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IFRS implementation issues

Date recorded:

Agenda paper summary

The regular update summary paper on the most recent IFRS Interpretations Committee meeting was made available.

Board discussion

Specific attention was drawn to the tentative agenda decisions relating to the derecognition of modified financial instruments and variable payments associated with asset purchases and service concessions.

Narrow-scope amendments to IFRS 2 Share-based Payment Classification and Measurement of Share-based Payment Transactions

The IASB discussed the proposed amendments to IFRS 2 in its November meeting. After this meeting, steps have been taken to complete the narrow-scope project. Based on the relevant criteria, the staff proposed that the amendments be finalised without re-exposure (see Agenda Paper 12A).

The staff proposed that the amendment reflect the decisions made in the November meeting, specifically:

The effects of vesting conditions on the measurement of cash-settled share-based payments:  When accounting for cash-settled schemes including a performance condition, the approach used for measuring equity-settled schemes should be used (refer to paragraphs 19-21A of IFRS 2).

The classification of share-based payment transactions with net settlement features

Under existing requirements (paragraph 34 of IFRS 2) such transactions would be bifurcated into an equity-settled and a cash-settled component and accounting would follow based on this split.

The IASB had previously decided to create an exception and remove the requirement to bifurcate if certain criteria are met.  If a scheme is net settled by withholding a specified portion of equity instruments to meet a statutory withholding tax obligation, the transaction should be accounted for as equity-settled in its entirety. However, this will only be the case if the scheme would have been accounted for as equity-settled if the net settlement feature had not been included. Further, this exception would not apply to shares withheld in excess of the tax withholding.

The accounting for a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled:

Given that IFRS 2 did not provide guidance on how to account for such a situation, the IASB had previously decided to clarify that if a cash-settled scheme is modified such that it is equity-settled, the cash- settled scheme is replaced by a grant of equity instruments.  In such a situation, measurement of the transaction is based on the modification-date fair value of the equity instruments granted; the previous liability is derecognised and the equity-settled transaction is recognised in equity to the extent of services rendered to modification date and any difference between the liability and amount recognised in equity should be recognised in profit or loss immediately.

The IASB had sought to clarify that the guidance provided would also apply in a situation where a cash-settled scheme is cancelled or settled and equity instruments granted as replacement equity instruments.

The IASB was asked whether it agrees that the amendments be finalised without re-exposure, whether any members intended to dissent from the final amendments proposed, whether they agreed with a mandatory effective date for the amendments of 1 January 2018 and whether the members agreed that the required due process has been followed relating to the publication of the final amendments.

Board discussion

All members agreed to finalise the amendments without re-exposure, with the proposed mandatory effective date and that due process had been followed correctly. No members intend to dissent.

The staff propose to start the balloting process of the ED in January 2016 with finalisation in late February 2016.

IAS 1 Presentation of Financial Statements Current/non-current classification of liabilities

Staff provided the IASB with an analysis of comment letters received and outreach conducted relating to this issue (see Agenda Paper 12B).

The IASB was asked whether it had any questions relating to the analysis presented and whether further analysis was required prior to finalising any amendments.

A number or questions were raised in the ED (Classification of Liabilities) and comments/responses have been received relating to these.

Question 1: Classification based on rights at reporting date

The proposals in the related ED clarify that classification of liabilities as current or non-current is based on rights that are in place at the end of the reporting period, and, to clarify this, wording amendments to IAS 1 were proposed by the IASB. These included:

(a)    replacing ‘discretion’ with ‘right’ in paragraph 73 to align it with paragraph 69(d);

(b)   making it explicit in these paragraphs that only rights in place at the reporting date affect the classification of a liability; and

(c)    deleting ‘unconditional’ from paragraph 69(d), therefore, ‘an unconditional right’ is replaced by ‘a right’.

The key messages from comment letters and outreach include:

  • the majority of respondents agree with proposal (a) above;
  • most respondents agree with proposal (b) above, but some suggested that, ‘right’  should refer solely to substantive rights; and
  • mixed responses were received relating to proposal (c) above.

Board discussion

The IASB discussion focussed on the need to ensure that what was trying to be achieved through the amendments was clearly understood and that further testing of the proposals would be beneficial.

Question 2: Linking settlement with the outflow of resources

The IASB had previously proposed to clarify the link between the settlement of a liability and the outflow of resources from the entity by adding, ‘by the transfer to the counterparty of cash, equity instruments, other assets or services’ to paragraph 69.

