information has always been tailored to the audience in outreach performed in the past.

Operational simplifications (Agenda Paper 4C)

In this paper, the staff explore the possible approaches for the operational simplifications to the DRM model. The staff is of the opinion that in the DRM model the operational challenges will arise with tracking benchmark derivatives used for measuring alignment and reclassifying accumulated gains and losses recognised in other comprehensive income to profit or loss. This is because the DRM model allows for designation of open portfolios (i.e. portfolios where new exposures are continuously added and other exposures are removed over time), hence the portfolio of derivatives required for alignment will also change. As a result, the benchmark derivative will become a portfolio of derivatives over time due to the dynamic nature of open portfolios.

The staff considered the following two approaches that could ease the potential operational burden related to tracking of multiple benchmark derivatives for the purpose of both measuring alignment and reclassifying accumulated gains or losses recognised in other comprehensive income to profit or loss.

• Amortising swap; and
• Aggregation by shared contractual terms.

Amortising swap

Under this method, the numerous benchmark derivatives will be combined into a single aggregated derivative that will replicate the risk profile. Such aggregated derivative will have:

• an amortising notional (i.e. notional of the aggregated derivative will be changing at the same time when the individual benchmark derivatives matures); and
• one blended fixed rate (i.e. the rate will be calculated as weighted average of fixed rates on the individual benchmark derivatives).

However, the staff have the following concerns with this approach:

• The cash flow pattern of the aggregated derivative (amortising swap) is not the same as that of the portfolio of the individual derivatives, i.e. the accruals arising from the amortising swap and the individual benchmark derivatives would differ. This would distort the performance because the amount reclassified each period would be the accrual on the amortising swap rather than the combined accruals from the individual benchmark derivatives.
• The change in fair value of the amortising swap will be different from the change in fair values of the portfolio of the defined benchmark derivatives for the same given change in interest rates. As a result, the sum of changes in fair value of the individual benchmark derivatives will not be equal to the change in the fair value of the amortising swap. Because of that, the staff is concerned that this simplification approach may be only possible when the fair value sensitivity of the amortising swap is not materially different from the benchmark derivatives, i.e. in certain market conditions.
• Combining the individual benchmark derivatives into an amortising swap would not simplify the rolling nature of a laddering strategy because the amortising swap would not automatically capture the reinvestment.

For the reasons provided above, the staff is of the opinion that this approach will not be successful in providing a practical operational simplification to the DRM model.

Aggregation by shared contractual terms

Under this approach, for the purposes of tracking and measurement, the individual benchmark derivatives would be aggregated into a single derivative based on similar contractual terms, i.e. maturity date, payment date and floating rate basis. The fixed rate on the aggregated derivative would be calculated by taking the weighted average of the coupons on the individual benchmark derivatives with the same maturity dates. In this way the accruals from the aggregated derivative will be the same as from the individual benchmark derivatives. Furthermore, because the maturity of the aggregated swap will be the same as the individual benchmark derivatives, the change in the fair value of the aggregated swap will be equal to the sum of changes in the fair value of the individual benchmark derivatives (i.e. no measurement differences will arise). Finally, in the case of re-investment, the ‘new’ benchmark derivatives could be added to the existing aggregated swap (based on their critical terms) and the entity could recalculate the new weighted average rate for the revised aggregated swap.

This method could be used for forward starting interest swaps; however, it may be necessary to consider additional contractual terms.

Finally, the staff stated that the similar methods are used by industry participants to aggregate positions for various purposes, including collateral management.

Given the aggregation proposed in this approach does not alter the expected cash flows or the maturity dates between the individual benchmark derivatives and aggregated derivatives, the staff believe this method should significantly reduce the volume of data required for tracking and therefore bring significant operational simplicity.

Staff recommendations

The staff recommend aggregation based on similar contractual terms (i.e. maturity dates and floating rate basis) as a method to reduce the number of benchmark derivatives that require tracking.

Discussion

The Board member indicated that some of the wording need clarification i.e. what can be and what cannot be aggregated e.g. the use of the word ‘similar’ when intended to convey the meaning ‘the same’ in respect of maturity dates, interest rate basis (e.g. LIBOR) and payment dates. All three are important and all three should be the same. The staff agreed and the wording will be amended accordingly.  

