Update since the last IC meeting – no agenda paper

The Staff updated the IC on the Board’s discussions since the IC’s last meeting in November 2016 as regards the latter’s recommendations.

• The proposed amendments to IFRIC 14 and IAS 19: the Board agreed with the recommendations made by the IC except requesting it to reassess the impact of minor plan amendments. See AP 2 to this meeting;
• IFRS 9 Symmetric prepayment options – the Board agreed to proceed with a proposed amendment to IFRS 9 to address this matter; and
• IFRS 9 Modifications of financial liabilities – the Board rejected the proposal to issue an interpretation and asked the IC to reconsider how best to communicate their conclusion to the public.

Plan amendments, curtailments or settlements (Minor plan events) — Agenda Paper 2

Background

The IASB issued an exposure draft in 2015 to amend to IAS 19 Employee Benefits and IFRIC 14 IAS19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction), using work undertaken by the Interpretations Committee. The ED proposed requiring that if the net defined benefit liability (asset) is remeasured in accordance with paragraph 99 of IAS 19 (i.e. when a plan amendment, curtailment or settlement occurs) the current service cost and the net interest for the period after the remeasurement are determined using the assumptions used for the remeasurement and the net interest for the remaining period is based on the remeasured net defined benefit liability (asset). The current service cost and the net interest in the current reporting period before a plan amendment, curtailment or settlement are not affected by, or included in, the past service cost or a gain or loss on settlement.

The comment letters were discussed by the Interpretations Committee in July and September 2016 and the IASB in December 2016.

When the Interpretations Committee discussed the feedback, the discussion was mostly focused on minor events. The staff had proposed excluding minor events from the amendments, but the Interpretations Committee voted not to exclude minor plan events and to rely on materiality. In December the IASB supported the recommendations of the Interpretations Committee but asked the Committee to consider the implications of not excluding minor plan events.

Staff analysis

The staff analysis was that not excluding minor plan events could change whether and when entities remeasure the net defined benefit asset or liability. The main reason was that entities would need to consider the future consequences of the change, and not just the effect on the past service cost. The staff demonstrated this using some fact patterns, including a curtailment, and their assessment is that such an outcome is appropriate.

Staff recommendation

The staff recommended that the Interpretations Committee recommend to the IASB that it:

1. Finalise the proposed amendments with no substantive changes in respect of minor plan events; and
2. Update the explanation in paragraphs BC17 and BC19 of the Exposure Draft to reflect the conclusion that the amendments could lead to more frequent remeasurements.

Discussion

The IC approved the Staff’s recommendation without any technical debate, and cautioned the Staff to be careful when drafting so as not to confuse minor plan events with immaterial plan events.

Discount rate - Agenda Paper 3

Background

The Interpretations Committee was asked to consider the rate to use to discount post-employment benefit obligations (discount rate). The entity operates in Ecuador, a country that uses the US dollar as its official or legal currency without being part of a regional market. The submitter asked the following questions:

• (a) If there is no deep market in Ecuador for US dollar denominated high quality corporate bonds (HQCB), should an entity in Ecuador that has US dollar denominated post-employment benefit obligations consider US dollar denominated HQCB in other markets or countries in which those bonds are issued such as the US?
• (b) If an entity in Ecuador determines the discount rate by reference to market yields on US dollar denominated HQCB in another market or country such as the US (having concluded that there is a deep market in US dollar denominated HQCB), would this lead the entity to use actuarial assumptions would not be mutually compatible (contrary to the requirement in IAS 19.78)?

Staff analysis

The staff assessment was that in applying paragraph 83 of IAS 19:

• (a) the entity assesses the depth of the market in HQCB denominated in US dollars and does not limit this assessment to the market or country in which it operates, but also considers other markets or countries in which US dollar denominated HQCB are issued.
• (b) if there is a deep market in US dollar denominated HQCB, the entity determines the discount rate by reference to market yields at the end of the reporting period on HQCB. This is the case even if there is no deep market in such bonds in the entity’s country. In this situation, the entity does not use market yields on government bonds to determine the discount rate.
• (c) if there is no deep market in US dollar denominated HQCB, the entity determines the discount rate using market yields on US dollar denominated government bonds.
• (d) the entity applies judgement to determine the appropriate population of HQCB or government bonds to reference when determining the discount rate. The currency and term of the bonds must be consistent with the currency and estimated term of the pension obligations.