The majority of respondents supported this proposal.

Four related topics were also dealt with:

(a)    when timing of settlement is uncertain

A minority of respondents sought clarity for situations when the timing of settlement was uncertain. The staff think that IAS 37 provides sufficient guidance in such situations.

(b)   rollover and refinancing

Many respondents agree that the term ‘transfer’ clarifies that rollover of debt does not constitute settlement whereas refinancing would do.

(c)    nature of the counterparty

The staff, in response to a comment received, recommend that the IASB consider using the wording ‘the counterparty or any entity authorised by the counterparty’ instead of ‘transfer to the counterparty’.

(d)   the inclusion of ‘equity’ in the proposed wording

A number of respondents thought this inclusion could lead to confusion.  The staff intend to prepare further analysis for presentation to the IASB.

Board discussion

Similarly to question 1, the IASB discussion focussed on the need to be clear as to what was trying to be achieved and what the overall outcome of the amendments is - it is important to determine whether information presented should focus on the maturity of the liability or the liquidity thereof.

Question 3: Transition arrangements

The proposal to retrospectively apply any amendments was agreed to by the majority of respondents. They thought that consistency of information was vital despite analysis that indicates that the proposed amendments exhibit the characteristics of a change in estimate (which would require prospective application).

Many responses received highlight that the proposals are likely to affect existing practice.  Therefore, the staff recommends that any decisions made should be tested against the transactions referred to in comment letters prior to finalisation and publication of the amendments.

Board discussion

There were no comments raised by the IASB.

The staff proposed to conduct more work relating to the various questions, comments and responses received.  The IASB agreed with this.

IFRS 9 Financial Instruments and IAS 28 Investments in Associates and Joint Ventures – Measurement of long-term interests

The staff provided a summary (see Agenda Paper 12C) of the IFRS IC discussions relating to the issue. The issue relates to the interaction between IFRS 9 and IAS 28—the measurement, impairment in particular, of long-term interests in associates and joint ventures that form part of the net investment.

The IASB was asked for its opinion regarding how the issue should be dealt with – in other words, how the scope exclusion to IFRS 9 is understood by the IASB and, depending on this, whether the IASB agreed with the staff’s recommended alternative view to the accounting for long-term interests.

The issue had been raised because of a lack of clarity about whether such impairment is governed by IFRS 9, IAS 28 or a combination of the two.

A number of views have been identified relating to accounting for such long-term interests:

- View A: the interests are entirely within the scope of IFRS 9 (subject to a loss allocation in accordance with IAS 28);

- View B: the interests are entirely within the scope of IFRS 9 (subject to a loss allocation in accordance with IAS 28) and also within the scope of IAS 28 for impairment;

- View C: entirely within the scope of IAS 28; and

-  View D: within the scope of IFRS 9 for classification and measurement purposes, excluding the impairment (subject to a loss allocation in accordance with IAS 28), and within the scope of IAS 28 for impairment.

The findings from outreach reflect that the majority of respondents feel that the requirements are unclear and therefore any or all of the views are possible.

Based on the current wording of IAS 28 and IFRS 9, the staff concluded that View D should be adopted.  In their September 2015 meeting, the IFRS IC largely supported this view, but noted that a narrow-scope amendment should be made to clarify the issue as well to clarify the interaction between the two standards.

To address the potential interaction problem, the staff developed an alternative view to View D.  This view accounts for the long-term interest in accordance with IFRS 9 (including impairment), is subject to the allocation of the share of losses of an investee in accordance with IAS 28 and is assessed as part of the net investment using IAS 28 guidance. The IFRS IC’s view were mixed when this alternative was discussed at their November 2015 meeting. The issue was, therefore, been brought to the IASB.

Board discussion

The IASB discussion was lively and, at times, quite heated. A small majority of IASB members (7 out of 13) agreed with the staff recommendations especially given that the alternative approach could ‘deal’ with the issue without an amendment to IFRS 9 with the amendment instead being to IAS 28.

Those who did not agree cited paragraph 34 of IAS 28 and its requirements that items that are in substance part of the net investment should be included as such and accounted for as equity.  However, they conceded that such instances were likely to occur infrequently.

Further points were raised concerning: the longer term project associated with equity accounting and whether and how this could address the issue and whether the staff’s recommended approach could lead to double-counting of losses.

Ultimately, the staff stated that they would report back the outcomes of the discussion to the IFRS Interpretations Committee for their consideration as to what steps to take next.

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.