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Annual Improvements

Date recorded:

IAS 38 - Advertising and Promotional Activities

In May 2007, the Board agreed a proposal to amend paragraph 68-70 of IAS 38 such that:

  • IAS 38.69 would be amended to state that expenditure on advertising and promotional activities would be recognised as an expense when those activities are rendered to the entity; and
  • IAS 38.70 would be clarified to state that, to the extent that there is a prepayment for such services, an entity is not precluded from recognising a prepayment asset between the time the payment is made and the time the service is rendered to the entity.

The draft changes submitted to the Board (omitted from the observer note) generated considerable debate. It appeared that it was unclear when the advertising and promotional activities should be considered as 'rendered' and therefore recognised as expenditures in profit or loss. Is it when they are delivered to the entity or to the targeted audience?

The Board agreed that the activities are considered rendered when they are delivered to the entity. Thus, if an entity pays in advance for the preparation and broadcast of a television commercial, the costs associated with the preparation of the commercial should be expensed on completion and delivery of the commercial to the entity. On the other hand, the air time would only be expensed when the television commercial is aired.

 

IAS 16 - Sale of assets held for rental

The IFRIC was asked to provide guidance on the accounting for sales of assets held for rental. The issues are whether the sales should be presented gross (revenue and costs of sales) or net (gain or loss) in the income statement and how they should be classified in the balance sheet during the renting and held for sale period (if any).

At its May 2007 meeting, the IFRIC noted that IAS 16 paragraph 68 states that gains arising from derecognition of an item of PP&E should not be classified as revenue. As IAS 16 is clear that disposal of an item of PP&E should be reported net in the income statement, the IFRIC believed that this issue would be better addressed by amending the Standards rather than by means of an Interpretation and therefore decided not to take this issue on its agenda but to draw it to the attention of the Board.

Based on the discussion at the IFRIC meetings, the staff presented to the Board two possible alternative views:

  • View 1: When sales of assets held for rental arise in the course of an entity's ordinary activities and recur on a regular basis, the entity should report gross revenue from sales;
  • View 2: Revenue from the sales of these assets should be reported net. No exception should be made to IAS 16.

Two possible accounting treatments would reflect that gross presentation of revenue. Under View 1A the asset is initially classified as non-current PP&E and when the asset ceases to be rented either it is immediately sold or held for sale and transferred to inventories. Under View 1B the asset is initially classified as current inventories.

The Board agreed with View 1A but suggested two editorial comments to be made. Firstly, they wanted to clarify that it is the carrying amount of the PP&E that should be transferred to inventory once the asset ceased to be rented and secondly that 'ordinary activities' should be replaced by 'routine activities'.

 

IAS 1 - Current or non-current presentation of derivatives that are not designated as hedging instruments

The IFRIC raised to the attention of the Board an inconsistent guidance in IAS 1 regarding the current/non-current classification of derivatives. The guidance included in paragraph 62 of IAS 1 might be read by some as implying that financial liabilities that are classified as held for trading in accordance with IAS 39 are required to be presented as current.

The Board decided to address this inconsistency by amending the examples of current liabilities in paragraph 62 of IAS 1 as follows: "Examples are financial liabilities held primarily for the purpose of being traded classified as held for trading in accordance with IAS 39, bank overdrafts," The Board also highlighted that this was not only relevant for derivatives that are not designated as hedging instruments but for all derivatives.

 

IAS 28 - Impairment of investment in associate

At the May 2007 meeting, the Board decided that any impairment recognised by an investor against an associate, when it applies the additional impairment test required by IAS 28, should not be allocated to goodwill and other individual underlying assets of the associate. Furthermore there should be no restrictions on the reversal of the impairment charge to the extent that the recoverable amount subsequently increases. The Board asked the staff to consider whether the impairment of the associate should be performed by applying the guidance in IAS 36 or IAS 39

At this meeting, the Board decided that the guidance in IAS 28 should clarify that the impairment test in IAS 28 refers to IAS 36 impairment testing and, for that purpose, that the investment in an associate is treated as a single asset for impairment testing. The Board also decided to specify than any additional impairment loss is not allocated against goodwill or other assets included in the investment balance. Accordingly reversals of the additional impairment should be recognised as an adjustment to the investment in the associate to the extent that the recoverable amount increases.

 

IAS 39 - Reclassifying derivatives on cessation or commencement of hedge accounting and reclassifying portfolio financial instruments

The staff identified an apparent inconsistency in the guidance of Paragraph 9 and 50 of IAS 39. It relates to the reclassification of certain financial instruments into or out of the category of financial asset or financial liability at fair value through profit or loss in certain circumstances. These are:

  1. Reclassification of derivative that no longer qualifies as a hedging instrument in accordance with IAS 39 or vice versa; and
  2. Reclassification of financial instruments that, after initial recognition, become, or cease to be, part of a portfolio of identified instruments that are managed together and for which there is evidence of a recent pattern of short-term profit-taking.

After a lengthy debate, the Board did not manage to conclude on this issue. Thus, it was decided to bring this issue back at a subsequent meeting.

