The exposure draft contains three proposed amendments to IFRS 3 'Business Combinations' that would update an outdated reference in IFRS 3 without significantly changing the requirements of the standard.

EFRAG agrees with all three proposed amendments.

Comments on EFRAG's draft comment letter are requested by 17 August 2019. For more information, see the press release and the draft comment letter on the EFRAG website.

The update reports on the EFRAG Board meeting on 4 June 2019, the EFRAG Board conference call on 13 June 2019, the EFRAG TEG conference call on 12 June 2019, the meeting of the European Lan Steering Group on 18 June 2019 and the plenary meeting of the Project Task Force on Climate-related Reporting on 21 June 2019. The update also lists an EFRAG publication issued in June:

• EFRAG’s final comment letter in response to the IASB Exposure Draft ED/2019/1 Interest Rate Benchmark Reform (Proposed amendments to IFRS 9 and IAS 39);
• EFRAG’s draft comment letter in response to the IASB Exposure Draft ED/2019/3 Reference to the Conceptual Framework (Proposed amendments to IFRS 3);
• EFRAG’s draft comment letter in response to the IFRS Foundation Exposure Draft Proposed amendments to the IFRS Foundation Due Process Handbook;
• EFRAG’s draft comment letter in response to the IASB Exposure Draft ED/2019/2 Annual Improvements to IFRS Standards 2018-2020; and
• EFRAG’s hedge accounting questionnaire under IFRS 9/IAS 39 for European insurers that apply IFRS Standards.

Please click to download the June EFRAG Update from the EFRAG website.

The podcast features dis­cus­sions of the following topics in more detail (length of the podcast: 20 minutes):

• Goodwill and impairment.
• Primary financial state­ments.
• Rate-regulated activities.
• 2019 review of the IFRS for SMEs Standard.
• Financial instruments with characteristics of equity.
• Business combinations under common control.

The podcast can be accessed through the press release on the IASB website. More in­for­ma­tion on the topics discussed is available through our com­pre­hen­sive notes taken by Deloitte observers at the June IASB meeting.

As the new UK GAAP regime has now been in place for a number of years, preparation of either parent company or subsidiary accounts under either FRS 101 or FRS 102 should now have become a more routine exercise. The FRC has made several changes to FRS 102 as part of its first triennial review of the Standard to deal with issues highlighted in its implementation. The amendments were published in December 2017.

The table below reflects new and revised UK GAAP financial reporting requirements that need to be considered for financial reporting periods ending on 30 June 2019. For those reporters who want to understand new UK GAAP application for earlier periods please select one of the following:

• New UK GAAP application for reporting periods ending 31 March 2019
• New UK GAAP application for reporting periods ending 31 December 2018
• New UK GAAP application for reporting periods ending 30 September 2018
• New UK GAAP application for reporting periods ending 30 June 2018
• New UK GAAP application for reporting periods ending 31 March 2018
• New UK GAAP application for reporting periods ending 31 December 2017
• New UK GAAP application for reporting periods ending 30 September 2017
• New UK GAAP application for reporting periods ending 30 June 2017
• New UK GAAP application for reporting periods ending 31 March 2017
• New UK GAAP application for reporting periods ending 31 December 2016
• New UK GAAP application for reporting periods ending 30 September 2016
• New UK GAAP application for reporting periods ending 30 June 2016
• New UK GAAP application as at 31 March 2016
• New UK GAAP application as at 31 December 2015

The information below reflects developments to 30 September 2019 and will be updated through to September 2019 to reflect new and revised financial reporting requirements that need to be considered for financial reporting periods ending on 30 June 2019. For accounts approved after September 2019, please also refer to subsequent versions of this document for any new and revised IFRSs that have additionally been issued that might require disclosure in the accounts under IAS 8:30.

Background

Since IFRS 17 Insurance Contracts was issued in May 2017, the Board has been monitoring the implementation and has learned about concerns and implementation challenges. The Board had previously indicated that it would consider whether additional action is needed to address matters arising during implementation. At the October 2018 meeting of the Board a list of 25 potential amendments to the standard was identified and the criteria against which any possible amendment would be considered were agreed. 

Subsequent discussions in the project on possible amendments to IFRS 17 led to the proposed amendments that are included in today's exposure draft.

