Annual Improvements — IAS 1: Encouraged vs. required disclosures

At the May 2009 meeting, the Committee recommended that the Board undertake a review of all encouraged disclosure requirements in IFRSs with the objective of either making them mandatory or removing them. The recommendation resulted from the fact that very few entities provide information on encouraged disclosures. When the Committee became involved with the Annual Improvements process, the Board referred the matter back to the Committee for consideration as part of the annual improvements process.

The staff tabled an analysis of all encouraged disclosures in IFRSs for the Committee's consideration.

When asked by the Chairman whether the Committee agree to take the matter through the Annual Improvements process, all members agreed unanimously with the proposal.

Several Committee members were however uncomfortable with the staff proposal to incorporate the encouraged disclosures from the various Standards into IAS 1 as part of the illustrative examples. It was also noted that during the drafting of the staff draft on the FSP exposure draft, quite a number of disclosures were removed from the ED and included in the relevant IFRS as the Board felt it would make more sense. If the Committee continue with the proposal to include encouraged disclosures in IAS 1, the disclosures may end up being pushed back into the Standards again.

A Committee member also expressed deep concern about turning some of the encouraged disclosures into required disclosures while the trend at the Board level has been to define the disclosure objective in each of its projects, with suggested disclosures on how to meet that objective. This will have the effect that there will be no required disclosures in any IFRS. This Committee member were puzzled as to why the Committee is considering disclosure requirements in existing IFRSs while there are so many practical issues that needs to be resolved. Another Committee member was also of the opinion that this process does not satisfy the criteria for the annual improvements process as it is neither necessary nor urgent.

While several Committee members expressed concern about the trend the Board is following with not requiring any specific disclosures, the Committee members recalled their earlier decision to add the matter to the AIP.

The Chairman recommended that the Committee cease all discussion on the issue and publish a tentative agenda decision explaining that this issue does not meet the AIP criteria and that the Committee will recommend to the Board to consider these encouraged disclosures in its separate projects.

Annual Improvements — IAS 1: Comparatives in financial statements

The Committee considered a proposed amendment to IAS 1 related to the requirements for comparative information when an entity provides individual financial statements beyond the minimum comparative information requirements. The Committee agreed at the May 2010 meeting to amend IAS 1 through an AIP to clarify the minimum requirements for comparative information to be included in a complete set of financial statements. The proposed amendment will clarify that if an entity decides to provide comparative information in addition to those required, the information needs to be prepared in accordance with IFRSs and that an entity can present additional comparative information in one statement, without having to present the additional information in the other statements.

Subject to drafting suggestions which would be dealt with offline, the Committee approved the draft amendment to IAS 1 as a proposed annual improvement.

Annual Improvements — IAS 36: Accounting for impairment testing of goodwill when non-controlling interest is recognised

The staff tabled an informal request received on how to account for impairment testing of goodwill when non-controlling interest (NCI) is recognised. The request seeks clarification on the following three matters:

• NCI is measured on a proportioned share and non-present ownership interests exist;
• Goodwill is allocated between the parent and the NCI on a disproportionate percentage to equity owned, e.g. as a result of a control premium; and
• There are subsequent changes in ownership between the parent and NCI, with the parent retaining control.

The Committee considered the staff recommendation to amend paragraph C6 and Example 7 in IAS 36 to require the allocation of an impairment loss on the same basis as that on which profit or loss is allocated unless an alternative basis would better reflect the substance of the impairment loss.

Several Committee members did not agree with this recommendation as they could not see any reason for not allocating impairment on assets on a basis different to what each party is entitled to. One Committee member noted that although he agrees that impairment should be allocated on the same basis as profit or loss, he can sympathise with the argument that goodwill arose as a result of control and therefore any impairment on the goodwill should be allocated to the controlling interest.

The Chairman noted that there are quite a number of practical issues relating to this request to consider, but that he is somewhere between ignorance and apathy when it comes to impairment of goodwill. The Committee tentatively agreed not to address the matter through the AIP, but to recommend to the Board to consider these issues as part of its post-implementation review of IFRS 3.

