IFRS implementation issues
The purpose of this session was to discuss the following topics:
- a) Narrow-scope amendments to IAS 40 Investment Property (final amendment) Agenda paper 12A and 12B.
- b) Annual Improvements to IFRSs 2014-2016 Cycle (final amendment) Agenda paper 12C, 12D, 12E, and12F.
- c) Annual Improvements to IFRs 2015-2017 Cycle (exposure draft) Agenda paper 12G
Narrow-scope amendment- IAS 40 Investment Property- Transfer of Investment Property - Comment letter analysis - Agenda paper 12 A
The IFRS Interpretations Committee discussed in May 2016 the comment letters received on the ED. (See summary of Agenda paper 5 for the May 2016 meeting for further detail). The purpose of this session is to present the Board the Interpretations Committee’s recommendations and ask the Board to finalise the amendments. Appendix A includes the wording of the proposed amendments as recommended by the staff.
Summary of recommendations from the Interpretations Committee
The staff indicates that the Interpretations Committee recommends the following:
- a) clarify that a change in management’s intentions, in isolation, does not provide evidence of a change in use;
- b) amend two examples in paragraph 57 of IAS 40 so they could relate to property under construction or development as well as completed property; and
- c) in the Basis of Conclusions, emphasise the use of judgement in assessing whether a property meets, or has ceased to meet, the definition of investment property.
In relation to the transition requirements, the Interpretations Committee recommends allowing entities a choice of:
- a) a full retrospective approach applying IAS 8; or
- b) an approach for which an entity would (i) reassess the classification of property at the date of initial application of the amendments; and (ii) apply the amendments to changes in use that occur after the date of initial application of the amendments to IAS 40. This option will not be available for first-time adopters.
The staff considers that there is no need for re-exposure because there were no substantial issues raised in the comment letters (see paper 12B summarising the due process steps). The staff recommends the effective date to be 1 January 2018 with earlier application permitted.
The Board approved the staff recommendation including all due process steps. None of the Board member indicated their intention to dissent.
There was general agreement with the staff analysis and recommendations. Some concerns were expressed mainly about the wording of the amendment and transition requirements, including whether the proposed wording of paragraphs 57a and 57b could be misused. The staff responded that entities would need to look carefully at the definition of investment property and obtain evidence of change in use. The staff discussed providing more examples but concluded that there was a risk of introducing more complexity. The staff concluded that it was necessary to introduce more discipline around the application of the principles.
In relation to the transition requirements, the staff clarified that the option provided in paragraph 27b) (prospective application) could not be categorised literally as prospective because entities would be required to make a reclassification at the date of initial application and then they would apply the amendments for new transfers. The staff also noted that they received mixed views on transition because there were entities that were already applying the principles properly, while some other entities would need to change their measurement basis due to the application of the amendments. For this reason, the staff considered it necessary to offer two choices on transition. Some Board members stressed the importance for not using hindsight and supported the choice to mitigate this risk. The staff accepted one suggestion of explaining in the Basis for conclusions that it is not appropriate to use hindsight when using full retrospective application. The staff will also analyse whether on applying the prospective transitional option an entity would need to provide more disclosures.
Exposure Draft - Annual improvements to IFRSs 2014-2016 cycle - Comment letter analysis - Proposed amendments to IFRS 1: Deletion of short-term exceptions - Agenda paper 12C
The ED Annual improvements to IFRSs 2014-2016 cycle proposed to delete the short-term exemptions in paragraphs E3-E7 of IFRS 1 because those exemptions have served their purpose. The exemptions relate to disclosure requirements in IFRS 7 (liquidity risk, transfers of financial assets and servicing contracts), IAS 19 (sensitivity analysis) and IFRS 10 (transition relief to a first-time adopter that is an investment entity).
Comment letter analysis
The staff indicates that some respondents want the Board to clarify the accounting when a first-time adopter is an investment entity before the date of transition but not at the date of transition. The staff concluded that a first-time adopter in such situation is able to make use of Appendix C to IFRS 1, which exempts the entity from applying IFRS 3 retrospectively to business combinations that occurred before the date of transition to IFRS.
Some respondents thought it was premature to delete paragraph E4A. The staff recommends proceeding with the deletion on the basis that the paragraph was obsolete at the time the amendments of IFRS 1 became effective because the relief provided applied to comparative periods beginning before 1 January 2016. Other respondents asked to make the short-term exemptions permanent. The staff noted that the exemptions are available for a limited period of time.
Some respondents asked the Board to consider in the future a retirement date for future short-term exemptions. The staff believes that when the Board issues future short-term exemptions, it should explicitly indicate that the exemptions will be deleted at some point after they cease to be relevant.
The staff recommends finalising the amendments with the proposed changes described above. The proposed effective date is 1 January 2018 (see agenda paper 12F).
The Board approved the staff recommendation. The Board also approved the due process and effective date.
No significant comments or issues were raised during the discussion. The staff will clarify in the Basis for conclusions the rationale for not making the short-term exemptions permanent as explained in the agenda paper.
