Commodity Loans (Agenda Paper 12)

In 2017, the IFRS Interpretations Committee received a question about a particular commodity loan transaction and observed that the transaction may not be captured within the scope of any IFRS Standard.

Due to this question, the Board previously discussed a possible narrow-scope project on commodity loans and related transactions and asked the staff to research the feasibility of such a project.

The critical component of such a project would be to determine the scope (i.e. which commodity transactions should be included versus which should not be included). Based on research performed by the staff, they are aware that there are many different types of commodity transactions, however without investing additional time and effort the staff believe it is difficult to identify a population of commodity transactions for the narrow-scope project.

The staff therefore do not recommend the Board add a narrow-scope standard-setting project on commodity transactions to its work plan.

The staff think the Board should gather more information as to which types of commodity transactions stakeholders view as a priority and recommend that the Board consider referring to commodity transactions as a potential project in its Request for Information on the 2020 Agenda Consultation.

Overall approach (Agenda Paper 24)

As part of the 2020 Agenda Consultation, the Board is planning to publish a Request for Information (RFI). The staff anticipate the following timetable:

• October 2019 – September 2020: Developing the RFI
• September 2020: Publish the RFI
• January 2021: RFI comment deadline
• Q1 2021 – Q3 2021: Board discussions to deliberate feedback and develop work plan and feedback statement
• Q4 2021: Issue work plan and feedback statement

Approach to existing projects and other commitments (Agenda Paper 24A)

The purpose of this paper is to present the staff’s proposed approach to seeking feedback on the Board’s existing projects and other commitments in the RFI.

The Board currently has the following projects in its research pipeline:

• Equity Method
• High Inflation: Scope of IAS 29
• Pollutant Pricing Mechanisms
• Variable and Contingent Consideration.

In addition, the Board decided after the last Agenda Consultation to carry out a Post-implementation review (PIR) of IFRS 5.

The Board expects to start work on the Equity Method in the next few months because there is some overlap with some of the issues that could be considered in the PIR of IFRS 11. The staff think the RFI should ask stakeholders to comment on and, if necessary, re-prioritise the other research pipeline projects and the PIR of IFRS 5.

The Board has previously considered a potential research project on commodity transactions. The staff recommend that the Board refer to a project on commodity transactions in the RFI for stakeholders to comment on.

The staff ask the Board whether they agree with this approach.

Summary of outreach conducted prior to publishing the Request for Information (Agenda Paper 24B)

This paper summarises the outreach undertaken to develop the list of potential projects to be described in the RFI and the messages heard. In this paper, the staff ask whether Board members have:

• any comments or questions on the outreach performed;
• any comments or advice on how the feedback received during the outreach should be reflected in the RFI;
• any comments or questions on the list of potential projects to be described in the RFI; and
• any comments on the content and level of detail included in the example potential project description in the agenda paper.

Agenda for the meeting

Agenda papers for this meeting are available on the IASB's website.

The IASB met on Tuesday 17 and Thursday 19 March 2020, by video link. The meeting was cut to three topics because of the Covid-19 pandemic.

Rate-regulated Activities: The staff have been drafting the ED for the accounting model for regulatory assets and regulatory liabilities since last July. The Board decided to clarify whether some components included in the regulated rates in a period form part of total allowed compensation for the goods or services supplied by an entity in the same period or in a different period. In particular, the Board decided to clarify whether regulatory returns and performance incentives included in the regulated rates for a period form part of the total allowed compensation for to the goods or services supplied in the same period.

Management Commentary: The Board continued its discussions about the objective of management commentary, and decided that it should support primary users in assessing an entity’s prospects of future cash flows and assessing management’s stewardship of the entity’s economic resources. The primary users are existing and potential investors, lenders and other creditors and they are expected to have a reasonable knowledge of business and economic activities. The staff also introduced their thinking on developing disclosure objectives for various types of content to be included in management commentary.

Amendments to IFRS 17 Insurance Contracts: The Board decided to defer the effective date of IFRS 17 (incorporating the amendments) to annual reporting periods beginning on or after 1 January 2023 and to extend the fixed expiry date of the temporary exemption from applying IFRS 9 in IFRS 4 to the same date. The staff expect that the amendments will be issued in the second quarter of 2020.

