Annual Improvements to IFRSs 2007

Date recorded:

The annual improvements process is a new procedure to deal with miscellaneous, non-urgent minor issues in IFRSs in an efficient way. The first annual improvements document was published in October 2007 containing 41 amendments on 25 IFRSs. The purpose of this session was to inform the Board of comments received from constituents and determine how the annual improvements process will proceed.

The staff informed the Board that it received 75 comment letters (with the majority from Europe) with nearly a third arriving after the deadline. Constituents were reminded that timely filing of comment letters is necessary.

The staff noted that it has segmented the proposed amendments into three areas:

  1. Items that received broad support and, subject to minor editorial change in some cases, are ready for the Board to reaffirm without deliberation (presented in Agenda Paper 4D); those items will go directly to balloting
  2. Amendments that require more staff work but can be completed in time to meet the timetable for publication in May (presented in Appendix 1 to Agenda Paper 4B and Agenda Papers 4E - 4L)
  3. Amendments that require more staff work but cannot be completed in time to meet the scheduled publication date (presented in Appendix 2 to Agenda Paper 4B)

The staff also asked the Board if they would consider approving separate publication of a restructured IFRS 1 on a stand-alone basis. The Board seemed to agree.

One Board member asked when the amendments will be incorporated in the Bound Volume published by the IASB. The Director of Technical Activities informed the Board that the plan is to incorporate the amendments in this year's edition of A Guide through International Financial Reporting Standards published by the IASCF (the 'Green Book').

The staff said that it has received a significant number of general comments on the annual improvements process itself, especially in the areas of:

  • Scope
  • Early adoption and transitional provisions
  • Consequential amendments
  • Due process and procedures



Staff noted that constituents had difficulties in understanding the criteria the Board applies when determining that an amendment is 'minor'. Some respondents were concerned about changing principles in IFRSs or addressing issues new to IFRSs without the appropriate level of attention from constituents. Some respondents objected strongly to treating some of the proposed amendments as minor improvements, such as:

  • Statement of compliance in IAS 1 when not all IFRS are followed
  • Changed definition of a derivative in IAS 39
  • Advertising and promotional activities
  • Classification of land under IAS 17

Some commentators believed due process had not been followed by the Board. One Board member noted that due process is actually being followed as the annual improvements process contains all steps except a discussion paper phase (not considered necessary) in accordance with the IASB Due Process Handbook.

This member also noted that minor does not mean 'minor impact' or 'no change in practice', but minor changes in terms of the number of words in IFRSs.

One Board member proposed to have a 'biennial improvements process'. This idea was not shared by other Board members.


Early adoption

A result of the comment letter analysis was that nearly all commentators disagreed with the transitional provisions as set out in the exposure draft. The Board acknowledged those comments and will consider this in the next annual improvements cycle. The Board also accepted that sometimes specific transitional provisions might be appropriate in this year's annual improvements document.


Consequential amendments

Another area of concern for constituents was that all accompanying material (for instance, the Basis for Conclusions) should reflect the amendments. Although some parts are not mandatory, it is thought of as being helpful for the full understanding of the implications of the changes.


Due process and procedures

Commentators raised concerns that the annual improvement document confuses small editorial corrections with changes having great impact on practice. Constituents proposed that the ED should have been structured to clearly identify amendments with broader impact.

The staff informed the Board that it plans to revisit the process for the 2008 annual improvements once the amendments resulting from the 2007 ED are finalised.

The Board then was asked if it agreed to the categorisation done by the staff. The Board seemed to agree.

The staff then turned to the amendments that it classified as 'requiring some staff work but can be completed in time' and informed the Board that this is the first of two batches for redeliberation. The topics discussed were:

  • Amendment to IFRS 5: Plan to sell the controlling interest in a subsidiary
  • Amendment to IAS 16: Sale of assets held for rental
  • Amendment to IAS 19: Curtailments and negative past service cost
  • Amendment to IAS 19: Short term and long term benefits
  • Amendments to IAS 28 and IAS 31: Disclosure requirements for investments accounted for under IAS 39
  • Amendment to IAS 28: Impairment of investments in associates
  • Amendment to IAS 38: Advertising and promotional activities
  • Amendment to IAS 40: Treatment of investment property under construction


Amendment to IFRS 5: Plan to sell the controlling interest in a subsidiary

The amendment proposes to clarify that all assets and liabilities of a subsidiary should be classified as held for sale if the parent has a sale plan involving loss of control of the subsidiary.

The staff proposed adding further words to clarify the proposed changes and align the effective date of the amendment with that of the revised version of IAS 27 Consolidated and Separate Financial Statements as published in January 2008. IAS 27 (2008) is effective for annual periods beginning on or after 1 July 2009.

The Board agreed.


Amendment to IAS 16: Sale of assets held for rental

The amendment should provide clarity in the case an asset is held with the dual purpose of renting and selling as part of an entity's business model.

Particular concerns were raised about the amendment being a rule instead of a principle, the consequential amendment to IAS 7 Statement of Cash Flows to prescribe 'operating' treatment for the original expenditure for the asset concerned, and the interaction with IFRS 5.

The staff recommended continuing with the amendment as proposed but adding clarification on the non-applicability of IFRS 5 in the Basis for Conclusions. One Board member proposed to put that guidance in the main body, which seemed to be supported by the rest of the Board.