Another Board member indicated that the proposed aggregation is only in respect of benchmark derivatives and not designated derivatives  thisshould be clarified. The same Board member raised questions about standardisation of repricing dates i.e. whether this will stop the entities from the using the intended simplification as well as whether this aggregation needs to be determined in advance or be part of the on-going decisions in  respect of  portfolio hedging. The Board member used the following example: if an entity has an additional CU500, will this be added to the existing ladder, which will be running for another 4.5 years, or should the  entity start a new 5 year ladder (because it runs 5year ladder policy)? The staff said that in a case such as this, the hedging documentation should specify this clearly. In respect of the standardisation, the staff said that an entity can always execute the tailored swap if that is needed. The simplification is to help manage the DRM model and it does not mean that if an entity cannot apply simplification then it cannot apply the DRM model.

One Board member has an observation on paragraph 6 that states “where operational challenges will arise and therefore, the simplification is required”. In his view, the wording is not appropriate as the simplification is not required to apply the DRM model. . Furthermore, the staff were asked to confirm that only the end dates matter and not the different start dates (chart 7, page 17). The staff confirmed and reiterated that end dates, payment dates and the interest basis matter but not the start dates. In other words, an entity would never be able group the benchmark derivatives together due to dynamics of the portfolio. It is duration that drives the interest rate sensitivity.  

A question was raised about the market of amortising swaps and the impact of that simplification. The staff answered that this will be just a speculation. The paper states that amortising swaps are ‘okay’ but not perfect and there always be an ineffectiveness , the size of which will depend on the market,that should be recognised.

Another Board member stated that the simplification is to make the DRM model easier, less costly to operate and not because of any weaknesses in the existing model. 

Decision

All Board members tentatively agreed with the preliminary staff recommendations.

Optional application and areas of focus for disclosure (Agenda Paper 4D)

In this paper, the staff discuss whether the DRM model should be mandatory or optional. Furthermore, the staff discuss the areas of focus for the disclosure requirements arising from DRM model.

Optional or mandatory

The staff highlight th following reasons for not making the DRM model mandatory:

• The DRM accounting model is an exception from the normal accounting for derivatives, similarly like a general hedge accounting model.
• The DRM model would require discipline (i.e. in order to apply the DRM model the entity will have to meet numerous qualifying criteria).
• The DRM model would require a certain degree of sophistication in modelling and risk management systems that would cause undue cost or effort on entities that do not have the necessary facilities.
• If an entity failed to demonstrate the existence of an economic relationship, such relationship still would not qualify for the DRM model and hence the mandatory application will be impractical.
• Certain items may be included in the scope of risk management activities that could not provide useful information or even conflict with existing IFRS Standards.

The staff have only one argument against making the DRM model optional—it would reduce the comparability as different entities could opt for different accounting alternatives. However, this argument was quickly rebutted by stating that dynamic risk management would need to be defined precisely in order to provide comparability between entities. Because there is a diversity in dynamic risk management approaches, even among entities within the same industry, this may be difficult.

Therefore, the staff are of the preliminary view that the application of the model should be optional.

Disclosure

The objective of the DRM model is to improve information provided regarding risk management and how the risk management activities affect a financial institution’s current and future economic resources. The staff recognised that the current focus on the information presented in the statement of profit or loss or in the statement of financial position is not enough because not everything can be communicated through measurement e.g. impact of misalignment on future economic resources. Therefore, an entity should provide additional information within notes. The staff proposed that the following should be disclosed:

• information that would enable users to clearly understand and evaluate the risk management strategy, i.e. information should be provided as the combination of qualitative and quantitative disclosures about the target profile;
• information about whether a management has the historical ability to align the asset and target profiles throughout the period in question, not just as at the reporting date (quantitative disclosure); and
• comparison of the designated derivatives with the benchmark derivative throughout the period (quantitative disclosure).

The staff think that before finalising the DRM model, a more detailed set of disclosures will be necessary. However, it may be more efficient and effective to develop the detailed requirements in a later stage of the project.