 

IAS 39 - Applicable effective interest rate on cessation of fair value hedge accounting

The staff identified an apparent inconsistency in the guidance in IAS 39. It relates to whether the revised or the original effective interest rate of a debt instrument should be applied in the remeasurement of the instrument's carrying amount on the cessation of fair value hedge accounting.

The Board decided to address this inconsistency by clarifying that the remeasurement of an instrument in accordance with AG8 is based on the revised effective interest rate calculated in accordance with paragraph 92 of IAS 39 where applicable rather than the original effective interest rate.

 

IAS 39 - Treating prepayment penalties as closely related embedded derivatives

The staff identified an apparent inconsistency in the guidance in IAS 39. It relates to penalties for early repayment (that is, prepayment) of loans and whether these are classified as closely related to the loan. The Board decided to address this inconsistency by amending paragraph AG30(g) of the application guidance of IAS 39 to make an exception to the example of embedded derivatives that are not closely related to the underlying. This exception is in respect of prepayment penalties that no more than compensate the lender for the loss of interest.

 

IAS 39 and IAS 20 - Accounting for nil or low interest loans received from a government

The staff identified an apparent inconsistency in the guidance in IAS 20 and IAS 39. It relates to the accounting for nil or low interest loan received from a government. IAS 20 states that no interest should be imputed for such a loan, whereas IAS 39 requires that all nil or low interest loans are recognised at fair value, thus imputing interest to the loan.

The Board decided to address this inconsistency by requiring below market rate government loans to be recognised and measured in accordance with IAS 39. They agreed to have the proposed draft amended accordingly as they believe that the term nil or low interest rate loans was not specific enough. As a consequence, the benefit of the government loan is calculated by the imputation of interest in accordance with IAS 39.

IAS 39 and IFRS 4 - Accounting by holders of financial guarantee contracts

The staff has been notified of an apparent ambiguity in the scope of IAS 39. It relates to the accounting by the holder of a financial guarantee contract. Scope paragraph 2(e) of IAS 39 implicitly excludes financial guarantee contracts held by the entity because of the general exclusion of insurance contracts from IAS 39 other than those issued by the entity that meet the definition of a financial guarantee contract. The implicit exclusion by paragraph 2(e) contrasts with the explicit exclusion of such contracts by the introductory paragraph IN6 of IAS 39.

The staff noted that the clarity of the standard would be improved by making a link between the introductory paragraph IN6 and paragraph 2(e) of IAS 39. This will be achieved by including an additional sentence in the introduction of IAS 39. Note that this issue is considered to be most appropriately resolved as an editorial change. The Board unanimously agreed with the staff proposal.

 

IAS 39 and IAS 18 - Costs of originating a loan

The staff has been notified of an apparent inconsistency in the guidance of IAS 18 and IAS 39. It relates to the accounting for transaction costs when originating a loan. Paragraph 43 of IAS 39 requires that financial assets are recognised initially at fair value plus, in the case of financial asset not at fair value through profit and loss, transaction costs. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability. Paragraph A4(a)(i) of the Appendix to IAS 18 states that fees that are an integral part of generating an ongoing involvement with a financial instrument are deferred, together with 'the related costs'. This would seem to permit more costs to be deferred than IAS 39 because there is no requirement for these costs to be incremental.

The staff recommended that the Appendix to IAS 18 be amended as an editorial change in order to clarify that 'origination fees' together with related transaction costs (as defined in IAS 39), are deferred and recognised as an adjustment to the effective interest rate.

The Board disagreed with the staff recommendation to have this corrected as an editorial change considering its implication and the widespread use of the Appendix to IAS 18 in practice. The Board proposed to have this issue exposed for comments instead.

 

IAS 41 - Discount rate for fair value calculations

The staff identified an apparent inconsistency in the guidance in paragraph 20 of IAS 41. It relates to the guidance on which discount rate should be used to calculate the fair value of the biological assets when using expected net cash flow as the basis for the calculation. Fair value is generally viewed as a post-tax concept and so the discount rate used. However, IAS 41 currently requires the use of a pre-tax discount rate to calculate fair value.

The staff proposed to address this inconsistency by amending IAS 41 to require the use of a post-tax discount rate when calculating fair value. The Board disagreed as they consider this to be more a fair value measurement issue and, therefore, requiring a post-tax discount rate would not solve the problem. The Board proposed to replace the 'pre-tax discount rate' by the 'rate applicable by the market participant' leaving it to the entity to determine which discount rate to be used.

 

IAS 41 - Replanting obligations

The staff identified an apparent practical issue that arises when an entity that has biological assets also has a legal obligation to replant such assets after harvest. The issue relates to the interaction of the requirement of IAS 37 and IAS 41. Paragraph 22 of IAS 41 requires that the calculation of fair value is not reduced by future replanting costs. A provision for replanting and the associated costs is recognised at the point of harvest where there is a legal obligation to replant in accordance with IAS 37.

After a lengthy debate, the Board did not reach a conclusion on this issue. Different views were expressed, and therefore the Board agreed to iscuss it again at the next meeting.

 

IAS 41 - Examples of agricultural produce

The staff identified that one of the examples of agricultural produce is an example of produce that has been processed rather than an example of unprocessed produce.

The Board decided to address this issue by amending this example by replacing 'logs' by 'felled trees' as agricultural produce of 'trees in a plantation forest'.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.