Annual Improvements — IAS 24: Key management personnel

The Committee considered a request on whether key management personnel (KMP), as defined in IAS 24, can include an entity as opposed to individuals. The request presents the case of mutual funds that do not have employees and therefore hire 'key management' services from a separate management entity. As remuneration for services performed, the management entity is paid a fee by the reporting entity. The submission also questions whether the employees of the management entity qualify as KMP of the reporting entity.

The Committee unanimously agreed with the request to address this matter through the annual improvements process as an amendment to IAS 24.

The Committee members deliberated the proposal to amend IAS 24 to clarify that:

• a management entity that provides KMP services to the reporting entity is a related party of the reporting entity;
• if the persons providing the KMP services to the reporting entity are not employees of the reporting entity, then they are not KMP for purposes of IAS 24, unless they qualify for other reasons; and
• the service fee paid to the management entity should be disclosed as part of disclosures of related party transactions;

One Committee member was not convinced that the proposed amendment will resolve the diversity in practice as explained in the submission. The Committee continued to discuss the question whether an entity can be an employee of the reporting entity or not. When put to a vote, the Committee tentatively approved the proposed amendment subject to drafting suggestions which would be dealt with offline.

IAS 36: Calculation of value in use

The Committee considered a request on whether the Dividend Discount Model (DDM), as opposed to the discounted cash flow model (DCF), can be used when calculating value in use (VIU) for purposes of impairment testing. The request specifically focussed on the impairment testing of a subsidiary that is a separate cash generating unit (CGU) in the consolidated financial statements.

Several Committee members were of the opinion that the DDM could be applied when assessing impairment of the investment in a subsidiary in the separate financial statements, but when assessing impairment in the consolidated financial statements, the assessment should focus on the assets included in the CGU and therefore a dividend model would not be appropriate. Other Committee members were supportive of the staff's recommendation that the DDM can be applied in limited circumstances.

The Committee members entered into a rather prolonged discussion on whether and in which circumstances a DDM can be applied to determine the VIU of a CGU in the consolidated financial statements. A Committee member noted that although IAS 28 appears to allow two methods (DCF and DDM) for the calculation of VIU of an investment in associate, it does include a statement that it is assumed that they will give similar results. Therefore an entity can use any method to determine VIU as long as it gives a similar result to the IAS 36 method.

When asked whether the Committee agree with the proposal not take the matter onto its agenda, the vote was unanimous. Several Committee members had objections to implying in the tentative agenda decision that an entity should use judgement when considering the DDM. Subject to drafting suggestions, the Committee approved the wording of the tentative decision.

IAS 19: Accounting for statutory employee profit-sharing arrangements

The Committee received a request to consider the accounting for statutory employee profit-sharing arrangements where the employee benefit is computed based on taxable profit, i.e. paying employees a fixed percentage share of the taxable profit of the entity. In analysing the issue, two components of the employee benefit were identified:

• a current component which is bases on a fixed percentage of taxable profit; and
• a deferred component as a result of present obligation for future profit sharing that will be payable.

The request asked for guidance on accounting for the deferred component. Those in favour of recognising the deferred component regarded it as similar to an income tax, where a deferred tax liability is recognised for tax payable in future on taxable temporary differences. Those opposing the recognition, argued that IAS 19 does not permit a liability to be recognised relating to future services to be received from employees.

When asked whether the Committee members had any appetite to add the matter onto the agenda, either as an Interpretation or annual improvement, the Committee members declined unanimously.

There was overall support for the reasoning that the deferred employee profit-sharing should not be recognised in accordance with IAS 19 (view 2 in the agenda papers), however some Committee members were of the opinion that the arguments put forward in the tentative decision wording, were not strong enough.

Subject to drafting suggestions which will be dealt with off line, the Committee approved the wording of the tentative agenda decision.

IFRS 2: Share-based payment awards settled net of tax withholdings

The Committee received a submission related to IFRS 2 Share-based Payment which arises when an employer withholds a specified portion of the shares that would otherwise be issued to the employee in order to settle the employee's tax obligation. The issue focuses on whether those amounts withheld and paid out in cash to the tax authority on the employee's behalf are considered as part of the equity settled award or should separately be considered a cash-settled award and therefore recognised as a liability.