The Board agreed.


Amendment to IAS 19: Curtailments and negative past service cost

The amendment's aim is to provide clarity on what is the difference between a curtailment and negative past service cost and to remove the reference to 'materiality from IAS 19.111. One of the Board's previous decisions was that any link to future salary increases relates to future services. The staff redrafted words aimed to reflect this. Also the staff proposed to make clear in the amendment that the change in the defined benefit obligation triggers whether or not there is a past service cost. The staff also proposed that the amendments relating to negative past service cost should be applied prospectively, that is, for benefit changes occurring on or after 1 January 2009.

Some Board members raised concerns with the wording proposed by the staff with regard to the link to future salary increases, suggesting that it was not helpful. The staff said they would go back and recirculate an improved wording. One Board member stated he would like to see the whole amendment dropped as IAS 19 cannot be fixed in this respect.

The Board decided to keep the replacement of the word 'materiality' with the term 'significant', even though 'significant' is not a defined term. All other staff proposals were accepted subject to some drafting changes.


Amendment to IAS 19: Short-term and long-term benefits

The original proposed amendment stated that entitlement is the distinguishing line between a short-term and long-term benefit.

The Board had a lengthy discussion on what is the appropriate distinguishing line and if the 'wholly' criterion (that is, if the liability is settled in total) was correct.

The staff recommendation used the words 'that are expected to be settled in full' for short-term employee benefits. Some Board members suggested using the words in IAS 1 (revised 2007) paragraph 69(c) that states '...due to be settled within twelve months after the reporting period'. Other Board members seemed to agree.


Amendments to IAS 28 and IAS 31: Disclosure requirements for investments accounted for under IAS 39

The proposed amendment would require entities that apply the fair value option to their investments in associates or jointly controlled entities to make some of the disclosures as set out in IAS 28 and IAS 31 in addition to the requirements of IFRS 7 Financial Instruments: Disclosures.

Constituents questioned why those investments should be treated differently from other IAS 39 investments, since the Board decided to allow fair value treatment for such investments on the basis they are no different from other financial assets for certain entities. The staff proposed to retain the original amendments. One Board member proposed to more extensively explain the rationale for the Board's decision in the Basis for Conclusions.

The Board agreed.


Amendment to IAS 28: Impairment of investments in associates

The amendment aims to provide clarity on reversals of an impairment loss in an associate that relates to goodwill of the associate. It states that the investment in the associate is treated as a single asset, that is, an entity is allowed to fully reverse any impairment loss if the recoverable amount of the associate has increased accordingly.

It was noted that constituents had raised some concerns about this amendment.

The Board had a short discussion on the topic, and one Board member made clear he would dissent from issuing the amendment in its current version. The other Board members agreed with the amendment as drafted.


Amendment to IAS 38: Advertising and promotional activities

The proposed amendments aim to clarify the term 'as incurred' used in IAS 38.69 that covers advertising and promotional activities. The proposed change would require entities to recognise the expense once they have access to the goods or services.

The Board received a significant number of objections to this proposal. A number of commentators highlighted that this would be a major change to existing practice and, hence, should not be part of the annual improvements project. Other constituents argued that, as advertising and promotional activities are not clearly defined, it is difficult to determine what is covered by IAS 38.69, especially in the case of mail order catalogues. Some constituents referred to the guidance under US GAAP set out in SOP 93-7, which allows capitalisation of direct-response advertising expenses (for example, mail order catalogues). Another issue that was raised in the comment letters was the treatment of undelivered advertising and promotional materials. The conclusion drawn by some commentators was that the amendment should be part of a separate project of the IASB or that the issue should be referred back to the IFRIC.

The staff proposes to continue with the amendment as proposed subject to some wording changes to reflect of the issues raised by commentators.

The Board had a lengthy debate on this issue and some Board members were in strong disagreement with the amendment. One Board member questioned if this amendment really improved financial reporting. Additionally, some Board members expressed their support for the Alternative View presented in the annual improvements document that some of the issues covered in the proposed amendment would better be dealt with in Standards on tangible assets such as IAS 2 Inventories.

The Chairman took a vote on this amendment. The Board agreed to proceed with the amendment (three Board members voted against).


Amendment to IAS 40: Treatment of investment property under construction

The final amendment discussed was the proposal to treat investment property under construction in accordance with IAS 40 (and not IAS 16). As a consequence, if an entity applies the fair value model, its investment property under construction would have to be fair valued from day one.

Of 42 respondents who commented on this amendment, 26 objected. The two main reasons were:

  • The amendment is a significant change and should not be dealt with as part of the annual improvements process.
  • If an entity applies the fair value model, but cannot determine the fair value for the investment property reliably, cost measurement would be required even when fair value becomes available.

The Board discussed some possible ways to address the issues raised. At the end of the discussion, there seemed to be agreement that the route IAS 41 takes in paragraphs 30-33, that is, use cost as a surrogate of fair value until it comes available, was appropriate.

At the end of the session, the staff informed the Board about the project plan. Some of the amendments that require more staff work will be brought back to the Board at the March meeting. Sweep issues will be discussed at the April Board meeting. The final annual improvements document is expected to be published in May 2008.

The Board agreed with the project plan.

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