Given that there appears to be no clear link between the objective of the discount rate and the discount rate methodology, there is no basis to conclude that, in the fact pattern in the submission, the application of the methodology required by paragraph 83 of IAS 19 would result in the use of actuarial assumptions that are not mutually compatible.

The requirements in IAS 19 provide an adequate basis for an entity to determine the discount rate.

Staff recommendation

The Staff recommended that the IC not add this issue to its agenda. Instead, the Staff recommended publishing an agenda decision that includes educative guidance outlining how an entity applies the relevant principles and requirements in IAS 19 to the fact pattern in the submission.

Discussion

The IC agreed with the Staff’s recommendation. The IC believes that the agenda decision should emphasise that:

• The discount rate used for the obligation should be determined independently of the expected rate of return on the plan assets. This is because the nature of the assets does not affect the nature or amount of the obligation (IAS 19.BC129-BC139).
• When an entity undertakes to settle a defined benefit obligation in a foreign currency, the local assumptions are not the only ones that are relevant. This is because even though the level of benefits to be provided to the employees are based on local assumptions (inflation, salary rates etc.), the liability must be discounted at a rate that reflects the risk of the currency in which it will be settled. In other words, the primary purpose of the discount rate is to calculate the present value of the liability. The assumptions (local and discount rate) serve different purposes and are used differently to value the liability as a whole. Accordingly, using a discount rate based on market yields on HQCB from another market would not be incompatible with the use of other actuarial assumptions based on local economics.

Some IC members also observed that the Staff’s analysis is consistent with current practice, especially in African countries where defined benefit obligations are often denominated in US Dollars and where there are hardly any long-term government bonds from which to derive the discount rate.

The rest of the session was spent debating how to word the tentative agenda decision so as to give educational guidance (as described above) without crossing the threshold to interpret IAS 19.

Basic earnings per share and participating equity instruments - Agenda Paper 4

Background

This new issue addresses the determination of basic EPS when an entity has issued has two classes of equity instruments—ordinary shares and participating equity instruments. Dividend payments on the participating instruments are discretionary and under local tax laws, entitle the entity to a tax deduction. The entity recognises this tax benefit in equity.

Paragraph A14 of IAS 33 requires an entity to allocate profit or loss (after adjusting for cumulative dividends and/or dividends declared in the period) to ordinary shares and participating equity instruments to the extent that each instrument shares in earnings as if all of the profit or loss for the period had been distributed.

The submitter asks whether, in making this allocation, the entity adjusts profit attributable to ordinary shareholders (ie the numerator in the basic EPS calculation) to reflect the tax benefit.

Staff analysis

The staff believed that, in applying IAS 33, the entity adjusts profit or loss attributable to ordinary shareholders to reflect the tax benefit when calculating basic EPS. This is because:

• (a) paragraph A14(b) of IAS 33 requires an entity to assume that all of the profit or loss for the period had been distributed—this hypothetical distribution of profits to the participating equity holders would generate a tax benefit that would effectively result in additional amounts available for distribution to the ordinary shareholders; and
• (b) paragraph A14 requires an entity to consider ‘other rights to participate in undistributed earnings’ when allocating profit or loss. The tax benefit accruing to the ordinary shareholders represents such a right to participate in undistributed earning.
• (c) the objective of basic earnings per share information is to provide a measure of the interests of each ordinary share of a parent entity in the performance of the entity over the reporting period. The tax benefit is an interest of the ordinary shares that arises from the hypothetical distribution of profit to the participating equity holders. Accordingly, adjusting the profit attributable to ordinary shareholders to include the tax benefit is consistent with this objective.

The staff considered the Board’s recently published proposed amendments to IAS 12 as part of the Exposure Draft on Annual Improvements to IFRS Standards 2015-2017 Cycle and noted that finalisation of the proposed amendments to IAS 12 might result in the entity recognising the tax benefit associated with distributions to participating equity holders in profit or loss. Accordingly, the staff believed that the application of the proposed amendments to IAS 12 would not change how an entity calculates basic EPS in the fact pattern described in the submission.