Two distinct examples exist of this scenario. In the first example, a company would issue the gross number of shares under the share-based payment award, but through the use of a broker, sells a stimulated number of shares to another market participant and uses the proceeds to remit to the tax authority. In the second example, the company automatically "repurchases" shares such that in reality the net number of shares are issued to the employee and the company remits the amount from those shares "repurchased" to the taxing authority.

While IFRS 2 does not specifically address this issue, U.S. GAAP does include an exemption for "direct or indirect (through a net-settlement feature) repurchase of shares issued upon exercise of options (or the vesting of non-vested shares), with any payment due employees withheld to meet the employer's minimum statutory withholding requirements resulting from the exercise, does not, by itself, result in liability classification of instruments that otherwise would be classified as equity." The basis for conclusion of FAS 123(R) notes that this accommodation was made for "pragmatic rather than conceptual reasons".

The staff supports the view that any portion of a share-based payment transaction that is settled net (i.e., withheld) (such as in example 2 above) should be classified as a cash-settled share-based payment with the physically settled portion of the share-based payment transaction classified as an equity-settled share-based payment. However, the staff acknowledges that when a company utilises a broker to facilitate the disposition of the shares, the company may be acting in the role of an agent which would not result in cash settling the shares. The staff recommended the Committee not add the issue to its interpretation agenda as current practice focuses on the company's role in either a principal or agent relationship.

Certain Committee members expressed sympathy for these arrangements and felt that the substance of the transactions was being overruled by the form driven requirements within IFRS 2. Other Committee members felt the standard was clear that when cash or other assets are used in the settlement that the award would result in liability treatment. One Committee member mentioned that these arrangements were widespread within the U.S. and not providing an exception would be highly problematic. Another Committee member mentioned that the exemption within U.S. GAAP had not resulted in significant abuses or structuring.

The Committee agreed that adding a specific exception for these arrangements could not be resolved through the Committee's agenda or through the Annual Improvements process. As a result, they will recommend this issue be further addressed by the Board as part of its post-implementation review of IFRS 2.

IAS 1: Current versus non-current classification of term loans with callable features

The Committee received a submission from the Hong Kong Institute of Certified Public Accountants (HKICPA) requesting views on an issue where certain term loan arrangements include a feature that allows lenders to call a loan at any time for any reason, and how such terms would impact an entity's classification of the loan as either current or noncurrent under IAS 1 Presentation of Financial Statements.

Examples of loan terms identified in Hong Kong that may impact balance sheet classification include the following:

• "The facilities are subject to review at any time and also subject to the Bank's overriding right of withdrawal and repayment on demand, including the right to call for cash cover on demand for prospective and contingent liabilities."
• "As a general banking practice and notwithstanding any terms and conditions specified above, the Lender reserves its overriding right to cancel or to modify the Facility, or to demand immediate repayment of all outstanding balances whether due or owing, actual or contingent under the Facility without prior notice."
• "Notwithstanding anything contained in this letter, the Facilities are subject to the Bank's overriding right of repayment on demand, to review, amend, and/or cancel any or all of the Facilities at its sole discretion."

While these terms may be included within the loan agreements, exercise of these call features has been very limited outside of a significant adverse change in the financial condition of the borrower.

IAS 1.69 requires that:

An entity classify a liability as current when:

• (a) it expects to settle the liability in its normal operating cycle;
• (b) it holds the liability primarily for the purpose of trading;
• (c) the liability is due to be settled within twelve months after the reporting period; or
• (d) it does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period (see paragraph 73). 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.

The HKICPA's majority view was that the determination of the loan as current or non-current should be determined based on the rights and obligations of the lender and the borrower. When a condition allows the lender to demand repayment at any time in its sole discretion, the borrower does not have the unconditional right to defer settlement for at least twelve months.

The staff agrees with the HKICPA's majority view as the only acceptable view under IAS 1 and believes paragraph 69(d) of IAS 1 provides specific guidance. The Committee agreed not to add the issue to the Committee's agenda or address through the Annual Improvements process.