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Location: London
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The IFRS Interpretations Committee met via video conference on 29 April 2020. The full agenda, meeting overview, and our meeting notes are available in the left navigation panel as well as below. |
Full agenda for the IFRS Interpretations Committee's April 2020 meeting.
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Wednesday 29 April 2020
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Agenda papers for this meeting are available on the IASB's website.
Overview of the IFRS Interpretations Committee's April 2020 meeting.
The Committee met on Wednesday 29 April 2020.
IAS 12 Income Taxes—Multiple Tax Consequences of Recovering an Asset (Agenda Paper 2): The Committee decided to finalise the agenda decision, with some suggested changes to the drafting.
Supply Chain Financing—Reverse Factoring (Agenda Paper 3):
The Committee members provided suggestions for the questions to be addressed in the upcoming agenda paper for supply chain financing.
The Committee decided to finalise the agenda decision — published in IFRIC Update in November 2019 — with some suggested changes to the drafting.
In its November 2019 meeting, the Committee discussed a submission asking how an entity accounts for deferred taxes when the recovery of the carrying amount of an asset gives rise to multiple tax consequences. In the fact pattern described, the entity acquires a licence (intangible asset) as part of a business combination. The entity expects to recover the carrying amount of the licence only through use, and the expected residual value of the licence at expiry is nil. The applicable tax law prescribes two different tax regimes: income tax regime (pay income tax on the asset's economic benefits but receive no tax deductions in respect of amortisation of the licence) and capital gain tax regime (receive a tax deduction when the licence expires). The tax law prohibits the entity from using the capital gain tax to offset the taxable economic benefits from use in determining taxable profit. The submitter asks, in accounting for the deferred tax arising on initial recognition of the licence, should the entity identify a single tax base or account for the tax consequences under each regime separately. In the meeting, the staff concluded that the entity should account for the tax consequences under each regime separately and did not recommend to add the matter to the Committee's standard-setting agenda but to publish an agenda decision. Most of the Committee members agreed with that conclusion.
Of the nine responses received to the tentative Agenda Decision, eight agreed with not adding the matter to the Committee's standard-setting agenda and to publish an agenda decision. One respondent, KPMG, disagreed with the Committee's analysis and conclusion.
KPMG considered that the staff did not analyse the underlying question of whether a single asset or liability can have multiple tax bases but the Agenda Decision implied that it could be the case. They considered that an asset or liability can only have one tax base on the grounds that all references to "tax base" in IAS 12 are singular rather than plural and an agenda decision published in March 2015 implied this. A single temporary difference is split into components if there are multiple ways of recovering the investment. Therefore, KPMG was of the opinion that finalising the agenda decision which implied multiple tax bases would be standard-setting. It also commented that the tax base of the asset is immediately apparent because the entity always receives a tax deduction of the initial cost.
The staff disagrees with KPMG's view that the agenda decision implied an asset or a liability can have more than one tax base. In the agenda decision, it states that an entity compares the portion of the asset's carrying amount that will be recovered under one regime with the tax deduction that will be received under the same tax regime. The staff considers this description as consistent with IAS 12:BC9 which requires an entity to split the carrying amount of the investment property measured using the cost model to reflect the tax consequences arising from different manners of recovery of the asset. Moreover, the staff continued to support the conclusion that the tax base of the asset is not immediately apparent because different views are identified about how an entity determines the tax base of the asset.
The staff further pointed out that regardless of whether the asset is considered to have a single tax base or a different tax base under each tax regime, this will not affect the outcome. In both cases, the resulting deferred tax would reflect two distinct tax consequences that will follow from recovering the asset's carrying amount through use.
Two respondents suggested wording changes to the agenda decision. Firstly, the agenda decision could emphasise that the tax law prohibits the offsetting of the deductions from one tax regime with the taxable profits from the other tax regime. However, the staff thinks that this emphasis already exists in the agenda decision. Secondly, the agenda decision could specify that the entity recovers the carrying amount of the asset by way of two manners of recovery and allocates the carrying amount of the license to each tax regime applying IAS 12:51 & 51A. These amounts are then compared with the tax base under the income tax regime and capital tax regime respectively. The staff does not agree adding this because in the fact pattern described, there is only one manner of recovery, i.e. through use. Instead, the recovery of the asset's carrying amount through use gives rise to two distinct tax consequences.
Some respondents commented that finalising the agenda decision could have far reaching consequences. Entities may apply the agenda decision to any asset or liability for which the carrying amount can be recovered or settled in more than one way; or with more than one tax consequences that cannot be offset. The respondents also considered that it is unclear that if the proposed amendments to IAS 12 in the Exposure Draft Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction would apply to scenarios where the initial recognition of a single asset or liability gives rise to the initial recognition exemption in IAS 12:15 & 24 and suggested that this be addressed. Nonetheless, the staff expect that only entities with the same fact pattern will apply the tax consequences in the manner set out in the agenda decision, but other entities with other fact patterns would not necessarily do so. Also, the staff noted that the recognition exemption is not within the scope of this agenda decision and suggested the Board should consider it in future meetings after feedback is received on the Exposure Draft instead.
