Cover paper (Agenda Paper 12)

In this session, IASB members were asked to make the final decisions on the Supplier Finance Arrangements and the Lack of Exchangeability projects. They also discussed potential amendments to IFRS Accounting Standards to be included in the next Annual Improvements to IFRS Accounting Standards Cycle, that have become necessary mainly due to inconsistencies or lack of clarities in specific paragraphs.

Supplier finance arrangements—Transition, effective date and due process (Agenda Paper 12A)

The purpose of this paper was to:

• Provide the IASB with supplemental information related to a possible earlier effective date for the amendments and associated transition requirements
• Ask the IASB whether it agrees with the staff’s updated recommendations with respect to the effective date and transition requirements for the amendments
• Set out the steps in the IFRS Foundation Due Process Handbook (Due Process Handbook) that the IASB has taken in developing the amendments
• Ask the IASB to confirm it is satisfied that it has complied with the due process requirements
• Ask whether any IASB member intends to dissent from the amendments

Staff recommendation

The staff recommended that the IASB:

• Require an entity to apply the amendments for annual reporting periods beginning on or after 1 January 2024
• Permit earlier application and, if an entity applies the amendments for an earlier period, require the entity to disclose that fact
• Not require disclosure of comparative information for prior periods in the annual reporting period it first applies the amendments
• Not require the disclosure of the following quantitative information as at 1 January 2024 in an entity’s first annual financial statements after the amendments become effective:
  • The carrying amount of financial liabilities recognised in an entity’s statement of financial position that are part of supplier finance arrangements for which suppliers have already received payment from the finance providers
  • The range of payment due dates of both financial liabilities that are part of supplier finance arrangements and comparable trade payables that are not part of such arrangements
• Not require the disclosures required by the amendments for any interim period presented within the annual period in which an entity first applies the amendments
• Provide no specific transition exemption for first-time adopters
• Finalise the amendments without re-exposure

IASB discussion

The staff clarified that the reference to 1 January 2024 in their recommendations is with regards to reporting periods beginning on or after that date. 

IASB members expressed agreement that disclosures above should only be required for periods beginning on or after 1 January 2024 and not before. This is because of the need for reporters to obtain internal control reports and there being a potential need for contract terms to be changed for reports to be allowed to externally publish the information.

One IASB member stated that the importance, or expressed need for a disclosure, should not result in a reduction to the implementation period. The IASB member argued that not giving the ordinary 12 months between publication of the new requirements and the effective date would set a precedent and could result in an increased pressure on the IASB for future decisions. This IASB member also did not think preparers were being given enough time to obtain the information needed to provide the disclosure and that there are many concerns facing reporters. The IASB member also said that the effective date may result in unnecessary pressure being placed on reporters.

The general consensus amongst IASB members was that the proposed effective date for the new requirements is not unreasonable. This was on the basis that an earlier published agenda decision on the subject already required disclosures to be made regarding liquidity risk, reporters still had 18 months to obtain the information after the release of the new requirement, the disclosure information is not difficult to obtain, and the proposals do not require comparatives or interims and thereby maximise the time given to reporters. 

The IASB voted with 11 out of 12 in support of the recommended effective date and of not giving any relief for first time adopters.

The IASB voted unanimously in favour of the other recommendations with no IASB member stating intention to dissent and all were satisfied that due process had been followed.

Lack of Exchangeability (Proposed amendments to IAS 21)—Due process, effective date and other matters (Agenda Paper 12B)

The purpose of this paper was to:

• Ask the IASB whether it agrees with the staff’s recommendations with respect to potential amendments to IFRS 1 and IFRS 13
• Ask the IASB whether it agrees with the staff recommendation with respect to the effective date for the amendments
• Set out the steps in the IFRS Foundation Due Process Handbook that the IASB has taken in developing the amendments
• Ask the IASB to confirm it is satisfied that it has complied with the due process requirements
• Ask whether any IASB member intends to dissent from the amendments

Respondents’ feedback

Almost all respondents provided no feedback on the proposed changes to IFRS 1. One respondent suggested also amending paragraph D27 of IFRS 1 to state that the currency of a hyperinflationary economy is not considered to be subject to severe hyperinflation when entities using that currency as their functional currency are able to apply IAS 29. In the staff’s view, such a change is beyond the project’s scope.