Cover Paper (Agenda Paper 2)

At its March meeting, the IASB discussed the remaining issues resulting from the feedback received on the Exposure Draft ED/2019/4 Amend­ments to IFRS 17, which are the effective date of IFRS 17 and the expiry date of the IFRS 9 temporary exemption in IFRS 4.

Agenda Paper 2C (not summarised below) for the meeting offers an overview of all topics discussed and the Board's tentative decisions.

After its March 2020 meeting, the Board has now completed its planned redeliberations of the feedback on the ED. The Board gave permission to start the balloting process at this meeting. The staff now plan to draft the amendments to IFRS 17 and bring any issues they identify during the balloting of the amendments for discussion at a future meeting. The staff expect that the amendments will be issued in the second quarter of 2020, in line with the plan the Board set out in the ED.

Effective date of IFRS 17 and IFRS 9 temporary exemption in IFRS 4 (Agenda Paper 2A)

Background

In the original version of IFRS 17, the Board had set an effective date of 1 January 2021, with earlier application permitted (as long as IFRS 9 is applied as well). The ED proposed deferring this date by one year.

In the comment letters received, almost all respondents agreed with that proposed deferral. However, some respondents asked for a further deferral, while others raised concerns about another potential delay.

The staff analysed those comments as follows:

Those respondents who were concerned about a further deferral were specifically concerned about delaying much-needed improvements to existing accounting practices for insurance contracts or the loss of momentum in implementation projects and increased implementation costs.

Those who asked for a further deferral want to allow for a well-controlled and robust implementation. Despite significant resources being dedicated to IFRS 17 implementation, more time is required to implement the Standard.

While the Board had already given a long effective date, the staff agree with those respondents who stated that implementation by 2022 would be demanding. The staff also acknowledge that some of the amendments need more implementation work.

The staff agree with respondents who stated the importance of an aligned effective date of IFRS 17 around the world. Given the delays in some endorsement processes around the world, respondents fear that the effective date might be set differently by jurisdictions. An aligned effective date of 1 January 2022 might therefore not be achievable.

With regard to the IFRS 9 temporary exemption in IFRS 4, the staff think that the benefit of extending the relief by a further year is appropriate to maintain the alignment of the initial application of IFRS 17 and IFRS 9 for specified insurers. In the staff’s view this could outweigh the disadvantage of a further delay to the implementation of IFRS 9 by those insurers.

Staff recommendation

Consequently, the staff recommended that the Board:

• defer the effective date of IFRS 17 (incorporating the amendments) to annual reporting periods beginning on or after 1 January 2023; and
• extend the fixed expiry date of the temporary exemption from applying IFRS 9 in IFRS 4 to annual reporting periods beginning on or after 1 January 2023.

Board discussion

Many Board members expressed discomfort with delaying IFRS 17, however ultimately supported the staff recommendation as the benefit of delaying outweighs its cost.

One Board member said that many users of financial statements have requested the earlier effective date as urgent action is needed. He said that it would be seven years between publication of the Standard and the first set of financial statements being published under IFRS 17. On the other hand, he acknowledged the longer than expected implementation time of IFRS 17 and the longer time to endorse the Standard in some jurisdictions. Another Board member agreed and said that the delay would enable all countries to apply IFRS 17 at the same time and would reduce challenges in developing systems, especially for smaller companies. These arguments were supported by several Board members.

The Chairman said that he supported the staff recommendation so that jurisdictions that have worked hard and fast to implement the Standard into local law are not punished by being exposed to the Standard before those jurisdictions that have taken a longer time to endorse. He said that this is regrettable as he wanted the Standard to be effective before the next financial crisis, which is now no longer possible. He found it especially concerning that the insurance sector is not only working with an outdated insurance standard, but also with an outdated financial instruments standard.