Staff recommendation

The Staff recommended that the Committee not add this issue to its agenda. Instead, the Staff recommended publishing an agenda decision that includes educative guidance outlining how an entity applies the relevant principles and requirements in IAS 33 to the fact pattern in the submission.

Discussion

Discussion of original AP 4 on Tuesday 14 March 2017

The IC agreed with the publication of an agenda decision; however, they suggested that it be shortened to focus on the relevant principles in IAS 33, and that the example and other guidance be moved to separate educational materials. The Staff agreed to bring back a revised agenda decision and what form the educational materials should take for discussion at a future meeting.

Most of the IC members agreed with the Staff’s technical analysis. One member disagreed with it on the grounds that the dividend had not actually been paid and therefore the tax benefit has not actually arisen. Another IC member asked the Staff to think of and address other possible consequences of a hypothetical declaration of all the profits of a company, e.g. would there be any employee compensation issues and other regulatory issues that would affect the amount of ultimate profits that is distributable? Furthermore, that IC member asked the Staff to assess how earnings (for EPS purposes) would be calculated beyond year one to make sure there is no double counting in subsequent years. Another IC member thought that the tax benefit should also be allocated to the participating shareholders on an iterative basis rather than being allocated in its entirety to the ordinary shareholders.

Discussion of addendum to AP 4 on Wednesday 15 March 2017

Based on the comments received from the IC (see above), the Staff presented a redrafted tentative agenda decision for discussion. There was no new technical debate – all the comments related to drafting. All IC members agreed with the revised draft subject to a few minor edits.

Subsidiary as a first time adopter - Agenda Paper 5

Background

The Interpretations Committee was asked to consider a new issue addresses the determination of cumulative translation difference (CTD) by a subsidiary that adopts IFRSs later than its parent. More specifically, it addresses the following fact pattern:

• When the parent adopted IFRSs, it used the exemption provided in IFRS 1.D13 and deemed the CTD for all its foreign operations to be zero at the date of transition to IFRS
• Some years later, the subsidiary adopts IFRSs and, as permitted by IFRS 1.16(a) measures its assets and liabilities at “the carrying amounts that would be included in the parent’s consolidated financial statements, based on the parent’s date of transition to IFRSs, excluding adjustments made for consolidation procedures and for the effects of the business combination in which the parent acquired the subsidiary”

The submitter asked whether paragraph D16(a) of IFRS 1 would permit the subsidiary to recognise CTD at the amount recognised by its parent (calculated based on the parent’s date of transition to IFRSs).

Staff analysis

The staff assessment was that a subsidiary that adopts IFRS Standards later than its parent is permitted to measure CTD at its date of transition to IFRSs, based on the amount reported to its parent. This is because paragraph D16 specifically mentions assets and liabilities, but not equity. Paragraph D16(a) IFRS 1 is not applicable to components of equity by analogy. This is because paragraph 18 of IFRS 1 explicitly prohibits applying exemptions contained in IFRS 1 by analogy to other items.

Accordingly, the staff conclusion was that when a subsidiary that adopts IFRS Standards later than its parent, in preparing its first IFRS financial statements, the subsidiary applies paragraphs D12-D13 of IFRS 1 to CTD. Applying those paragraphs, at its date of transition to IFRSs, the subsidiary recognises CTD either of zero or on a retrospective basis.

The staff also considered whether a change to IFRS 1 may be warranted to allow an entity to apply the exemption in paragraph D16 to CTD. They concluded that such a change was not needed, on the grounds that:

• (a) there is no evidence to conclude that the Board intended anything other than what the requirements in paragraph D16 of IFRS 1 say;
• (b) the existing requirements in IFRS 1 in this respect is not overly burdensome; and
• (c) relatively few entities would be expected to benefit from any such change.

Staff recommendation

The staff recommended that the IC not add this issue to its agenda. The staff believes that the requirements in IFRS 1 provide an adequate basis for a subsidiary to determine how to measure CTD at its date of transition to IFRSs.