The IASB received no feedback on its proposal to permit earlier application.

Staff recommendation

The staff recommended that the IASB:

• Proceed with the proposed amendments to IFRS 1
• Make no amendments to IFRS 13
• Require an entity to apply the amendments for annual reporting periods
• Beginning on or after 1 January 2025, with earlier application permitted
• Finalise the amendments without re-exposure

IASB discussion

No IASB discussion was held on these recommendations. The IASB unanimously voted in favour of the staff’s recommendations.

No IASB member expressed intention to dissent and all IASB members were satisfied that due process had been followed.

Hedge accounting by a first-time adopter (IFRS 1)—Potential annual improvement (Agenda Paper 12C)

In November 2022, the IFRS Interpretations Committee (IFRS IC) discussed the potential confusion arising from an inconsistency in wording between paragraph B6 of IFRS 1 and requirements for hedge accounting in IFRS 9.

Paragraphs B5–B6 of IFRS 1 were originally written to be consistent with the requirements for hedge accounting in IAS 39. First-time adopters of Accounting Standards applying IFRS 1 and IFRS 9 do not have an option to apply the hedge accounting requirements in IAS 39 and therefore apply IFRS 9.

If read literally, there is an inconsistency between the requirements in paragraph B6 of IFRS 1 and the requirements in paragraph 6.4.1 of IFRS 9; IFRS 9 sets out ‘qualifying criteria’ rather than ‘conditions’ for hedge accounting.

The question raised to the IASB was whether the reference in paragraph B6 of IFRS 1 to the ‘conditions’ for hedge accounting in IFRS 9 should be updated to be consistent with the wording in Section 6.4 of IFRS 9 that sets out ‘qualifying criteria for hedge accounting’. 

Staff recommendations

The staff recommended that the IASB should amend paragraphs B5 and B6 of IFRS 1 as follows:

• Adding a cross-reference to paragraph 6.4.1(a) of IFRS 9 in paragraph B5 of IFRS 1
• Adding a cross-reference to paragraph 6.4.1(b)-(c) in paragraph B6 of IFRS 1
• Replacing the word ‘conditions’ with ‘qualifying criteria’ in paragraph B6 of IFRS 1

The staff recommended that the IASB include these proposed amendments in its next annual improvements cycle.

The staff considered that no specific transition requirements should be provided for the proposed amendments, considering that transition requirements are not relevant for companies that applied IFRS 1 in a previous period.

IASB discussion

IASB members generally agreed with the staff recommendation. When asked to vote, all 12 IASB members voted in favour of the staff recommendation.

Determination of a ‘de facto agent’ (IFRS 10)—Potential annual improvement (Agenda Paper 12D)

In November 2022, the IFRS IC discussed the potential confusion arising from an inconsistency between paragraphs B73 and B74 of IFRS 10 related to an investor determining whether another party is acting on its behalf.

Confusion may arise because paragraph B73 states the principle—that a de facto agent is a party that acts on the investor’s behalf—and that the determination of whether other parties are acting as de facto agents requires judgement. However, the second sentence of paragraph B74 includes more conclusive language and states that ‘a party is a de facto agent when the investor has, or those that direct the activities of the investor have, the ability to direct that party to act on the investor’s behalf’.

Following the requirements of the paragraph B74, more than one entity might conclude that it controls an entity through a de facto agent. This because the definition of ‘de facto agent’ is strictly related to the ‘ability to direct that party to act on the investor’s behalf’ and not on the determination of whether other parties are acting as de facto agents, that requires judgement.

The purpose of this paper was to propose an amendment to paragraph B74 of IFRS 10 to remove the inconsistency with the requirement to use judgement included in paragraph B73 of IFRS 10.

Staff recommendation

The staff recommended that the IASB amend paragraph B74 of IFRS 10 using less conclusive language, which would replace ‘is [a de facto agent]’ with ‘may act as [a de facto agent]’ and to include the proposed amendment in its next annual improvements cycle.