On the temporary exemption to apply IFRS 9, one Board member said that this proposal made him think whether delaying IFRS 9 for insurers was a good idea in the first place. The decision to delay was originally taken so that insurers would not have to implement two big Standards in a short time. However, it is now not a short time anymore and with hindsight, the Board might have taken a different route. On the other hand, there is some benefit of insurers applying the two Standards at the same time. Also, if the staff proposal is not supported today, the situation that the Board wanted to avoid would arise (i.e. the two Standards would have to be implemented within one year of each other). Other Board members supported that and said the practical implication of having to implement IFRS 9 first and then IFRS 17 should be considered. Many companies have a joint implementation project for both Standards. The disclosures required by IAS 8 and IFRS 4 would help to understand the impact of IFRS 9 on insurance companies. Also, the temporary exemption is optional and insurers could therefore apply IFRS 9 earlier than IFRS 17.       

One Board member rejected the staff recommendation as the benefits of IFRS 9 are significant, especially in these difficult times.

Board decision

On the deferral of the effective date of IFRS 17 to annual reporting periods beginning on or after 1 January 2023, 12 of the 14 Board members supported the recommendation (1 was absent).

On the extension of the fixed expiry date of the temporary exemption from applying IFRS 9 in IFRS 4 to annual reporting periods beginning on or after 1 January 2023, the Board supported the recommendation with 12:2 votes.

Due process steps and permission to balloting (Agenda Paper 2B)

This paper set out the due process steps that the Board has taken in developing the amendments and asked the Board:

• to confirm that it is satisfied that it has complied with the due process requirements.
• to give permission to begin the balloting process for the amendments to IFRS 17.
• whether any Board member intends to dissent from the issuance of the amendments.

The staff recommended that the amendment to IFRS 4—reflecting the extension of the fixed expiry date for the temporary exemption from applying IFRS 9—is balloted separately from the amendments to IFRS 17 (including consequential amendments to other IFRS Standards). This will give jurisdictions with an endorsement process the possibility to endorse the temporary exemption independently (and possibly more quickly) and so avoid endorsement after the current temporary exemption has run out (January 2021).

Board decision

All Board members:

• confirmed that they are satisfied that the Board has complied with the due process requirements.
• gave permission to begin the balloting process for the amendments to IFRS 17 and IFRS 4.

No Board member signalled intent to dissent from the issuance of the amendments.

Cover Paper (Agenda Paper 9)

In July 2019, the Board gave the staff permission to start the balloting process for the publication of an Exposure Draft (ED) for the accounting model for regulatory assets and regulatory liabilities (the model).

When developing the model, the Board discussed ‘total allowed compensation’ and its components. However, in drafting the ED, the staff observed that the earlier Board discussions were not detailed enough to determine whether some components included in the regulated rates in a period form part of total allowed compensation for the goods or services supplied by an entity in the same period or in a different period.

In particular, the discussions were not explicit about whether the following elements of target profit included in the regulated rates for a period form part of the total allowed compensation for to the goods or services supplied in the same period: (a) regulatory returns; and (b) performance incentives. Therefore, the staff has prepared a set of papers that provide further clarification and specific recommendations on this aspect of the model.

Background and Regulatory Capital Base (RCB) (Agenda Paper 9A)

This paper provided background information about total allowed compensation and analyses how to determine whether regulatory returns on regulatory capital base (RCB) for a period should be regarded as forming part of total allowed compensation for goods or services supplied in that period or in a different period. The answer to this question will determine when those returns affect profit.

This paper did not ask the Board to make any decisions. However, it provides analysis that is used further in Agenda Paper 9B.

At the meetings held in 2019, the Board discussed the following description of total allowed compensation: “The total allowed compensation is the amount that an entity is entitled to charge customers for the goods or services supplied.” Total allowed compensation is a key concept in the model because it is compared with the amounts already charged to customers in a reporting period, that is amounts that an entity recognised as revenue in that reporting period in accordance with IFRS 15. That comparison determines whether the entity:

• (a) has not charged all or part of the compensation to which it is entitled for the goods or services it already supplied and, consequently, whether it has a present right to include outstanding compensation in determining the regulated rate(s) in future period(s); or
• (b) has already charged customers compensation for goods or services it has not yet supplied and, consequently, whether it has a present obligation to deduct that compensation in determining the regulated rate(s) in future period(s).

At meetings held in 2019, the Board discussed the components of total allowed compensation as follows:

• (a) allowable expenses and chargeable income
• (b) target profit, the main elements of which are:
  • i. margins on allowable expenses
  • ii. regulatory interest
  • iii. performance incentives (ie bonuses and penalties); and
  • iv. regulatory returns on the regulatory capital base (RCB).