Furthermore, the Staff also recommended that the Board does not amend IFRS 1 to specifically allow an entity to apply paragraph D16 to CTD.

Discussion

The IC agreed with the Staff’s recommendation, and will discuss whether to propose an amendment to IFRS 1 to address this issue based on the feedback to be received on the tentative agenda decision.

All but two members agreed with the Staff’s technical analysis of the meaning of IFRS 1.D16. The members who disagreed observed that although the wording of IFRS 1.D16 is clear, they doubted whether the words reflect the intention behind providing the relief in the first place, and questioned the principle behind allowing the subsidiary to report the same figures only for assets and liabilities but not for equity. These members observed that not allowing the subsidiary to report the same CTA figure in their own books as that reported to the parent would mean having to keep two sets of accounts which could undermine one of the benefits of adopting IFRS by the subsidiary in the first place. These members also questioned whether the same treatment would apply to other components of equity e.g. those arising from revaluations of PPE. The Staff responded that the difference in the CTA would be a static day-1 difference that will not change in subsequent years. Furthermore, a detailed assessment of how other components of equity should be accounted for in terms of this exemption would require a more fundamental review of IFRS 1. Some other IC members had sympathy for the view that the subsidiary could recognise CTA in its own books at the same amount as that reported to the parent; however, they did not believe that the issue is pervasive enough to warrant an amendment at this point in time.

Interest and penalties — Agenda Paper 6

Background

In October 2015, the Interpretations Committee published a draft Interpretation Uncertainty over Income Tax Treatments. The draft Interpretation did not consider the accounting for interest and penalties related to uncertain tax treatments, and this omission drew concerns from some respondents to the consultation.

The Committee considered the comments received at its meeting in September 2016 and decided that the Interpretation should be finalised and apply to income taxes within the scope of IAS 12 Income Taxes but would not address interest and penalties. At the time, some Committee members expressed concerns that the absence of specific requirements for interest and penalties related to income taxes has led to diversity in practice. Accordingly, the Committee decided to consider whether it should add a separate project to its agenda to address how an entity accounts for interest and penalties, more generally.

Staff analysis

The staff undertook some research and identified that some entities apply IAS 12 and others apply IAS 37 to interest and penalties. Their assessment is that the concerns regarding the accounting for interest and penalties relate to possible diversity in the measurement of liabilities and the presentation of the related expense. However, they were not able to quantity or otherwise assess the significance of any potential effect.

The staff conclusion was that there is insufficient evidence to conclude that the absence of specific requirements on interest and penalties has resulted in materially different information being reported by entities for similar items. Consequently, they were not convinced that the potential benefits of undertaking a standard-setting project on interest and penalties would outweigh the costs of proposing an amendment.

Recommendation

The staff recommended that the Committee does not add this issue to its agenda.

Because this discussion was a consequence of comments received on a draft Interpretation, rather than from a request to the Committee, the staff also considered how the matter should be concluded. The staff recommended publishing a tentative agenda decision because it has the benefit of explaining the Committee’s rationale for not adding the issue to its agenda. The proposed wording was in Appendix A of the paper.

Discussion

The IC agreed not to add this issue onto its agenda by a narrow margin. The Staff will update the tentative decision to emphasise the following points:

1. An entity should look at all relevant facts and circumstances and apply judgement to determine whether the interest and penalties fall within the scope of IAS 12; if not, they should be accounted for in accordance with IAS 37.
2. It is not an accounting policy choice to apply either IAS 12 or IAS 37.
3. If this determination requires significant judgement, an entity should make the necessary disclosures in accordance with IAS 1 relating to significant judgements.
4. Entities should make proper disclosures about material interest and penalties in accordance with the existing requirements in the relevant Standards.

There was significant debate on this issue. All members acknowledged that there is diversity in practice but they were split as to whether or not this issue should be taken onto the IC’s agenda. Those who supported not taking it one believed that the diversity reflects the different nature of the interests and penalties (which is jurisdictional-specific and entity-specific, sometimes it could even be a financing decision by management to delay paying tax rather than to borrow from a bank) and no rule could fit all the circumstances. Accordingly, they believed that management should be given room to apply judgement in this area, supplemented by appropriate disclosures.