Suggested changes

The main changes proposed in ED/2019/4 Amendments to IFRS 17 are:

• Deferral of the date of initial application of IFRS 17 by one year to annual periods beginning on or after 1 January 2022 and change the fixed expiry date for the temporary exemption in IFRS 4 Insurance Contracts from applying IFRS 9 Financial Instruments, so that entities would be required to apply IFRS 9 for annual periods beginning on or after 1 January 2022.
• Additional optional scope exclusion for loan contracts that transfer significant insurance risk and related transition requirements to enable entities issuing such contracts to account for those contracts applying either IFRS 17 or IFRS 9.
• Additional scope exclusion for credit card contracts that provide insurance coverage.
• Amendments regarding allocation, recognition, assessment of the recoverability, and disclosure regarding insurance acquisition cash flows relating to expected contract renewals.
• Amendments regarding the contractual service margin (CSM) allocation relating to investment components and related disclosure requirements so that in the general model the CSM is allocated on the basis of coverage units that are determined by considering both insurance coverage and any investment return service.
• Extension of the risk mitigation option to include reinsurance contracts held.
• Amendments to require an entity that at initial recognition recognises losses on onerous insurance contracts issued to also recognise a gain on reinsurance contracts held.
• Simplified presentation of insurance contracts in the statement of financial position so that entities would present insurance contract assets and liabilities in the statement of financial position determined using portfolios of insurance contracts rather than groups of insurance contracts.
• Additional transition relief for business combinations.
• Additional transition relief for the date of application of the risk mitigation option and the use of the fair value transition approach.

The exposure draft also contains several smaller proposed amendments.

Comments on the proposed changes are requested by 25 September 2019.

Effective date

The proposed effective date for the amendments would be the same as the proposed new effective date for IFRS 17 (1 January 2022) with early application permitted. The amendments would be applied retrospectively.

Additional information

Please click for:

• IASB press release (link to IASB website)
• Access to the exposure draft on the IASB website
• Separate document with the Basis for Conclusions (link to IASB website)
• Short Snapshot overview of the proposed amendments (link to IASB website)
• Version of IFRS 17 incorporating the proposed amendments (link to IASB website)
• Information on stakeholder events in Toronto, London, Hong Kong and Sydney (link to IASB website)
• Our related Need to know newsletter
• Our UK Accounting Plus project page on Amendments to IFRS 17 Insurance Contracts

EFRAG considers the IASB proposals to be a "step in the right direction in addressing the inability to meet specific forward-looking hedge accounting requirements due to uncertainty that exists around the transition of interbank offered rates (IBORs) in the periods before the transition".  

Whilst supporting the proposals EFRAG is of the view that a number of changes are necessary most notably

• EFRAG suggests that relief from including the uncertainties of IBOR reform in the retrospective assessment is needed.
• EFRAG disagrees with not applying the proposed amendments retrospectively to hedges that were discontinued because entities were unable to apply the proposed reliefs, and suggests to assess whether structuring opportunities would not arise as a result of the ED not allowing reinstatement of such hedges.
• EFRAG finds that the objective of the proposed disclosures "lacking explicit justification, especially because the aim of the Amendments is to neutralise the impacts from IBOR transition".  EFRAG highlights that the proposed disclosures will be will require costly changes to the current reporting systems and is "not convinced" that the level of disclosures proposed will, in this stage, provide sufficient additional information to justify the increased cost.

With regards the second phase, EFRAG believes that it should be "addressed as soon as possible and in parallel to the finalisation of the first phase , without hindering the finalisation of the relief for the issues addressed in the first phase".  EFRAG suggests in an appendix a number of topics that could potentially be addressed in the second phase.

For more information, see the press release and final comment letter on the EFRAG site.

At the March 2019 IFRS Interpretation meeting, the Committee determined that borrowing costs would not be capitalised when the borrowings relate to the construction of a residential multi-unit real estate development for which revenue is recognised over time.

For more in­for­ma­tion, see the press release on the IASB’s website.

Below is an analysis of all changes that were made to the work plan since our last analysis on 18 May 2019.

Standard-setting projects

• Rate-regulated activities — the expected timing of a discussion paper or exposure draft has been moved to H1 2020 (was: H2 2019)

Maintenance projects

• The IASB published an exposure draft Annual Improvements to IFRS Standards 2018–2020 on 21 May 2019. The following projects are part of the annual improvements 2018-2020 and are therefore now reflected as open to comment in the work plan:
  • Fees in the ‘10 per cent’ Test for Derecognition (Amendments to IFRS 9)
  • Lease Incentives (Amendment to Illustrative Example 13 accompanying IFRS 16)
  • Subsidiary as a First-time Adopter (Amendments to IFRS 1)
  • Taxation in Fair Value Measurements (Amendments to IAS 41)
• IBOR reform and the effects on financial reporting — the work plan reflects that the comment period on the exposure draft has ended; a first discussion of the feedback received is scheduled for Q3 2019
• Updating a reference to the Conceptual Framework (Amendments to IFRS 3) — The IASB published an exposure draft Reference to the Conceptual Framework (Proposed amendments to IFRS 3) on 30 May 2019 - the work plan reflects that the project is now open for comment

Research projects

• No changes

The above is a faithful comparison of the IASB work plan at 18 May 2019 and at 24 June 2019. For access to the current IASB work plan at any time, please click here.

The Board came to the following conclusions.