The Board´s previous discussions did not explicitly address a general principle for when target profit and one of its elements (regulatory returns on RCB) should be regarded as forming part of total allowed compensation for goods or services supplied.

The staff is of the view that the fact the regulatory agreement entitles an entity to charge customers target profit in a specified period (by including those amounts in the regulated rates to be charged for the period), establishes that that target profit relates to goods or services supplied to customers in that period, unless there is a compelling reason to link it to goods or services supplied in a different period.

Board discussion

Many Board members supported the staff’s recommendation. Those who spoke found the clarification of the general principle useful and liked that the ED will make clear where it departs from the general principle. While agreeing with mirroring what is proposed for the expense side for the income side, one Board member found that this aspect of the ED would add a layer of complexity without adding much useful information. In her view, the guidance relied too much on how an agreement is written, rather than the economic reality. Another Board member highlighted practical difficulties with this approach. One Board member would have preferred a simpler solution to the issue, but conceded that it is needed in this complexity.

The Board did not make a decision.

Regulatory returns on construction work in progress base (Agenda Paper 9B)

This paper continues the analysis in Agenda Paper 9A and applies it to a specific situation—that is, whether regulatory returns on a construction work in progress (CWIP) base included in the regulated rates charged to customers during the construction period should be regarded as forming part of total allowed compensation for goods or services in the construction period, or of total allowed compensation for goods or services supplied when the asset is being used in supplying goods or services to customers.

Entities that are expected to have regulatory assets or regulatory liabilities often undertake construction work for long periods of time to build up the infrastructure necessary for the supply of goods or services. Long construction periods imply that significant amounts of capital are tied up in construction for many years. As compensation for that capital, regulatory agreements typically provide entities with regulatory returns applied to a base that consists of CWIP. Two approaches commonly used by regulators for including regulatory returns on CWIP base in the regulated rates are as follows:

• (a) regulatory returns accumulate during the construction period and are included in the regulated rates charged to customers after the construction works have been completed—i.e. during the operating period of the asset; or
• (b) regulatory returns are included in the regulated rates charged to customers during the construction period of the asset.

The staff analysed both fact patterns and recommended the following principles for when target profit and regulatory returns should be regarded as forming part of total allowed compensation:

• (a) Target profit that a regulatory agreement entitles an entity to charge customers for a specified period forms part of total allowed compensation for goods or services supplied in that period.
• (b) Regulatory returns on an RCB that a regulatory agreement entitles an entity to charge customers for a specified period form part of total allowed compensation for goods or services supplied in that period.
• (c) Regulatory returns on a CWIP base that are included in the regulated rates during the construction period form part of total allowed compensation only during the operating period(s) of the asset (i.e. when goods or services are being supplied with the asset to which those regulatory returns relate (i.e. over its useful life)).

Board discussion

Board members welcomed the staff’s effort to enhance the model. Revenue recognition would not be accurate under the general principle. Several Board members highlighted that the staff should also analyse a case in which the useful life of the assets is different for IFRS and regulatory purposes.

Board members asked whether the construction is considered a service in this approach. The staff confirmed it would not be a service as it is not delivered to the customer. This would be clarified in the ED. Board members raised some concerns about whether construction could always be clearly distinguished from other goods and services. The Vice-Chair named the example of maintenance and repairs. The drafting would have to be clear to avoid ambiguity.

Performance incentives (Agenda Paper 9C)

This paper discusses when performance incentives form part of total allowed compensation and gives special consideration to incentives for construction-related activities of the entity.

During this project, the Board has learnt that performance incentives are a common feature of rate regulation in many jurisdictions. Incentive-based regulation will often incorporate financial rewards and penalties in the basis for setting the regulated rates to induce an entity to achieve desired regulatory objectives.

In July 2019, the Board discussed performance incentives—bonuses for achieving (or penalties for failing to achieve) specified performance criteria (e.g. targeted levels of service quality or reliability, customer satisfaction, etc.) and 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). The incentives discussed in July 2019 were those of an operational or non-construction-related nature.