The IC members who wanted to add this issue onto the agenda believed that the difference between applying IAS 12 and IAS 37 could be material and some guidance as to how one determines whether an interest or penalty charge falls under which standard should be given.

None of the Board members present in the room supported adding the item onto the IC’s agenda as they did not believe that this was a high priority item in the whole scheme of things.

Fair value of biological assets growing on bearer plants — Agenda Paper 7

Background

The Interpretations Committee received a request to clarify whether, in applying IAS 41 Agriculture, there are circumstances in which an entity cannot reliably measure the fair value of growing produce (i.e. the produce from a bearer plant). The request related to palm oil and the valuation of palm oil fresh fruit bunches (which the paper abbreviates to FFB).

The staff collected views and information about how IAS 41 was being applied in practice to support their analysis.

Staff analysis on comment letters received

The feedback received indicated that a majority of entities applying IAS 41 measure biological assets (including produce growing on bearer plants) at fair value, indicating that they can do so reliably, including for palm oil FFB. The findings suggested that entities harvesting palm oil entities are able to determine a fair value measure for FFB using a discounted cash flow method on the basis of supportable assumptions.

The staff assessment was that the submitter is asking the Committee for clarity on how a particular industry sector should apply the requirements in paragraph 30 of IAS 41 in assessing whether fair value measurements are clearly unreliable. They are not seeking clarification on how to read the requirements or on which requirements to apply.

On the basis of their analysis, the staff thought that the requirements in existing IFRS Standards provide an adequate basis for an entity to account for growing produce on bearer plants, including FFB growing on oil palms.

Staff recommendation

The staff recommended that the Committee not add this issue to its agenda. Appendix A to this paper outlines the proposed wording of the tentative agenda decision, which notes that it is not the role of the Committee to provide answers to very specific application questions for particular industries.

Discussion

The IC approved the Staff’s recommendation. The IC members agreed that this is an application issue that is beyond the ability and the remit of the committee. The IC suggested that the tentative agenda decision emphasise the following points:

• Where the fair value measurement of growing produce is subject to significant measurement uncertainties, an entity should make the appropriate disclosures as required by IAS 1.
• Encountering significant practical difficulties in a fair value measurement does not automatically mean that any fair value measurement of the growing produce is clearly unreliable.

Some IC members also suggested that the Staff use the IFRS 13 post-implementation review to elicit views on what type of educational material and/or fair value measurement guidance could be provided to affected entities to help them with the decision making process.

Investment entity consolidation - Agenda Paper 8A

Background

In November 2016 the Interpretations Committee considered a request regarding the assessment of whether an investment entity that has subsidiaries (i.e. a parent investment entity) should consolidate a subsidiary in terms of IFRS 10.32 in specified circumstances. The submitter asked the following questions:

• (a) Would a subsidiary qualify as an investment entity (IE) if it possessed all three elements described in IFRS 10.27, but did not have all of the typical characteristics of an investment entity listed in IFRS 10.28?
• (b) Would a subsidiary be considered as providing investment management services to investors per IFRS 10.27(a) if it outsourced the provision of these services to a third party?
• (c) Would a subsidiary be considered as providing services that related to the parent’s investment activities per IFRS 10.32 if it held an investment portfolio as beneficial owner and had no other activity?
• (d) To what extent could an investment entity provide investment-related services, itself or through a subsidiary, to third parties?

The Committee decided to issue draft decision not to add this issue to its agenda, on grounds that the existing guidance in IFRS 10 was adequate to address the issue.

Staff analysis on comment letters received

The Committee received three comment letters, of which two supported the tentative decision. One comment letter, from the Swiss Association of Investment Companies, expressed concerns about wholly owned subsidiaries being classified as investment entities. The letter suggested that in such cases simply having the three elements in IFRS 10.27 should not in of itself lead be sufficient to conclude that the subsidiary is an investment entity. In such cases the parent and subsidiary should be considered together and more emphasis should be placed on the characteristics in IFRS 10.28. The Regulatory Board of the Swiss Stock Exchange has issued supplementary disclosure requirements to remedy what it sees as a deficiency in the information about the assets and liabilities of the subsidiary.

