IFRS implementation issues
Agenda paper 12A — Proposed narrow-scope amendment: IAS 40 'Investment Property' — Can a property under construction be transferred from inventory to investment property when there is an evident change in use?
The Project manager introduced the agenda paper. She said that the IFRS Interpretations Committee discussed a request for clarification of the application of paragraph 57 of IAS 40 which provided guidance on transfers to, or from, investment properties. More specifically, the Interpretations Committee discussed whether a property under construction or development that was previously classified as inventory could be transferred to investment property when there was an evident change in use. She said that the Interpretations Committee recommended that the IASB should address the issue through a narrow-scope amendment to IAS 40 by amending paragraph 57 of IAS 40. The proposed amendment would reinforce the principle for reclassification into, or out of, investment property by specifying that an entity should reclassify investment property (including investment property under construction or development) into, or out of, investment property if, and only if, a change in the use of such property has occurred, supported by appropriate evidence. She said that the staff proposal also included a disclosure requirement that for each transfer to, or from, investment property, an entity should describe the evidence used to support the change in use. She then opened the discussion to the Board.
There was general support for the staff recommendation in terms of the amendments to IAS 40. However, there was general concern in adding a very particular disclosure requirement to discuss about the evidence that supported the change in use.
One Board member said that she believed that IFRIC concluded that the standard was written as an exhaustive list so that an amendment would be necessary. However, she was not sure about whether adding additional disclosure requirements would be appropriate. She said that it would make sense only because the proposal would make the requirement less prescriptive.
Another Board member said that the additional disclosures would add overload to preparers. He said that it was understood that materiality always applied but he was not sure if the materiality concept would be clear if the standard asked to disclose about each transfer. Another Board member pointed out that the evidence should be looked at by the auditors and the Board should not ask for disclosures about evidence.
One Board member asked whether the amendment was just a clarification or if it was found out that there was diversity in practice. She said that if it only related to a clarification it could be dealt with by an annual improvement process. Later in the discussion, she withdrew the suggestion as there was general agreement that there would be a change in the standard instead of just a clarification.
Another Board member expressed concern as regards the term that the change had occurred because it seemed more prohibitive. The Implementation Director clarified that for an asset to quality as investment property it needed to qualify for the definition. However, it would not necessarily mean that the construction had to be finished. An entity could start making decisions that would lead to change in use and that would be appropriate evidence.
The Chairman then called to vote and all Board members agreed with the proposed amendment (subject to drafting suggestions); while the majority rejected adding the proposed disclosure requirements. Finally all members agreed to proceed through a narrow scope amendment.
Agenda paper 12B — Annual Improvements to IFRS (2015–2017 Cycle): Proposal to discontinue the Annual Improvements to IFRS 2014–2016 cycle and to initiate the Annual Improvements to IFRS 2015–2017 Cycle
The Project manager introduced the agenda paper. She said that there were currently only two issues in the IFRS 2014–2016 cycle which were:
- IFRS 1 First-time Adoption of International Financial Reporting Standards: short-term exemptions for first-time adopters.
- IAS 28 Investments in Associates and Joint Ventures: clarification that measuring investees at fair value through profit or loss was an investment-by-investment choice.
She said that the staff was proposing to discontinue the Annual Improvements to IFRSs 2014–2016 Cycle; to initiate a new cycle and to carry forward the proposed amendments to the next cycle.
One Board member expressed concern for delaying the IAS 28 amendment because he believed that there was diversity in practice and they should not prolong the problem. Others agreed and also pointed out that the previous cycle had already been discontinued in favour of this cycle. By postponing again, the IASB would turn the annual improvements into triannual improvements. Possible alternatives for dealing with the IAS 28 amendment were sought, but as it was already determined that the amendment would be a clarification, it was clear that it was most appropriate to deal with it through an annual improvement cycle. The staff therefore changed its position and recommended proceeding with the annual improvements 2014-2016 as planned.
The Chairman then called to vote and all Board members were in favour of the new staff recommendation.
Agenda paper 12C — Draft Interpretation for IAS 12 'Income Taxes' — Accounting for uncertainties in income taxes: Summary of due process followed and technical matters agreed by the IFRS Interpretations Committee
The Project manager introduced the agenda paper. She said that the Interpretations Committee reached a general agreement in January 2015 to publish a draft interpretation on accounting for uncertainties in income tax. She said that the agenda provided a summary of the Interpretations Committee general agreement and asked the Board to confirm whether it was satisfied with the due process. She then opened the discussion to the Board.
One Board member asked about the interaction between paragraph 14 and paragraph 19 of the agenda paper. He said that paragraph 14 discussed about expected value [an entity should measure a tax liability or asset using the expected value or the most likely amount] to predict the amount that it would pay or recover while paragraph 19 required an entity to assume that an examination would occur. He asked whether paragraph 14 was about the measurement of the expected value but assuming a 100% probability that an inspection would occur. The Implementation Director responded that an entity should assume that there would be 100 % probability of tax inspection; however, tax decisions taken by tax authorities either implicitly or explicitly should be taken into consideration. He asked whether penalties on income tax would be treated in a similar way. The Implementation Director said that they did not look at that particular issue; however, in general penalties were not dealt with in IAS 12 Income Taxes but rather in IAS 37 Provisions, Contingent Liabilities and Contingent Assets so this interpretation would not apply to penalties on income tax.
The Board member then asked whether in a case where there was no statute of limitation the liability would be recorded perpetually; however, interest and penalties would be assessed under IAS 37 so there could be a situation where there was no interest and penalties accrued but there was a liability. Another Board member said that he agreed with his interpretation.
Another Board asked that the agenda paper said that the approach in paragraph 14 was similar to the approach taken by the revenue standard. However, he disagreed that there could be similarities between both standards. He also asked if the Interpretation Committee knew when to use expected value or most likely amount. The Project manager said that they could provide examples to facilitate judgements. She said that they could ask for comments during the comment period. The Board member then said that he did not see tax situations that would support the use of an expected value.
Another Board member disagreed with adding the discussion about the statute of limitation in the Basis of Conclusion because it was a very important issue.
The Chairman then called to vote. Regarding question 1 as to whether any Board member intended to object to the release of the draft interpretation, the Board decided that they would like to see the wording before proceeding. Regarding the remaining questions (2) due process; (3) comment period no less than 90 days and (4) permission to ballot; all Board members agreed.
Agenda paper 12D — IFRIC update
The Implementation Director indicated that he was going to present four topics from the latest IFRIC update related to the March 2015 meeting.
The first topic was related to IFRS 5 issues. He said that the Interpretations Committee would continue discussions in May and would bring a paper to the Board summarising the decisions.
He also mentioned that the Interpretations Committee discussed IAS 21 regarding guidance to determine the date of the transaction for the purpose of identifying the applicable exchange rate. He said that the Committee reached a general agreement with the proposal and he would bring to the Board a paper setting out the Committee’s conclusion and proposal.
Then he mentioned that the Committee had discussed the comments received on the ED to amend IAS 12 (deferred tax assets for unrealised losses). He said that the comments were supportive of the staff recommendation and that he would also bring a paper to the Board for their consideration.
Finally, he mentioned that the Committee had finalised their agenda decisions on several IFRS 11 Joint Arrangements issues related to joint arrangements.
No questions or comments were raised by the Board.