The staff’s analysis presented in July 2019 concluded that non-construction-related performance incentives form part of total allowed compensation for goods or services supplied during the period to which the performance incentive relates—that is, the period in which the performance criteria for the performance incentive are monitored and evaluated.

In the staff’s view, aligning the treatment of when amounts for non-construction-related and construction-related performance incentives form part of total allowed compensation has the following advantages:

• (a) It provides more useful and understandable information to the users of financial statements than using different approaches to reflect compensation for different types of incentives—having different requirements may only add confusion for users and not result in any added information value.
• (b) It means lower costs for preparers from not having to develop and implement different policies and processes to account for performance incentives according to their type (except those construction-related incentives that are conditional on satisfying requirements when supplying goods or services in future periods).

Therefore, the staff recommended that performance incentives, whether construction-related or non-construction-related, should form part of total allowed compensation for goods or services supplied in the period when the relevant performance criteria are monitored and evaluated.

Board discussion

Board members generally agreed with the staff recommendation with one Board member suggesting to add an example in the ED to illustrate the logic.

One Board member asked whether the recommendation is consistent with the general principle if goods and services have not been supplied and it the entity has therefore no right to the bonus. The staff replied that if there was a condition attached to the bonus, then the entity should recognise the part of the bonus that relates to the ongoing business in the operating period. However, the staff did not want to be overly prescriptive and not provide a bright line for this. Board members agreed with this approach.

Another Board member asked whether IFRIC 12 would have to be applied first. The staff confirmed this.

Summary of staff recommendations (Agenda Paper 9D)

This paper set out the following staff recommendations relating to agenda papers 9A–9C prepared for the meeting and asked the Board related questions.

Recommendation 1 (Agenda Paper 9A): Target profit that a regulatory agreement entitles an entity to charge customers for a specified period forms part of total allowed compensation for goods or services supplied in that period.

Recommendation 2 (Agenda Paper 9B): Regulatory returns on a RCB that a regulatory agreement entitles an entity to charge customers for a specified period form part of total allowed compensation for goods or services supplied in that period.

Recommendation 3 (Agenda Paper 9B): Regulatory returns on a CWIP base that are included in the regulated rates during the construction period form part of total allowed compensation only during the operating period(s) of the asset (i.e. when goods or services are being supplied with the asset to which those regulatory returns relate—i.e. over its useful life).

Recommendation 4 (Agenda Paper 9C): Performance incentives, whether construction-related or nonconstruction-related, form part of total allowed compensation for goods or services supplied in the period when the relevant performance criteria are monitored and evaluated.

Board decision

Recommendation 1: 13:1 Board members support this recommendation.

Recommendation 2: 13:1 Board members support this recommendation.

Recommendation 3: All Board members support this recommendation.

Recommendation 4 [with the suggestions around allocation and specific drafting of monitoring and evaluating]: 12:2 Board members support this recommendation.

Cover paper (Agenda Paper 15)

In previous meetings, the Board has discussed the objective of management commentary, guidance on the characteristics of useful information in management commentary and particular aspects of guidance on the business model.

At this meeting, the staff presented further work relating to the objective of management commentary (refer to Agenda Paper 15A) and disclosure objectives for particular types of content in management commentary (refer to Agenda Paper 15B).

The objective of management commentary (Agenda Paper 15A)

The staff provided a recap of previous Board discussions relating to the topic (please refer to the summary of the November 2018 meeting) in addition to providing explanations for their latest recommendations.

In this meeting, the staff asked the Board whether they agree that the Practice Statement:

• (a) describes the objective of management commentary as follows:
  
  The objective of management commentary is to support primary users in assessing an entity’s prospects for future cash flows and assessing management’s stewardship of the entity’s economic resources by providing useful information and analysis which:
  • (i) enhance the primary users’ understanding of the entity’s performance and position as depicted in the related financial statements; and
  • (ii) give insight into factors that could affect the entity’s prospects.
• (b) retains the statement that management commentary is prepared for existing and potential investors, lenders and other creditors and refers to them as ‘primary users’; and
• (c) explains that primary users are expected to have a reasonable knowledge of business and economic activities and to review and analyse the information diligently, but are not expected to have knowledge of the entity.

