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Maintenance and consistent application

Date recorded:

Attributing Benefit to Periods of Service (IAS 19)—Finalisation of Agenda Decision (Agenda Paper 12A)

At its April 2021 meeting, the IFRS Interpretations Committee (Committee) decided not to add a standard-setting project to the work plan in response to a submission about the periods of service to which an entity attributes benefit for a particular defined benefit plan. The Committee instead decided to finalise an agenda decision that would include material explaining how the applicable principles and requirements in IFRS Standards apply to the fact pattern described in the submission.

The purpose of this meeting was to ask the Board members whether they object to the Committee’s decision that a standard-setting project should not be added to the work plan and the Committee’s conclusion that the agenda decision does not add or change requirements in IFRS Standards.

Board discussion

One Board member said that while agreeing with the Committee’s decision, he wondered whether the Committee reporting comments to the Board that have been made by respondents to the tentative agenda decision was a request that the Board investigate whether the relevant paragraphs of IAS 19 are working and if not, propose a narrow-scope amendment. The staff responded that in this case, the Committee wanted the Board to be aware of the comments, rather than proposing an investigation. The Committee had found that the Standard works in the fact pattern submitted, however, comment letters have raised the question of whether it would work in different fact patterns as well. One Board member asked whether the agenda decision would meet the criterion of addressing a wide-spread issue if the fact pattern was so narrow. The Vice-Chair replied that while the fact pattern was narrow, there was a core idea in the agenda decision that applied to a multitude of fact patterns. The staff confirmed that.

One Board member added that the Board should collect issues for every Standard and once the critical mass is reached, should explore targeted amendments to the Standard in question. This topic would be one of these.

Board decision

None of the Board members objected to publishing the agenda decision.

Hedging Variability in Cash Flows due to Real Interest Rates (IFRS 9)—Finalisation of Agenda Decision (Agenda Paper 12B)

At its April 2021 meeting, the IFRS Interpretations Committee (Committee) decided not to add a standard-setting project to the work plan in response to a submission about applying the hedge accounting requirements in IFRS 9 when the objective is to fix the cash flows in real terms. The Committee instead decided to finalise an agenda decision that would include material explaining how the applicable principles and requirements in IFRS Standards apply to the fact pattern described in the submission.

The purpose of this meeting was to ask the Board members whether they object to the Committee’s decision that a standard-setting project should not be added to the work plan and the Committee’s conclusion that the agenda decision does not add or change requirements in IFRS Standards.

Board discussion

One Board member highlighted that in counties with high or hyperinflation, it is almost impossible to achieve a fixed interest rate, especially for long-term transactions.

Board decision

No Board member objected to the agenda decision.

Lease Liability in a Sale and Leaseback—Feedback Summary—Background and Overview (Agenda Paper 12C)

Background

The purpose of Agenda Papers 12C–12E was to provide the Board with a summary of feedback on Exposure Draft ED/2020/4 Lease Liability in a Sale and Leaseback, which proposes to amend IFRS 16. The Board members were asked for their initial thoughts on the feedback and to comment on any feedback that was unclear, that provides new information or that needs further research.

Overview of feedback

87 comment letters were received from different respondents (including standard-setters, professional bodies, individuals, preparers and professional firms) and different jurisdictions (primarily Europe and Asia). While a few respondents agreed with the proposed amendment, most respondents disagreed with, or expressed concerns about, aspects of the proposals.

Almost all respondents commented on the differing treatment of variable lease payments when measuring a leaseback liability compared with other lease liabilities. Many respondents said that including variable lease payments in leaseback liabilities raises several practical and conceptual challenges. A few respondents disagreed with explaining in the Basis for Conclusions to the ED how a seller-lessee (applying IFRS 16:100(a)) measures the leaseback liability at the date of the transaction.

Nevertheless, most respondents agreed that there is a need to amend IFRS 16 and enhance the measurement requirements for sale and leaseback transactions. Many respondents suggested possible ways forward, including alternative solutions to account for sale and leaseback transactions.

Next steps and question for the Board

The staff plan to submit a paper to a future Board meeting analysing the feedback and providing recommendations on the project direction. No decisions will be required on this month’s papers.

Furthermore, the staff asked whether the Board have any questions on the feedback as summarised in Agenda Papers 12C–12E and whether there are any topics that Board members would like more details on in future meetings.

These papers were discussed together. For the discussion summary see Agenda Paper 12E below.