The staff analysis suggests that many of these matters were considered by the IASB when it developed the investment entity exception in IFRS 10. That Standard is also scheduled to undergo a post-implementation review, and this type of concern would be more appropriately considered is part of that broader review.

Staff recommendation

The Staff recommended that the Committee finalise the agenda decision.

Discussion

The IC agreed to finalise the agenda decision subject to drafting changes without any significant discussion.

Fund manager’s significant influence over a fund - Agenda Paper 8B

Background

In 2014 and 2015 the Committee has discussed a request to clarify whether, and how, a fund manager should assess if it had significant influence over a fund that it managed and in which it had a direct investment. At the time, the Committee decided to put the issue on hold because it believed that the issue should be better considered as a part of the Board’s comprehensive project on the equity method of accounting. A tentative agenda decision was issued in September 2014 to this effect. The Committee affirmed its decision in January 2015 in the light of comments received but did not proceed to finalise the agenda decision.

In November 2017 the Interpretations Committee was updated on progress in the equity method project. The Committee decided to issue a draft decision not to add this issue to its agenda.

Staff analysis on comment letters received

The Committee received four comment letters. All of the respondents had similar concerns about the wording of the decision. They were concerned that the decision implied that a fund manager did not need to assess whether it had significant influence if it did not have control or joint control, and that the principal-agent considerations could be disregarded. The staff agreed that neither implication was intended or appropriate.

Staff recommendations

The Staff recommended that the Committee finalise the agenda decision, but amended to address the concerns noted above.

Discussion

The IC agreed to finalise the agenda decision subject to drafting changes without any significant discussion.

A couple of IC members noted that removing the word ‘whether’ from the sentence ‘IAS 28 does not contemplate whether and how decision-making authority held in the capacity of an agent affects the assessment of significant influence’ is a substantive change from the committee’s previous discussions. This is because without ‘whether’, the sentence implies that agency rights automatically affect the assessment of significant influence. The Staff agreed to make appropriate changes to avoid this unintended consequence.

Initial recognition exception and single-asset entities - Agenda Paper 8C

Background

In September the Committee assessed a request related to the initial recognition exception in IAS 12 when an entity acquires all of the shares of an entity that is not a business (in accordance with IFRS 3) and the acquired entity has only one asset (an investment property) which is measured at fair value.

The submitter explained that if an entity acquirers an entity that has only an investment property the acquirer will not recognise deferred tax on acquisition because of the exception in IFRS 3.2(b). The consideration paid for the subsidiary becomes the deemed cost of the property. If the parent immediately measures the property at fair value it will recognise a gain, not because the fair value has increased but because of the accounting for the deferred tax. In practice, the valuation would be made at the end of the reporting period, but the deferred tax effect will be embedded in any recognised gain or loss.

The staff outreach determined that this type of transaction is common, with a large number of respondents follow the accounting treatment described in the submission while others recognise both the investment property and the deferred tax liability at initial recognition.

The staff assessed that addressing this issue would require a more comprehensive review of IAS 12 than was within the scope of the Committee’s activities. The feedback received from the agenda consultation indicated that a comprehensive review of IAS 12 was not a high priority project.

The Committee decided to issue a draft decision not to add the matter to its agenda.

Staff analysis on comment letters received

The Committee received eight comment letters. Most of the comment letters agreed that this was not an issue the Interpretations Committee could deal with. Two respondents disagreed with the technical analysis and argued that the initial recognition exception does not apply to the transaction. The staff disagree and think that requirements in IFRS 3 and IAS 12 are clear on this point.

Staff recommendations

The Staff recommended that the Committee finalise the agenda decision.

Discussion

The IC approved the Staff’s recommendation. Given the concern raised by various IC members, the Staff will bring back further analysis on the subsequent recognition and measurement of the deferred tax liability to see whether a separate project thereon is warranted. The Staff will also alert the Board to this issue.