Discussion and voting

The discussion around the objective of management commentary focused on the link between the ‘prospects for future cash flows’ and ‘value creation’. Many Board members want to ensure that this link is clearly identified early in the Practice Statement. Furthermore, ‘value creation’ is to be considered in the narrow sense i.e. the creation of value for the entity and its shareholders. In addition, it should be clarified that something may be value-creating despite the actual cash flows only occurring in the distant future.

When asked to vote on (a) above, taking into account suggestions provided regarding clarifications and drafting, 13:1 Board members voted in favour of the staff recommendation.

When discussing the primary users and their assumed knowledge, there was general agreement with the staff’s recommendation. Two clarifications were sought: that the primary users are expected to have a general knowledge of business and economic activities, rather than an entity-specific knowledge; and how standing information was to be treated.

Staff confirmed that a general knowledge, consistent with the Conceptual Framework, was assumed for users. Given this, standing information in management commentary is important, as users are not expected to have entity-specific knowledge. As a result, management commentary should not just highlight changes from year to year but should contain some standing information, but drafting could help preparers to assess what this should be.

When asked to vote on (b) and (c) above, 14 Board members voted in favour of the staff recommendation.

The staff also provided a discussion of the related supporting guidance that could be included in the revised Practice Statement. This could include guidance on management’s view and the types of information in management commentary. No vote was required and the Board made limited comments centred on terminology, specifically non-financial and operational.

Disclosure objectives (Agenda Paper 15B)

The staff introduced their thinking on developing disclosure objectives for various types of content to be included in management commentary. Staff suggest that, for each type of content in management commentary, an explicit disclosure objective be introduced and guidance should be provided to assist preparers to meet each disclosure objective.

This seeks to assist preparers in identifying what information they should provide to help primary users to assess the entity’s prospects for future cash flows and management’s stewardship and for regulators and assurers to determine whether management commentary meets its objective.

The Board was not be asked for decisions at this meeting, but they were asked to comment.

Discussion

A few Board members mentioned that, despite the staff saying that the order of topics provided was not an indicator of how information should be presented, they should consider that some preparers may decide to follow any order provided.

The layout the practice statement was discussed and it was clarified that staff intend to present each objective with the related guidance and disclosures rather than creating a single disclosures section.

The linkage, replication and consistency of information provided was also discussed.

Next steps

The staff intend to bring further topics in clusters based on the interaction between topics. For example, business model, resources and relationships and strategy and opportunities; operating environment and risks and performance, position and progress, will be grouped together.

Further discussions will take place in the future relating to the status of the Practice Statement and the approach to be taken in developing guidance in support of the disclosure objectives.

Cover Paper (Agenda Paper 11)

The purpose of this meeting is for the Board to decide whether the staff can begin the balloting process on Exposure Draft (ED) Targeted Standards-level Review of Disclosures—Amendments to IAS 19 and IFRS 13.

Due process steps and permission to begin the balloting process (Agenda Paper 11A)

This paper summarises the due process steps taken in the project and asks the Board whether the staff can begin the balloting process.  It also summarises the staff’s proposed structure for the upcoming ED and their analysis and recommendation regarding the length of the comment period.

Staff analysis

The staff’s analysis highlights that, whilst the minimum comment period is 120 days, the Board should opt for a longer period in this instance as the project deals with a new approach to developing and drafting disclosure sections of IFRS Standards, which is likely to have significant consequences, and a longer period would allow staff more time to perform additional consultation activities. The staff therefore recommend that the Board allow a comment period of 180 days for the ED.

The staff’s analysis also demonstrates that the Board has completed all the required due process steps and some of the optional steps necessary to issue an ED. The staff’s tentative plan for the ED package is for it to contain the following sections:

• Amendments
• Illustrative Examples
• Basis for Conclusions
• Project Summary

Financial instruments settled in own equity instruments: foundation principle (Agenda Paper 5A)

At the December 2019 Board meeting, the Board discussed the staff’s preliminary analysis on how the fixed-for-fixed requirement in IAS 32 could be clarified. Based on the input provided by Board members at that meeting, the staff have developed their analysis further and asks the Board to make tentative decisions that will help set the direction for the clarified principles that are being developed (Agenda Paper 5B).

