Sale of a Subsidiary to a Customer (Agenda Paper 12A)

In October 2019, the Board discussed whether to undertake narrow-scope standard-setting to address the accounting for particular transactions that involve the sale of a subsidiary to a customer. The Board’s discussion related to a discussion at the IFRS Interpretations Committee (Committee) about the sale of a single asset entity containing real estate.

The Board asked the staff to undertake further research to assist the Board in assessing the feasibility of narrow-scope standard-setting to address the question.

The staff believe that, applying existing IFRS Standards, IFRS 10 applies for the sale of subsidiaries.

Further feedback from investors has revealed that for sales of subsidiaries that contain an investment property a net gain/loss on disposal would be appropriate, while for sales of subsidiaries that contain inventory, recognising the consideration received as revenue would provide the most useful information. However, if the seller retains an interest, the recognition of revenue would not be appropriate.

Staff recommendation

The staff recommended proposing a narrow-scope amendment that would require an entity to apply IFRS 15, instead of IFRS 10, to disposals of subsidiaries that have all of the following characteristics:

• The entity contracts with a customer for goods or services that are the output of its ordinary activities in exchange for consideration.
• The subsidiary contains only inventory (as defined in IAS 2) and any related income tax asset or liability (as defined in IAS 12).
• The entity retains no interest in the inventory transferred to the customer.

Board discussion

Many Board members expressed concerns about instigating standard-setting on this topic. A common theme was that the scope would be very difficult to contain as there could be many more transactions that are structured through the sale of shares in a subsidiary than those outlined in the paper. The Vice-Chair acknowledged the desire for information, however, in her view, at the moment there is a conceptually solid line between when IFRS 10 applies and when IFRS 15 applies. Moving this line for only some transactions would not be a robust solution. In her view, the post-implementation review (PIR) for IFRS 10 should be utilised to address this issue. One Board member said that the problem was not brought by IFRS 10, but by IFRS 15, which explicitly excludes transactions that fall into IFRS 10. It should therefore be addressed in the PIR of IFRS 15 not the PIR of IFRS 10. Others thought that any PIR will not be the right tool to address the problem and that a broader-scope project about the line between IFRS 10 and IFRS 15 would be required.

Board decision

The Board rejected the staff recommendation to instigate standard-setting on this issue with only 6 of 14 Board members in favour.

Accounting Policy Changes (Proposed amendments to IAS 8)—Introduction and background (Agenda Paper 12B)

ED/2018/1 Accounting Policy Changes proposed amendments to IAS 8. The proposed amendments aimed to simplify the application of accounting policy changes that result from an agenda decision by lowering the threshold for retrospective application of such changes. The proposed threshold would include consideration of the expected benefits to users of financial statements (investors) of applying the new accounting policy retrospectively and the cost to the entity of determining the effects of retrospective application.

At its meeting in December 2018, the Board received a summary of feedback on the ED. However, because of the interaction with the Due Process Oversight Committee’s (DPOC) review of the Due Process Handbook (Handbook) which was ongoing at that time, the Board was not asked to make decisions about the proposed amendments. The DPOC has now completed its deliberations on the due process for publishing an agenda decision and expects to publish the revised Handbook in June 2020.

At its meeting in December 2019, having considered the feedback on its proposed amendments to the Handbook regarding agenda decisions, the DPOC:

• confirmed the status of agenda decisions
• decided that the Handbook should be amended to clarify that, while an agenda decision cannot add or change requirements in IFRS Standards, the explanatory material in an agenda decision derives its authority from the Standards themselves. An entity is therefore required to apply the applicable Standards, reflecting the explanatory material in an agenda decision.
• decided to involve the Board in the process of publishing a final agenda decision as an additional due process step—i.e. if the Board objects to such an agenda decision (which would be the case if four or more Board members object), an agenda decision would not be published and the Board would decide how to proceed.

The objective of this meeting is to provide the Board with the staff’s analysis of whether to proceed with the proposed amendments in the light of the feedback and ask the Board whether it agrees with the staff’s recommendation not to proceed and to do no further work on the project.

There was no discussion on this paper.

Accounting Policy Changes (Proposed amendments to IAS 8)—Possible ways forward (Agenda Paper 12C)

Comments on the ED were mixed. Some respondents agreed, some disagreed, and some said they would agree if the Board were to extend the scope of the proposed cost-benefit threshold. The extended scope suggested would include all voluntary accounting policy changes, not only those that result from an agenda decision.

Respondents who generally agreed with the proposed amendments did so because they said the proposed amendments would remove part of the challenge entities face when changing an accounting policy as a result of an agenda decision.

Respondents who disagreed with, or expressed concerns about, the proposed amendments said they are unnecessary because the existing requirements in IAS 8 are adequate and they would result in a fundamental change that could lead to unintended consequences for investors.

The staff have analysed the main comments and identified the following two possible ways forward:

• Modified Exposure Draft: Proceed with finalising the proposed amendments, subject to extending the scope of the proposed cost-benefit threshold so that an entity could apply it to all voluntary changes in accounting policy.
• Do Not Proceed: Do not proceed with the proposed amendments and do no further work on the project.

The Modified Exposure Draft approach would not address concerns raised about applying the cost-benefit threshold. Based on the staff’s analysis of those concerns, if the Board decides to proceed, the staff would propose that the Board amend IAS 8 so that an entity could apply the cost-benefit threshold but would not be required to do so. An entity could then apply the threshold when that application would itself be considered cost-beneficial. However, in the staff’s view, the expected benefits of proceeding with the Modified Exposure Draft approach do not outweigh the expected cost of standard-setting.

Staff recommendation

Based on their analysis, the staff recommended not proceeding with the proposed amendments and doing no further work on the project.

Board discussion

Many Board members supported the staff recommendation, albeit some of them reluctantly. Many of the Board members acknowledged the mixed feedback to the ED, but did not see any way to overcome this, unless the project would be made much broader. One Board member raised the issue that an accounting policy change that is necessary on grounds of an agenda decision would still be treated as a voluntary change in IAS 8. He suggested an amendment to reflect that agenda decisions are now mandatory. The Vice-Chair responded that, unfortunately, this is the way IAS 8 works, as mandatory accounting policy changes can only be brought by new or amended Standards and IFRIC Interpretations. She suggested, however, to wait with an amendment to repair this until IAS 8 is open anyway, for example by way of another amendment.

Board decision

12 of the 14 Board members agreed with the staff recommendation not to proceed with the project.

Accounting Policy Changes (Proposed amendments to IAS 8)—Feedback summary (Agenda Paper 12D)

This paper reproduces Agenda Paper 12C of the December 2018 Board meeting, except for one of the appendices to the paper and the question to the Board.

There was no discussion on this paper.