Lease Liability in a Sale and Leaseback—Feedback Summary—Main Matters (Agenda Paper 12D)

Background

This paper summarises:

  • Respondents’ comments on the treatment of variable lease payments when measuring a leaseback liability compared with other lease liabilities
  • Respondents’ suggestions on the possible ways forward, including alternative solutions

Two of the main alternative solutions suggested by respondents are also illustrated in the paper.

Respondents’ comments

Almost all respondents commented on the differing treatment of variable lease payments when measuring a leaseback liability compared with other lease liabilities. The main comments related to:

  • Practical challenges, particularly around measurement uncertainty
  • Conceptual challenges, particularly around measurement consistency
  • Measurement of the gain or loss on a sale and leaseback transaction
  • Disagreement with how a leaseback liability is measured applying IFRS 16:100(a)

Some respondents also suggested possible ways to address these matters.

Many respondents namely suggested considering the accounting for variable lease payments more holistically as part of either the post-implementation review (PIR) of IFRS 16 or a project on variable and contingent consideration. Moreover, some respondents suggested an approach in which a seller-lessee measures the gain or loss relating to the right of use retained in accordance with IFRS 16:100(a) and recognises a deferred income liability. Two variations of this approach have been identified: “Deferred Income Approach A” and “Deferred Income Approach B”.

Under Deferred Income Approach A:

  • Consistent with IFRS 16:100(a), the seller-lessee would measure the right-of-use asset arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the right of use the seller-lessee retains. Accordingly, the seller-lessee would recognise only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor.
  • The seller-lessee would measure the leaseback liability applying the measurement requirements applicable to other lease liabilities (i.e. in accordance with IFRS 16:26–28.
  • The seller-lessee would recognise any residual balance as a deferred income liability and amortise this balance to profit or loss on a straight-line basis over the term of the leaseback (unless another systematic basis would be more representative of the pattern in which the seller-lessee receives benefit).

Under Deferred Income Approach B, similar to Approach A, and consistent with IFRS 16:100(a), a seller-lessee would recognise only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor. However, applying this approach the seller-lessee would measure both the right-of-use asset and the leaseback liability applying the measurement requirements applicable to other right-of-use assets and leaseback liabilities (i.e. applying IFRS 16:23–28). The seller-lessee would recognise any residual balance as a deferred income liability, which would be amortised to profit or loss on a straight-line basis over the term of the leaseback (unless another systematic basis is more representative of the pattern in which the seller-lessee receives benefits).

Other suggestions have also been put forward by some respondents.

Lease Liability in a Sale and Leaseback—Feedback Summary—Transition and Other Matters (Agenda Paper 12E)

Background

This paper summarised feedback on the ED in respect of:

  • Calculating the proportion of the carrying amount retained using the expected lease payments
  • Remeasurement of the leaseback liability
  • Classification of the leaseback liability
  • Illustrative example
  • Transition requirements
  • Other comments

Calculating the proportion of the carrying amount retained using the expected lease payments

The Board proposed requiring seller-lessees to determine the proportion of the carrying amount retained by comparing the present value of the expected lease payments to the fair value of the asset sold.

Respondents’ comments were mixed and focused on prescribing a particular method. A few respondents also requested clarity around expected lease payments as defined in IFRS 16:100A of the ED.

Remeasurement of the leaseback liability

The ED proposed that a seller-lessee would not remeasure the leaseback liability to reflect a change in future variable lease payments related to a sale and leaseback transaction, other than as specified for changes in the lease term or lease modifications.

Some respondents expressed concern around a seller-lessee not remeasuring the leaseback liability to reflect a change in future variable lease payments other than for changes in the lease term or lease modifications for various reasons, including the fact that the leaseback could extend for many years, that management’s estimates at the commencement date (or a later remeasurement date) could significantly affect profit or loss for several reporting periods, that the liability would be overstated when leaseback payments include variable lease payments linked to the performance or use of the asset and the seller-lessee’s expected performance or use declines and that tracking the expected lease payments and actual lease payments may require significant cost and effort and not necessarily align with the configuration of existing lease accounting systems.

Classification of the leaseback liability

The ED proposed to clarify that the leaseback liability is a liability to which IFRS 16 applies.

Although not disagreeing with the Board’s rationale and conclusion, a few respondents said it could be confusing to classify leaseback liabilities in the same manner as other lease liabilities because the measurement requirements for a leaseback liability would differ from those applying to other lease liabilities. They suggested instead requiring entities to separately present and/or disclose leaseback liabilities. A few respondents also suggested clarifying how a seller-lessee would present changes in leaseback liabilities in the statement of cash flows.

Illustrative example

The Board concluded that developing an example with journal entries would enhance the understandability of the proposed amendment. The ED therefore proposed to add an example to the illustrative examples accompanying IFRS 16 to illustrate how a seller-lessee accounts for a sale and leaseback transaction that includes variable lease payments.