In the papers, the staff analyse the classification of derivatives on own equity, whether standalone or embedded in a non-derivative instrument.

In December 2019, the Board considered the following potential clarifications proposed by the staff to explain the rationale for the fixed-for-fixed condition in IAS 32:16:

• 1) Foundation principle—a derivative on own equity that meets the fixed-for-fixed condition should have a fair value on the settlement date (settlement value) that is:
  • a) only affected by fluctuations in the price of the underlying equity instruments (exposed to equity price risk); and
  • b) not affected by fluctuations in other variables that the holder of the underlying equity instruments would not be exposed to (not exposed to other risks).
• 2) Adjustment principle—if a derivative is subject to any adjustments to the amount of cash or another financial asset, or the number of own equity instruments, the adjustments would not preclude the derivative from meeting the fixed-for-fixed condition if the adjustments:
  • a) preserve the relative economic interests of the derivative holder and the underlying equity instrument holder (‘preservation adjustments’); or
  • b) compensate the issuer for the fact that the derivative will be settled at a future date (‘passage of time adjustments’).

This paper sets out an analysis of the “foundation principle”—including its application to some illustrative examples—and includes two alternative methods of articulating the foundation principle: “Alternative A” is a direct refinement of the foundation principle discussed in December 2019, whereas “Alternative B” is an alternative way to articulate the foundation principle based on the certainty of the amount of cash exchanged per unit of equity instrument.

The paper also discusses the classification of share-for-share exchanges, where contracts are settled by the issuer exchanging one type of its own non-derivative equity instruments for another type of its own non-derivative equity instruments. The paper notes that IAS 32 does not address a fact pattern that involves a share-for-share exchange where both legs of the exchange are a fixed number of own shares. The staff are aware that different views exist in practice with respect to how such a contract should be classified.

Summary of the staff’s preliminary views

Foundation principle—The staff’s preference on how to articulate the foundation principle necessary to assess the fixed-for-fixed condition is “Alternative B” because of the potential limitations of “Alternative A” discussed in this paper. Also, Alternative B does not use new concepts such as settlement value, which should make it easier for stakeholders to understand and implement. Foundation principle Alternative B is articulated as follows:

In a derivative on own equity that meets the fixed-for-fixed condition, the amount of functional currency units to be exchanged with each underlying equity instrument is fixed and does not vary other than (if applicable) with:

• i) preservation adjustments; and
• ii) passage of time adjustments.

Share-for-share exchange—The staff’s view is that a contract that will or may be settled by exchanging a fixed number of non-derivative own equity instruments with a fixed number of another type of non-derivative own equity instruments should be classified as equity. By issuing such a contract, the issuer will be or may be extinguishing one type of own equity with another type of own equity. The value of shares received in exchange may be different from the value of shares delivered. However, such a contract would not impose any additional obligations on, or give any additional rights to, the issuer compared to a scenario in which it issues and reacquires the underlying equity instruments directly.

Questions for the Board

1. Foundation principle for classifying derivatives on own equity - does the Board agree that Alternative B is a better way of articulating the foundation principle?
2. Share-for-share exchange - if the Board agrees with Alternative B for articulating the foundation principle, does the Board agree with the staff’s analysis of the share-for-share exchanges where both legs of the exchange are a fixed number of non-derivative equity instruments of the entity?

Financial instruments settled in own equity instruments: adjustment principle (Agenda Paper 5B)

In December 2019, the Board discussed developing a principle to allow the following two types of adjustments to derivatives on own equity to meet the fixed-for-fixed condition:

• 1. Preservation adjustments—these adjustments preserve the relative economic interests of the potential or future equity instrument holder (in the case of options or forwards respectively) and the existing underlying equity instrument holder.
• 2. Passage of time adjustments—these adjustments compensate either the issuer or the holder of a derivative for changes in the timing of exercise of a derivative or changes in the exercise date of the option. The passage of time adjustment must vary with the passage of time, i.e. the timing of settlement of the derivative.

Within the paper, the staff present two alternatives (Alternatives A and B) to describe the preservation adjustments that would be allowed in an equity-classified derivative, and four alternatives ways (Alternatives A – D) to specify what is an allowable passage of time adjustment in order to classify a derivative as equity.