The staff recommended finalising the agenda decision as published in IFRIC Update in November 2019 with no changes.
All of the Committee members agreed with the conclusion in the agenda decision but there was a lively discussion about whether changes to the drafting should be made. Some Committee members were of the view that IAS 12:10 should not be quoted because the tax base is immediately apparent. Therefore, these members suggested that sentences related to IAS 12:10 and stating that the tax base is not immediately apparent be removed from the agenda decision. However, others considered quoting the paragraph helped to explain the complete thought process or, at least, would not be misleading.
Moreover, one Committee member expected entities to go through the whole process of assessment for the temporary difference according to IAS 12, including recognition and measurement. Therefore, the term “account for” was too unspecific. The staff agreed with this.
The Committee voted in three stages:
The Committee discussed the prevalence of supply chain financing (SCF) arrangements, the key terms of reverse factoring arrangements—which are a type of SCF arrangement—and the accounting for such arrangements.
The Committee received a submission about supply chain financing ("SCF") arrangements. The submitter is concerned that such arrangements are widespread while the relevant disclosures in the financial statements are inadequate. Accordingly, the submitter requested the Committee to give guidance on the disclosure requirements and classification of such liabilities. In view of this, the staff performed research and outreach and prepared a summary of it. The research summary provides the Committee with a summary of the prevalence of SCF arrangements, the key terms of reverse factoring arrangements, which are a type of SCF arrangement and the accounting for such arrangements.
Based on outreach and the staff's research, it was found that "reverse factoring" is the most common type of the SCF arrangement and is common in Australia, Brazil, China, Malaysia, Singapore, South Africa and South Korea but not in Japan. Under such arrangements, three parties are involved, an entity that purchases a good or service, a supplier providing those goods or services and a financial institution. The arrangement either enables an entity's suppliers to receive payment for their trade receivables before the due date or enables an entity to settle trade payables later than the due date. The relevant information is typically exchanged through the use of a platform offered by financial institutions.
In determining whether to derecognise the trade payables in the statement of financial position, an entity considers the requirements for derecognition of financial liabilities in IFRS 9:3.3.1 & 3.3.2. For arrangements which enable a supplier to receive payment later, respondents said that an entity typically does not derecognise its trade payable because its obligation is not extinguished and there is no change in the nature or the credit terms of the trade payables, i.e. there is no substantial modification. Only in the circumstance when the reverse factoring arrangement legally novates the payable to the financial institution, the entity derecognises trade payables and recognises other financial liabilities. On the other hand, for arrangements which enable an entity to settle payments later, entities typically reclassify trade payables as other financial liabilities.
For the presentation in the statement of cash flows, respondents said entities typically follow the classification of the liability in the statement of financial position, i.e. the cash outflows on settlements are included in the operating activities if the trade payables are not derecognised while the cash outflows are included in financing acitivities if other financial liabilities are recognised. For entities which present the cash outflows as financing activities, they normally disclose a non-cash transaction at the timing of entering into the reverse factory or gross up the cash flows by presenting a cash outflow from operating activities and a cash inflow from financing activities when the invoice is factored and a cash outflow from financing activities when they are settled.
Respondents said entities often do not disclose the existence of reverse factoring arrangements in the financial statements. Entities disclose the relevant information more frequently when the liabilities are classified as other liabilities than those continuing to classify them as trade payables.
The staff asked if the Committee had any questions or comments on the information provided.
Most of the Committee members agreed that there is diversity in accounting for SCF arrangements and the relevant presentation is currently not transparent. They considered it would be helpful for the Committee to provide guidance on the presentation in the statement of financial position and in the cash flow statement. The disclosure requirements (including those in IFRS 7 and IAS 7) should also be highlighted because judgement is involved and those disclosures provide useful information for readers of the financial statements to gain more details of such arrangements.
Some Committee members commented that it is difficult to distinguish payables and debt in SCF arrangements. However, this is critical for the relevant disclosures. The disclosures of the SCF would depend on whether the liabilities are “operating” or “financing” in nature.
The staff suggested that the upcoming agenda paper could start by analysing whether the trade payables should be derecognised or not. If the existing Standards are not clear about this, standard-setting may be required. However, some Committee members pointed out that on initial recognition, the liabilities might not be “trade payables”. If, based on the arrangement between an entity and its supplier, it is already a financing arrangement, it would be necessary to distinguish payables and debts when they are originated. Again, the upcoming agenda paper may assess if the guidance in the current Standards helps to clearly distinguish these. No decisions were made.
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