Staff recommendations

The staff recommend that:

• a) the application of the model should be optional; and
• b) the aim of disclosures should be to enhance or supplement the information provided in the statement of financial position and the statement of profit or loss. Disclosures should help users to:
  • i) understand and evaluate the merits of the entity’s risk management strategy;
  • ii) evaluate the entity’s ability to achieve the stated risk management strategy; and
  • iii) understand the impact of an entity’s risk management actions on current and future economic resources.

Discussion

A. Optional or Mandatory

Board members agreed that the model should be voluntary and not mandatory, however several Board members expressed that they did so reluctantly. Those Board members said that this optionality will impair comparability of the results of different financial institutions -something that is important for investors.. Board members said that it should be made as clear as possible which model a particular entity applied. The staff reiterated that the DRM model is not trying to replicate risk management strategy in the accounts, the DRM model works as an exception to the accounting for derivatives and that cannot be make compulsory.

One Board Member indicated that the optionality is not ideal, but due to cost considerations,  entities should have an option. The same Board member raised two questions i.e. whether the optionality will be at the level of an entity or at the level of the specific portfolio and whether the designation is irrecoverable. The staff clarified that the model cannot be revoked, it has to be change in the risk management strategy or derivatives expired. In the case of designations, the optionality is on the portfolio basis i.e. an entity can choose which portfolios to hedge.

Another Board member indicated that if the model is optional, then there are three consequences that would need to be considered: (1) education of investors to make them aware that there is another option in place; (2) clarity around who is using the DRM model and where the DRM model was used; and (3) disclosures around net interest income and margin.

One Board member asked whether the staff had thought about any mandatory disclosures for the entities that do not apply the DRM model. The DRM model provides useful information about the risk management strategy of an entity and even if the entity would not apply the model to recognition and measurement of the effectiveness, the information about the strategy, activity and the choices will be useful for the investors. The staff replied that mandatory disclosures for all entities may be considered but the staff currently did not think about that. Another Board member mentioned that a similar question was discussed during the general hedge accounting model (IFRS 9) where it was concluded that  entities not applying hedge accounting do not have to make those disclosures, however, she did not remember what the arguments were used and suggested that the staff look into this.

B. Areas of Focus

One Board member indicated that time should not be on the development of disclosures before the outreach has been conducted. Another Board member stated that disclosures should be developed because this will help to understand the implication of the DRM model on the financial statements. The same Board member stated that per her understanding during the outreach, the following stakeholder groupswill be addressed: (1) preparers in order to understand whether the DRM model is operational and whether they think it replicates their performance;  and (2) investors in order to talk about the information that they will obtain from DRM model. Based on the IFRS 9 experience, getting investors engaged in any talks about  hedging is difficult because they are not interested in the mechanics (i.e. they are too complicated). Disclosures are something that most of the investors will be interested in and should be the focus of the discussions with this user group. 

Some Board members saidthat the DRM model needs to be tested firstly with preparers and subsequently with investors..

One Board member stated that it is important to understand user needs and identify the specific  disclosures to be developed (i.e. taking into account their purpose and how they will be used). Furthermore, staff were asked to clarify the statement of ‘disclosures over time’ and how this should be applied. . The staff confirmed that the disclosures should provide information not just at the end of reporting period but whether during the period an entity was outside the thresholds.

Another Board member stated that the topic of disclosures should be discussed with both preparers and investors; however, the disclosures do not need to be developed prior to any consultation. Another Board member stated that prepares will expect that the DRM model would require detailed disclosures (based on their experience with IFRS 9, IFRS 13 etc.), even if they are not developed currently. Another Board member agreed that the general areas of disclosures should ultimately be provided as that will be the ‘whole’ package of the DRM model and not just recognition and measurement. 

One Board members expressed strong view that if the disclosures are not developed then the outreach should not proceed with investors as that will be a waste of their time. This would indicate doing the project in two phases as it was said earlier. Another Board member indicated that the phases do not need to be discrete and once some comments are gathered from prepares, investors can be consulted.

The Board voted on the original questions in paragraph 12 of Agenda Paper 4D plus an additional objective i.e. understanding the effects of the DRM model on the financial statements.

The staff confirmed that they have enough direction from the Board and  will develop objectives. This approach will reconcile with the question that the Board will be asked in the future about the structure of the outreach and how the outreach will be done.

Decision

The Board tentatively agreed with both preliminary staff’s recommendations unanimously.