Goodwill and impairment: The staff aim to begin the process for preparing a Discussion Paper in Q3 2019 and to publish it towards the end of this year.  At this meeting the Board decided which preliminary views it wishes to express in the DP:

• a) New disclosure objectives about the rationale for the business combination and disclosure requirements about how the entity plans to assess whether the combination is meeting its objectives and the measures reported to the CDOM.
• b) That the amortisation of goodwill not be reintroduced.
• c) That the requirement to undertake a quantitative impairment test annually be removed and replaced with an impairment-indicator approach (for goodwill and intangible assets with indefinite useful lives or not yet available for use).
• d)removing the requirement to exclude from the calculation of value-in-use cash flows that are expected to arise from a future restructuring or enhancement.,
• e) Removing references to pre-tax cash flows and discount rates and instead requiring that the assumptions about cash flows and discount rates be internally consistent.
• f) A subtotal of total equity before goodwill be required to be disclosed.

Primary Financial Statements: This is the last meeting planned before the staff intend to begin the process of preparing an exposure draft that will propose a replacement of, or revisions to, IAS 1. At this meeting, the Board decided that:

• a) exchange differences and gains and losses on derivatives be classified into the section (i.e operating, financing or investing) to which they relate, with special guidance for derivatives;
• b) incremental expenses related to an investment (those expenses that would not have been incurred if the investment had not been made) be classified as investing;
• c) the income tax effect of MPM adjustments be based on a reasonable pro-rata allocation of the current and deferred tax of the entity in the tax jurisdiction, or another method which achieves more appropriate allocation, and the approach taken disclosed;
• d) entities not be required to disclose how and why the MPM differs from the total of the measure of profit or loss for the reportable segments; and
• e) the requirements not be effective for 12 to 24 months after publication and that comparative information would be required to be reclassified.

Proposed amendments to IAS 16: The Board decided to finalise the proposal to require that proceeds generated when testing if an asset is functioning be recognised in income (rather than a reduction of the cost of the asset) and to clarify the meaning of ‘testing’. 

Rate-regulated activities: The staff aim to begin the process for preparing an exposure draft in July or September and to publish it in the first quarter next year. At this meeting, the Board decided that:

• a) the descriptions of the scope criteria and the definitions of regulatory assets and liabilities be refined, a reference to fines payable be included in the explanation of total allowed compensation and that the Board retain its earlier decisions about recognition and not develop further derecognition requirements;
• b) regulatory assets and liabilities be measured by discounting the estimated future cash flows arising from the regulatory assets (including the cash flows relating to the regulatory interest or return), using the regulatory interest or return rate unless there is any indication that that rate is not adequate. An exception is regulatory assets and liabilities that relate to expenses or income that will be included in/deducted from the future rate(s) when cash is paid/received. They are adjusted for risks that are not present in the related liability or asset.
• c) the model not include a separate step to assess whether the effects of the time value of money and risks inherent in the cash flows are significant or a practical expedient that would avoid the need for discounting if the effects of the time and risks are not significant.
• d) an indicator-based approach be used to assess whether the regulatory interest rate or return rate is adequate. The minimum adequate rate is one that the entity would expect to receive for a stream of cash flows with the same timing and uncertainty as those of the regulatory asset. If the rate provided by the agreement is inadequate the minimum adequate rate is used for initial and subsequent measurement. The same measurement requirements apply to regulatory liabilities and assets, except in the limited circumstances when that rate is affected by an identifiable event or transaction that should be recognised separately.
• e) Regulatory income and expense that is related to a particular income or expense line item be presented immediately above or below that line item (for both profit or loss and OCI line items) with all other regulatory income and expenses presented immediately below the revenue line in profit or loss. Regulatory interest or returns accrued on regulatory assets or liabilities must be disclosed as a separate caption (either in the breakdown of regulatory income/expense for the period or the regulatory asset and liability reconciliations).

There are also papers summarising the similarities and differences between the proposed model and US GAAP requirements and the Board’s tentative decisions to date.

Business Combinations under Common Control: The Board agreed that distinguishing between combinations in which the non-controlling shareholders of the receiving entity get a residual interest in the transferred entities or businesses is a viable approach to explore in determining when to apply a current value approach, and when to apply a form of a predecessor approach.

Financial instruments with the characteristics of equity: The Board discussed detailed analysis of the comment letter feedback received about the Discussion Paper on a selection of topics: The Board’s preferred approach; Classification of non-derivative financial instruments; Classification of derivative financial instruments; Compound instruments and redemption obligation arrangements; the Puttable exception; and IFRIC 2 instruments. 

Comprehensive review of the IFRS for SMEs Standard: The Board plans to issue a Request for Information (RFI) in the second half of 2019. The Board decided that the RFI propose that IFRS 13 Fair value Measurement, IFRS 9 Financial Instruments and IFRS 16 Leases be incorporated in the SME Standard, with some simplifications but that IFRS 14 Regulatory Deferral Accounts not be incorporated.

Please click to access the detailed notes taken by Deloitte observers for the entire meeting.