Annual Improvements Project (AIP) 2009

Date recorded:

IAS 39: Treating loan prepayment penalties as closely related embedded derivatives (2007 AIP issue)

The Board agreed to replace paragraph IAS 39.AG30(g) along the following lines:


(g) A call, put, or prepayment option embedded in a host debt contract or host insurance contract is not closely related to the host contract unless:

(i) the option's exercise price is approximately equal on each exercise date to the amortized cost of the host debt instrument or the carrying amount of the host insurance contract; or

(ii) the exercise price of a prepayment option [is approximately equal to an amount that would]* reimburse the lender for the present value of lost interest for the remaining term of the host debt contract. Lost interest is the excess of the effective interest rate of the original contract and the effective interest rate for a contract with the same terms as the host debt contract.

The assessment of whether the call or put option is closely related to the host debt contract is made before separating the equity element of a convertible debt instrument under IAS 32.

The staff paper used the phrase 'no more than reimburses the lender' in sub-paragraph (g)(ii). Board members thought that this was inconsistent with sib-paragraph (i) and implied a level of precision that the Board probably did not intend. The Board agreed and instructed the staff to make sub-paragraph (g)(ii) consistent with (g)(i).

IAS 1: Classification of the liability component of a convertible instrument (2007 AIP issue)

The Board noted that in the 2007 AIP they had concluded that classifying the liability on the basis of the requirements to transfer cash or other assets rather than on settlement better reflects the liquidity and solvency position of an entity, and it proposed to amend IAS 1 accordingly. However, it acknowledged that the wording proposed in the ED had not reflected the Board's intent.

The Board agreed that IAS 1 paragraph 69 should be amended as follows:

69 An entity shall classify a liability as current when: [...] (d) it does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period (see paragraph 73). The potential settlement of a liability by the issue of equity instruments [when the terms of the liability instrument permits settlement in shares does not affect]* its classification as current.

The staff paper used the phrase 'is not relevant' to the classification. Board members noted that the potential settlement through the issue of equity instruments must be a feature of the instrument and not a matter of management intent.


IAS 17: Classification of leases of land and buildings (2007 AIP issue)

The Board did not agree with a staff recommendation that this issue should be subsumed in the forthcoming Leases Discussion Paper. Board members acknowledged that they had caused the problem when the IASB had amended IAS 17 in 2003 and they had an obligation to constituents to make IAS 17 operational.

After discussion, the Board agreed to amend IAS 17 but revise the amendment proposed in the 2007 Annual Improvements ED to address various consequential amendments identified in the comment letters, to expand the Basis for Conclusions to set out the Board's rationales underlying the change from its previous decision in 2003 and explain why it is imperative to do so at this time outside of the Board's active project on leases. No amendments will be made to IAS 40.

Transitional relief will be made, so that if an entity had a 'previously published fair value' of a lease, it could use that as the transitional fair value rather than attempting a 'with hindsight' exercise.


Next steps: All 2007 AIP issues discussed

The staff will prepare ballot drafts of the three 2007 AIP issues. These issues will be included in the 2008 Annual Improvement Amendments document, rather than as a separate document. The effective date for these amendments will be 1 January 2010.

New issues for 2009 AIP

Guidance inconsistency in Appendix to IAS 18

The Board considered whether paragraph 17 of the Appendix to IAS 18 (dealing with initiation, entrance, and membership fees) was inconsistent with the general principles in IAS 18 and in particular with IAS 18.13, which addresses multiple element transactions.

The Board agreed that the first sentence of paragraph 17 of the Appendix to IAS 18 should not be read in isolation - the paragraph goes on to give examples of situations in which revenue from identifiable components of a single transaction should be identified.

For this, and other reasons highlighted by the staff, the Board did not add this issue to the 2009 AIP.


IAS 40: Transfers from Investment Property (to Inventory (IAS 2) or Held for Sale (IFRS 5))

The Board discussed a potential inconsistency between IAS 40 Investment Property, IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and IAS 2 Inventories in situations when an investment property is now being held for sale.

The staff explained that there was confusion around the operation of IAS 40 paragraphs 56 and 58 regarding reclassifications out of investment property when management determines that it will sell a non-current asset. In addition, there was the anomaly that when an entity transferred an investment property to inventory (IAS 40.57(b)), it ceased to be remeasured at fair value, but reverted to the cost method under IAS 2.

The Board discussed these issues for some time. Several expressed dissatisfaction with the relatively permissive nature of the fair value alternative in IAS 40 and were in favour of keeping investment properties for which the fair value model had been chosen in that model until disposal. The Board noted that the measurement provisions of IFRS 5 do not apply to investment property measured using the IAS 40 fair value model (IFRS 5.5(d).

The Board agreed:

  • To amend IAS 40 paragraph 60 to remove the reference to 'inventories' and 'IAS 2' (i.e., IAS 40.60 will address transfers from investment property to owner-occupied property only) [that is, restricting transfers from the fair value model];
  • To amend IAS 40 to require investment property accounted for under the fair value model to be analysed between 'investment property' and 'investment property held for sale'; and
  • To require disclosures similar to those required for non-current assets held for sale in IFRS 5 whenever investment property is held for sale.

A majority of the Board were in favour of including this issue in the Annual Improvements Project. The staff stated that this decision could be reviewed once the Board had seen the proposed changes.


Customer-related Intangible Assets

The Board noted that in light of the explicit guidance in IFRS 3R, the IFRIC had decided at its November 2008 meeting that the issue of customer-related intangible assets could be best resolved by referring it to the IASB and the FASB with a recommendation to review and amend their respective business combination standards by:

  • removing the distinction between 'contractual' and 'non-contractual' customer-related intangible assets recognised in a business combination and focusing on the nature of the relationship rather than how it is established; and
  • reviewing the indicators that identify the existence of a customer relationship in paragraph IE28 of IFRS 3 and including them in the standard (IASB only).

Because IFRS 3R is a converged standard, the staff asked if the Board would like to consider this amendment proposal made by the IFRIC as a joint project with the FASB. The Board asked the staff to discuss the extent of such a project with the staff of the FASB and return to the Board with more specific proposals.

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