Commodity loans - Agenda Paper 8D

Background

In November 2016 the Interpretations Committee received a request to clarify the accounting for commodity loan transactions. The scenario described by the submitter was of an entity borrowing a fungible commodity such as gold from a lender for a fixed period of time, with legal title passing to the entity on physical receipt of the commodity. There are no cash flows at inception. Instead the entity pays a fixed quarterly fee to the lender for the duration of the contract based on the value of the commodity and relevant interest rates at inception. At maturity the entity must deliver a commodity of the same type, quantity and quality to the lender, although an entity could have an option to settle in cash on the basis of the spot price of the commodity.

The entity then itself becomes a lender in a similar transaction with another party, but for a higher quarterly fee. The parties are not related to one another and the second contract was negotiated independently of the first.

The submitter asked whether the entity that initially borrows and then lends the commodity should recognise an asset and a liability in respect of these transactions.

The IC agreed that there was a multitude of commodity transactions and acknowledged that they represented a big issue in practice and that there was diversity in accounting for them. However, the IC believed that this issue was far too broad for the IC to address. One IC member was particularly concerned that if the IC tried to address this as a narrow scope amendment, the resulting guidance would be the only guidance on commodities and that would present an even stronger reason for entities to apply that guidance by analogy to other types of commodity transactions, but perhaps inappropriately so.

The Committee decided to issue a draft decision not to add this issue to its agenda.

Staff analysis on comment letters received

The Committee received five comment letters. All of the respondents acknowledged that any narrow scope standard-setting activity would be of limited benefit. However, several respondents said that referring to the IAS hierarchy, as suggested by the proposed wording, was unhelpful because there is no clear guidance in IFRS.

Staff recommendations

The Staff recommended that the Committee finalise the agenda decision.

Discussion

The IC approved the Staff’s recommendation with no technical debate. Rather, the discussion buffeted to and fro between the desirability and danger of providing more guidance on the submitter’s specific fact pattern (similar to the reasons discussed in the November 2016 meeting).

Previously Held Interests — Agenda Paper 9

Background

In June 2016 the IASB issued an exposure draft proposing amendments to IFRS 3 Business Combinations and IFRS 11 Joint Operations in relation to the Definition of a Business and Accounting for Previously Held Interests. The amendments were placed together for convenience, but are being considered separately by the IASB. The proposals in relation to previously held interests came through the Interpretations Committee and the comment letter feedback is being assessed by the Committee before it is considered by the IASB.

The proposals clarify that when an entity gets:

• control of a business that is a joint operation, it applies the requirements for a business combination achieved in stages, including remeasuring at fair value previously held interests in the assets and liabilities relating to the joint operation.
• joint control of a business that is a joint operation, it does not remeasure previously held interests in the assets and liabilities relating to the joint operation.

Staff analysis

The IASB received comments from 67 respondents. Most of the comment letter supported he proposals. The main concerns expressed were:

• a preference by some respondents that the IASB undertake a more fundamental review of how entities should account for changes in interests, or at least wait until the post-implementation review of IFRS 11 has been undertaken;
• whether the two amendments (see (a) and (b) above) are consistent; and
• whether “previously held interests” is clear.

Staff recommendation 

The Staff recommendation was that the Committee recommend that the IASB finalise the proposed amendments without alteration.

Discussion

The IC approved the Staff’s recommendation, except for the clarification of what constitutes ‘previously held interest’ – is it the entity’s overall interests in the joint operation (including goodwill and unrecognised intangible assets), or only the entity’s previously recognised share of individual assets and liabilities in the joint operation? The Staff agreed to conduct further research and will report back to the IC.

Centrally cleared derivatives — Agenda Paper 10

Background

Following the financial crisis in 2008, regulators in both the US and Europe require that entities executing particular derivative products clear these products through a central clearing counterparty (CCP). To be able to do so, an entity must be a clearing member, which requires a significant capital contribution as well as other legal requirements. Most major international financial institutions offer their clients services to clear their transactions, either in their capacity as a direct Clearing Member at the CCP or through relationships they have with other Clearing Members.

The Interpretations Committee received a request to clarify whether a clearing broker for centrally cleared derivatives reflects these activities on a principal or agent basis in their financial statements when applying IFRS 9 Financial Instruments.

The submitter states that whether a financial institution considers itself as principal or as an agent in those transactions has implications for the statement of financial position of those entities.