The staff considered that no specific transition requirements should be provided because no changes in practice or material effects on the entities’ consolidated financial statements are expected. In the absence of any specific transition requirements, an entity would apply the proposed amendment retrospectively in accordance with paragraph 19(b) of IAS 8.

IASB discussion

IASB members generally agreed with the staff recommendation. One member requested to split the second sentence of paragraph B74 of IFRS 10, clarifying that “a party is a de facto agent when the investor has the ability to direct that party to act on the investor’s behalf” and “a party may act as a de facto agent when those that direct the activities the investor have the ability to direct that party to act on the investor’s behalf”. Another IASB member requested to carefully evaluate the explanation that will be included in the basis for conclusions to support the amendment and to be clear that the amendment is aimed to avoid a situation in which more than one party can conclude that they have control over the entity.

When asked to vote on the staff proposal, as amended according to the request made during the discussion, all 12 IASB members voted in favour of the staff recommendation.

Transaction price (IFRS 9)—Potential annual improvement (Agenda Paper 12E)

In November 2022, the IFRS IC discussed the potential confusion arising from a reference in Appendix A of IFRS 9 to the definition of ‘transaction price’ in IFRS 15. The potential for confusion arises because the term ‘transaction price’ is used in particular paragraphs of IFRS 9 with a meaning that is not necessarily consistent with the definition of that term in IFRS 15.

IFRS 9 uses the term transaction price in several paragraphs. In particular, there are two ways in which IFRS 9 uses the term ‘transaction price:

• As defined in IFRS 15—in paragraph 5.1.3 of IFRS 9 in the context of trade receivables
• As the fair value of the consideration given or received—in paragraphs 5.1.1A, B5.1.1 and B5.1.2A of IFRS 9

The use of the term ‘transaction price’ as defined in IFRS 15 is not intended to be, and is not necessarily, the same as ‘fair value of the consideration given or received’. According to the IFRS IC, it is unnecessary—and potentially confusing—to retain a reference to ‘transaction price’ (as defined in IFRS 15) in paragraph 5.1.3 and in Appendix A of IFRS 9.

The purpose of this paper was to propose an amendment to paragraph 5.1.3 of (and Appendix A to) IFRS 9 to remove the inconsistency between paragraph 5.1.3 of IFRS 9 and the requirements in IFRS 15.

Staff recommendation

The staff recommended that the IASB amend paragraph 5.1.3 of IFRS 9 replacing the words ‘their transaction price (as defined in IFRS 15)’ with ‘the amount determined applying IFRS 15’ and deleting the reference to ‘transaction price’ (as defined in IFRS 15) from Appendix A to IFRS 9. The staff recommended including these proposed amendments in its next annual improvements cycle.

The staff considered that no specific transition requirements should be provided because no changes in practice or material effects on the entities’ financial statements are expected. In the absence of any specific transition requirements, an entity would apply the proposed amendment retrospectively in accordance with paragraph 19(b) of IAS 8.

IASB discussion

IASB members generally agreed with the staff recommendation. One IASB member raised doubts on the process to measure trade receivables according to IFRS 9 when there is a significant financing component. During the discussion, it was made clear that such doubts were not related to the proposed amendment, but to the actual treatment of the IFRS 9 for trade receivables that have a significant financing component. When asked to vote on the staff proposal, 11 out of 12 IASB members voted in favour of the staff recommendation.

Cost method (IAS 7)—Potential annual improvement (Agenda Paper 12F)

In November 2022, the IFRS IC discussed the potential lack of clarity in paragraph 37 of IAS 7, which arises from the continued use of the term ‘cost method’ with reference to the cash flows between the investor and an investment in an associate, a joint venture or a subsidiary. The ‘cost method’ is no longer defined in IFRS Accounting Standards since the amendment of IAS 27 in May 2008.

The purpose of this paper was to propose an amendment to paragraph 37 of IAS 7 to replace the term ‘cost method’ with ‘at cost’. This would improve clarity in that paragraph, without changing or adding new requirements.

Staff recommendation

The staff recommended that the IASB should amend paragraph 37 of IAS 7 replacing replace the term ‘cost method’ with ‘at cost’ and to include the proposed amendment in its next annual improvements cycle.