Exposure Draft - Annual improvements to IFRSs 2014-2016 cycle - Comment letter analysis - IFRS 12 Disclosure requirements for held-for-sale entities - Agenda paper 12D
IFRS 5 states that an entity need not apply the disclosure requirements in other Standards unless those Standards require specific disclosures to assets (or disposal groups) in scope of IFRS 5. IFRS 12 does not include any reference to held-for-sale interests, with the exception of paragraph B17 which states that the disclosure requirement in paragraphs B10-B16 do not apply to held-for-sale interests. It is unclear whether other disclosure requirements apply to such interests. The proposed amendments will clarify that the disclosure requirements in IFRS 12, except for those in paragraph B10-B16, apply to held-for-sale interests.
Comment letter analysis
Most respondents agreed with the proposed amendments. However, some respondents thought the amendments should clarify which disclosure requirements are relevant for held-for-sale interests. The staff believes that the relevance depends on specific facts and circumstances related to such interests and IFRS 12 already provides some flexibility because an entity is required to determine the level of detail necessary to meet the objective of IFRS 12. Some respondents disagreed with the transition requirements and asked that the amendments should be applied prospectively. Others asked for transition relief in specific circumstances. The staff do not support either request because retrospective application will lead to consistent application and is unlikely to be onerous and transition relief is inconsistent with IFRS 12.
The staff recommends finalising the amendments with no further amendments. The staff also proposes that the effective date to be 1 January 2017 (see agenda paper 12F).
The Board approved the staff recommendations.
During the discussion the staff clarified that no significant impact was expected in interim reports because IAS 34 only made a reference to disclosures when an entity becomes an investment entity. The staff believe that the amendments will affect primarily annual financial statements.
There were two Board members that indicated a preference to unify the effective date for all amendments to be included in the package. The staff noted that even though the amendments were discussed as a single package, each amendment would be included in separate standards. Accordingly, the effective date should be analysed on a case by case basis.
Annual improvements to IFRSs 2014-2016 Cycle - Comment letter analysis - IAS 28 - Measuring investees at fair value through profit or loss on an investment-by-investment basis - Agenda paper 12E
When an investment in an associate or a joint venture is held by, or is held indirectly through, an entity that is a venture capital organisation, or a mutual fund, unit trust and similar entities, the entity may elect to measure that investment at fair value through profit or loss (FVTPL). The ED proposed amendments to IAS 28 to clarify that the election is available for each investment in an associate or a joint venture on an investment-by-investment basis, upon initial recognition.
Comment letter analysis
Most respondents agreed with the proposed amendments. However, several concerns were expressed.
Some respondents believe the proposed amendments are inconsistent with IFRS 10. They say that there is no conceptual basis to provide an accounting policy choice to an investment entity with an interest in an associate or joint venture, given that it is mandatory for an investment entity parent to measure all of its subsidiaries at FVTPL. The staff note that the Board discussed these points when developing amendments to IFRS 10 and IAS 28 in 2012 and 2014. Accordingly, the staff does not recommend revising the proposed amendments.
Some respondents stated that the amendment will create an inconsistency with IAS 39 because IAS 39 requires the designation of all eligible financial instruments that are managed and evaluated together. The staff disagrees with this concern because IAS 39 excludes from its scope interests in associates or joint ventures that are accounted for applying IAS 28.
Some respondents think that it is not clear whether a qualifying entity is allowed to apply the proposed amendments or is required to measure all investments at FVTPL because paragraph 10 of IAS 27 requires the same accounting for each category of investments. The staff disagrees with this concern because the staff believes that paragraph 10 of IAS 27 does not imply that in all circumstances all investments in associates are one category of investments and all investments in joint ventures are one category of investments.
Some respondents asked for additional disclosure requirements. The staff disagrees because IFRS 12 already includes extensive disclosure requirements for each material investment in an associate or joint venture.
Some respondents said that the rationale for the amendments was not clear. The staff agree, and propose expanding the explanation in the Basis for Conclusions.
Some respondents questioned whether entities are allowed to change decisions taken in earlier years, and apply the election from the date of first applying the amendments. The staff analysis is that they could change if they have not been following an investment by investment basis.
The staff also recommend confirming the requirement to apply this retrospectively because the proposed amendments are expected to affect only a narrow range of entities and if an entity is a qualifying entity, the entity would be expected to have fair value information on its investments.
The staff recommends proceeding with the amendments with the changes noted above, with an effective date of 1 January 2018 with earlier application permitted (see paper 12F).
The Board approved the staff recommendations. No significant comment or issues were raised during the discussion.
One Board member suggested to add in the Basis for conclusions the rationale by which the staff concluded that the issues discussed in the agenda paper were not accepted. It was also suggested a similar suggestion discussed earlier to add a requirement that full retrospective application could only be used when the entity would not need to use hindsight.
Annual improvements to IFRSs 2015-2017 cycle - Due process steps - Agenda paper 12G
The Board has previously decided to include two proposed amendments in the Exposure Draft Annual Improvements to IFRSs 2015-2017 Cycle.
The proposed amendments to IAS 12 will clarify that paragraph 52B is applicable to the income tax consequences of dividends in all circumstances (see June 2016).
The proposed amendments to IAS 23 will clarify that an entity would transfer a specific borrowing to general borrowing once the construction of the qualifying asset is complete. (See October 2015).
The purpose of this session is for the staff to provide the Board a summary of the proposed amendments and have the Board approve the comment period and the due process.
The staff recommends the comment period to be no less than 90 days. The staff expects to be ready to publish the ED in the fourth quarter of 2016.
The Board approved the staff recommendation. No comment or issue was raised during the discussion.