The submission refers to IFRS 9.3.1.1, which states that an entity “shall recognise a financial asset or a financial liability in its statement of financial position when, and only when, the entity becomes party to the contractual provisions of the instrument.” IFRS 9 does not use the term principal or agent in relation to determining the capacity in which an entity is acting. Nevertheless, the submitter uses the IAS 8 hierarchy to consider how the terms principal and agent are defined in other IFRSs to assess whether a clearing broker is responsible for delivery, clearing and settlement and is a principal, or whether they are an agent. In the former case each transaction results in a financial instrument. The submitter then draws on the discussions in IAS 18 Revenue, IFRS 10 Consolidated Financial Statements and IFRS 15 Revenue from Contracts with Customers on principal and agent relationships.

Staff analysis

The staff assessment was that the appropriate question to ask is whether the contractual arrangement referred to in the submission meets the definition of a financial instrument. The staff also stated that their outreach indicated that although there is some diversity in practice, their assessment was that the diversity reflects different fact patterns rather than from a misunderstanding of the requirements in IFRS.

Staff recommendation

The Staff recommended that the Committee not add this issue to its agenda.

Discussion

The IC approved the Staff’s recommendation subject to redrafting the tentative agenda decision.

The members agreed with the Staff’s analysis and believed that the reference to agent and principal in this case is a red-herring – if the contract is within the scope of IAS 39/IFRS 9, the entity should assess whether the IAS 32 offsetting criteria are met to determine whether the contract should be presented gross or net.

Modifications and exchanges of financial liabilities — Agenda paper 11

Background

This issue was discussed initially by the Interpretations Committee at its November 2016 meeting.

The submitter requested a clarification of the requirements in IFRS 9 relating to modifications or exchanges of financial liabilities. The submitter asked whether an entity should recognise a gain or loss, in profit or loss, when a financial liability was modified or exchanged and that modification or exchange did not result in derecognition of the financial liability.

The submitter noted that paragraph 5.4.3 of IFRS 9 required an entity to recognise any gain or loss arising from a modification of a financial asset that did not result in its derecognition in profit or loss immediately.

At that meeting the Committee supported the view that an entity should recognise a gain or loss at the date of modification. This view was based on the application of paragraph B5.4.6 of IFRS 9 which was considered clearer than AG8 of IAS 39. Paragraph B5.4.6 states that if an entity revised its estimates of payments or receipts (excluding modifications in accordance with paragraph 5.4.3), it is required to adjust the gross carrying amount of the financial asset or liability to reflect the revised contractual cash flows, with the difference recognised in profit or loss as income or expense.

In November, the Committee also debated how best to convey that view and concluded that an interpretation would be the most efficient means. Members were concerned that more prominence should be given to this matter than could be done via an agenda decision. However, there was hardly any support by the Board members present in the IC for an interpretation on grounds of timing and the fact that they believed IFRS 9 was sufficiently clear on this issue.

The matter was referred to the IASB, where it was discussed at its February 2017 meeting. The IASB did not support the publication of a draft interpretation. The IASB asked the Committee to issue an agenda decision.

Staff recommendation

The staff recommended issuing an “educative” agenda decision, which is included in Appendix A of the paper.

Discussion

The IC approved the Staff’s recommendation, and emphasised that the tentative agenda decision should highlight what is different in IFRS 9 that requires the change from IAS 39. The IC also supported providing further educational guidance via a webcast. The IC further explored possible ways to enhance the visibility of these technical communications.

Issues reported to the Board — Agenda paper 13

The Staff updated the IC on the status of the issues that had come to it since 2012 (when the Trustees last changed the IC’s agenda criteria) that it concluded were too broad for it to address and those that were referred to the Board without an agenda decision being published. The Staff identified 25 such issues, 24 of which were considered by the Board – 15 are included as part of the Board’s current or future work plan and no further work on the other 9 issues is planned at this time. For the remaining issue on the acquisition of an interest in an associate or joint venture under common control, the Staff recommended that the IC reconsider it on the grounds that it is not currently within the scope of any current or future Board projects.

The IC agreed to bring the last issue back onto its agenda. The rest of the discussion centred on whether the IC should reconsider the other issues not taken on by the Board against the system’s and the market’s capacity for change.