The staff considered that no specific transition requirements should be provided because no changes in practice or material effects on the entities’ financial statements are expected. In the absence of any specific transition requirements, an entity would apply the proposed amendment retrospectively in accordance with paragraph 19(b) of IAS 8.

IASB discussion

IASB members generally agreed with the staff recommendation. When asked to vote, all 12 IASB members voted in favour of the staff recommendation.

Gain or loss on derecognition (IFRS 7)—Potential annual improvement (Agenda Paper 12G)

In November 2022, the IFRS IC discussed the potential lack of clarity in paragraph B38 of IFRS 7 that arises because it refers to paragraph 27A in IFRS 7 that no longer exists.

In May 2011, the IASB issued IFRS 13. As part of that issuance, the IASB made consequential amendments to several IFRS Accounting Standards, including deleting paragraphs 27–27B of IFRS 7. However, paragraph B38 of IFRS 7 was not updated to reflect this deletion.

The purpose of this paper was to propose an amendment of paragraph B38 of IFRS 7 to remove or replace the reference to paragraph 27A of IFRS 7.

Staff recommendation

The staff recommended that the IASB amend paragraph B38 of IFRS 7 to replace the reference to paragraph 27A of IFRS 7 with a reference to paragraphs 72–73 of IFRS 13 and to include the proposed amendment in its next annual improvements cycle.

The staff considered that no specific transition requirements should be provided because no changes in practice are expected. In the absence of any specific transition requirements, an entity would apply the proposed amendment retrospectively in accordance with paragraph 19(b) of IAS 8.

IASB discussion

IASB members generally agreed with the staff recommendation. One member suggested to substitute “inputs that were not based on observable market data” with “unobservable inputs” to align the wording with the one already included in paragraph 13 of IFRS 13.

When asked to vote on the staff proposal, as amended according to the suggestion proposed during the discussion, all 12 IASB members voted in favour of the staff recommendation.

Credit risk disclosures—Illustrative examples accompanying IFRS 7—Potential annual improvement (Agenda Paper 12H)

In November 2022, the IFRS IC discussed the potential lack of clarity in paragraph IG20C of the implementation guidance accompanying IFRS 7 because that paragraph fails to state that the example does not illustrate all the requirements in paragraph 35M of IFRS 7.

The tables in paragraph IG20C of IFRS 7 do not illustrate all the disclosure requirements in paragraph 35M of IFRS 7—and the paragraph does not state that it omits illustration of particular requirements. For example, the tables illustrate neither an entity’s exposure to credit risk on loan commitments and financial guarantee contracts nor the requirements in paragraph 35M(b)(i)–(ii) 2 or 35M(c).  

The purpose of this paper was to propose an update of paragraph IG20C of IFRS 7 to state that it does not illustrate all the requirements in paragraph 35M of IFRS 7.

Staff recommendation

The staff recommended that the IASB should amend paragraphs IG1 to add a statement that the implementation guidance accompanying IFRS 7 does not illustrate all the requirements in IFRS 7 and paragraph IG20B of IFRS 7 to streamline the wording. The staff recommended including these proposed amendments in its next annual improvements cycle.

The staff considered that no specific transition requirements should be provided because the amendment proposed is to non-authoritative material accompanying IFRS 7.

IASB discussion

IASB members generally agreed with the staff recommendation. During the discussion one member of the staff illustrated to IASB members a possible rewording of the proposed amendment to paragraph IG1 of IFRS 7 that was suggested by an outside stakeholder. One IASB member suggested to bear in mind the explicit use of such disclaimers when developing guidance or illustrative examples to new accounting standards or modifications to the existing ones. According to one IASB member, the additional wording to IG20 of IFRS 7 “other than financial assets that are purchased or originated credit-impaired” seems to be redundant considering the other modifications included in the amendment, even if he agreed on the fact that the most important modification is the one related to paragraph IG1 of IFRS 7.

When asked to vote on the staff proposal, as amended according to the rewording proposed during the discussion, all 12 IASB members voted in favour of the staff recommendation.