Summary of the staff’s preliminary views

The staff’s preliminary views on how to articulate the adjustment principles necessary to assess the fixed-for-fixed condition are set out below.

• a) Adjustment principle: Preservation adjustments—The staff prefer Alternative B. Applying Alternative B, preservation adjustments would not preclude equity classification of derivatives on own equity if they require the issuer to preserve the relative economic interests of the potential or future shareholders to an equal or a lesser extent than the underlying equity instrument holders.
• b) Adjustment principle: Passage of time adjustments—The staff prefer Alternative B. Applying Alternative B, passage of time adjustments would not preclude equity classification of derivatives on own equity if they:
  • a. are pre-determined and only vary with passage of time; and
  • b. have the effect of fixing the number of functional currency units per underlying equity instrument in terms of a present value.

Questions for the Board

1. Preservation adjustments—does the Board agree that Alternative B should be used to articulate allowable preservation adjustments?
2. Passage of time adjustments—does the Board agree that Alternative B should be used to determine what is an allowable adjustment for the passage of time?

Disclosures: Planned outreach (Agenda Paper 5C)

The purpose of this paper is to set out the staff’s plan for outreach with stakeholders on potential disclosures that can be developed as part of the FICE project. In this paper the staff recap some of the concerns raised and suggestions made by stakeholders for each type of disclosure that was proposed in the 2018 Discussion Paper Financial Instruments with Characteristics of Equity (2018 DP). The staff then present potential refinements for each type of disclosure that could address some of these concerns and suggestions. The potential disclosure refinements will be used to help facilitate the discussions during the outreach with stakeholders.

For each type of disclosure, the following is discussed:

• i) 2018 DP proposal;
• ii) Challenges and concerns raised in the 2018 DP feedback; and
• iii) Potential disclosure refinements.

Question for the Board

The staff are not asking the Board to make any decisions at this meeting but would welcome any comments or questions on the staff’s outreach plan.

Findings from the first phase and determining the next step (Agenda Paper 7A)

In September 2019, the first phase for the post-implementation review (PIR) of IFRS 10-12 was outlined to the Board. In this meeting the staff will present their findings from the first phase and ask the Board to approve a Request for Information (RFI) proposal.

The paper outlines the areas of each Standard considered by the staff and the stakeholder feedback for each area that has been collected so far.

Staff recommendation

The staff recommend that:

• a) the Board proceed with the PIR and publish a request for information. The objective of the RFI would be to gather evidence on the requirements identified in the first phase of the review from a broader group of stakeholders. Publication of an RFI does not imply that any standard-setting is required.
• b) the RFI include questions on:
  • (i) IFRS 10, relating to:
    • 1. power over an investee.
    • 2. the link between power and returns, with a focus on identifying agency relationships.
    • 3. accounting requirements in IFRS 10, with a focus on changes in ownership interests.
    • 4. the investment entity consolidation exception.
  • (ii) IFRS 11, relating to:
    • 1. collaboration arrangements outside the scope of IFRS 11.
    • 2. classifying joint arrangements as joint operations based on other facts and circumstances.
    • 3. accounting requirements in IFRS 11, with a focus on joint operations.
  • (iii) IFRS 12, relating to the quality of information and whether and how well the disclosure objectives are met by an entity applying the requirements.
• c) the RFI does not include questions on the interaction of IFRS 10, IFRS 11 and IFRS 12 with other IFRS Standards.

Background to IFRS 10, IFRS 11 and IFRS 12 and due process relation to the post-implementation review (Agenda Paper 7B)

The paper outlines the due process required for a PIR of the Standards. It includes the background to development of the three Standards as well as details of other projects undertaken since the Standards were issued.

The paper is not intended to be discussed unless the Board have any questions.

Work undertaken in the first phase (Agenda Paper 7C)

The paper summarises the work undertaken in the first phase of the PIR including a summary of the outreach performed and the academic literature review undertaken.

The key messages from the outreach work are that IFRS 10 and IFRS 12 work well and improved financial reporting. Several application issues relating to the accounting for interests in joint operations were noted in relation to IFRS 11. Further details on the messages from the outreach can be found in the paper.

The paper is not intended to be discussed unless the Board have any questions.