In addition to the illustrative example included in the proposals, a few respondents suggested also illustrating (or otherwise clarifying) situations in which:

  • Actual payments made include shortfalls or recoveries of shortfalls
  • Leaseback payments include variable lease payments that depend on an index or rate
  • The transaction includes off-market rates

A few respondents also suggested updating proposed Illustrative Example 25 to:

  • Disaggregate the journal entries to better explain the accounting for the transaction
  • Reflect changes in estimated future revenue

Transition requirements

The ED proposed that a seller-lessee apply the amendment retrospectively to sale and leaseback transactions entered after the date of initial application of IFRS 16. However, if retrospective application to a sale and leaseback transaction that includes variable lease payments is possible only with the use of hindsight, the seller-lessee would determine the expected lease payments for that transaction at the beginning of the annual reporting period in which it first applies the amendment (hindsight expedient).

Some respondents agreed with the proposed transition requirements for the reasons explained by the Board. However, a few respondents disagreed. A few of the respondents who disagreed with the Board’s proposals have highlighted that the cost of applying the proposals retrospectively would not outweigh the expected benefits. It has also been noted by a few respondents that it would be difficult to avoid the use of hindsight when estimating variable lease payments retrospectively and determine whether hindsight is being used.

A few respondents who disagreed suggest requiring or permitting prospective application to sale and leaseback transactions occurring after the date of initial application of the amendment (or from the beginning of the annual reporting period immediately preceding the date of initial application).

Other suggestions and questions have also been raised by respondents.

Board discussion

The Vice-Chair noted that, following her involvement in some of the outreach activities, she thought some of the feedback comments might be driven by the underlying concern that the Board could move to a model where all variable lease payments are measured and included in the lease liability measurement as a next step, although she does not think that this will be the case. She also highlighted that some of the concerns around the operational challenges of the proposed amendments would need to be assessed further as she would expect information around structured sale and leaseback transactions to be available to the parties involved. Furthermore, she pointed out that although initially the alternative proposed Approach A seemed appropriate regarding the initial accounting for the transaction, she finds it difficult to support it due to its effect on the income statement over time. Conversely, she thought Approach B might be preferable, considering the subsequent accounting treatment, however it is conceptually further from the Board’s initial proposal. 

Other Board members agreed with the Vice-Chair’s comments, in particular around the challenges raised regarding the alternative Approaches A and B and understanding further the operational challenges raised by respondents. Board members have stressed that uncertainty would also exist in other complicated transactions an entity is accounting for, including on regular leases, so they were unsure as to how the uncertainty around sale and leaseback transactions would differ.

A Board member noted that they would prefer Approach A in terms of consistency with IFRS 16.

Another Board member raised a point around considering this issue and proposed approaches more broadly both in terms of comparability and the value of information conveyed to users. They also thought that some of the options considered might lead the project beyond the initial scope of a narrow-scope amendment and more towards the direction of a post-implementation review of IFRS 16.

One Board member noted that as different stakeholders are raising different concerns, including measurement uncertainty, further information might be needed to understand which of the challenges are widespread and might, hence, require further action from the Board to be addressed. They also stressed that the initial recognition and subsequent measurement requirements for sale and leaseback transactions should have a consistent and conceptual basis and that should be taken into account when considering the alternative approaches proposed.

Another Board member noted that the alternative approaches proposed should be considered from the perspective of providing a short-term solution to the issue of sale and leaseback transactions that were not previously directly addressed in IFRS 16, whilst seeking to only make narrow-scope amendments to the Standard which has been the objective of the project. They also noted that an alternative would be to consider making no amendments at this point, however that might entail asking the IFRS Interpretations Committee to withdraw the relevant agenda decision.

One Board member noted that the chosen solution going forward should reconcile the tension that in their view exists between IFRS 16:100A and many stakeholders’ ask for consistent treatment of lease transactions (including sale and leaseback transactions).

In response to some comments raised in Agenda Paper 12E requesting additional clarity around expected lease payments, a Board member noted that they believe the existing guidance should be sufficient to address these points. With regards to the broader suggestions in the feedback around additional guidance to be added, including in an illustrative example, another Board member also noted that it is important to maintain the right balance between the contents of the Standard and illustrative examples, in order to ensure alignment with the principles-based approach of the Standard.

IFRIC Update April 2021 (Agenda Paper 12F)

The staff presented the April 2021 IFRIC Update to the Board and asked whether Board members have any questions or comments.

There was no discussion on this agenda item.

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