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Implementation matters

Date recorded:

Onerous Contracts—Cost of Fulfilling a Contract (Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets)—Effective date and due process. (Agenda Paper 12A)

Background

In December 2018, the Board published ED/2018/2 Onerous Contracts—Cost of Fulfilling a Contract (Proposed amendments to IAS 37). The Board is currently discussing the finalisation of the amendments. In previous Board meetings, the Board decided to proceed with its proposal to clarify that the cost of fulfilling a contract comprises the costs that relate directly to the contract. Nonetheless, in response to comments received, the Board decided to replace the examples proposed in the ED with a clarification that the costs that relate directly to the contract consist of:

  • a) the incremental costs of fulfilling that contract; and
  • b) an allocation of costs that relate directly to fulfilling that and other contracts.

The Board also decided to amend IAS 37:69 to refer to assets that relate directly to a contract, rather than assets dedicated to a contract.

Staff analysis and recommendation

Effective date

Staff considered that the entities and jurisdictions would have sufficient time to apply and incorporate the amendments if the Board were to set an effective date of 1 January 2022—i.e. approximately 18 months after the end of the second quarter of 2020. Accordingly, staff recommended that the Board require entities to apply the amendments for annual periods beginning on or after 1 January 2022. The Board received no feedback on its proposal to permit early application. Accordingly, staff recommended permitting such earlier application.

Due process steps and permission for balloting

In the light of the changes made to the ED, staff considered the requirements in the Due Process Handbook to assess whether the Board should re-expose the amendments to IAS 37.

In response to feedback indicating that the examples (as articulated in the ED) would raise more questions than answers, the staff mention that it is unlikely that re-exposure would reveal new information or feedback not already considered by the Board because the ED had already included the concept of incremental costs plus an allocation of other directly related costs. The Staff also suggested that amending IAS 37:69 does not require re-exposure, because there is no change to the purpose of that paragraph and the change is in the nature of a consequential amendment. Accordingly, staff recommended finalising the amendments to IAS 37 without re-exposure.

The Staff considered that the Board has undertaken all the due process activities identified as being required in the Due Process Handbook and, thus, is able to finalise the amendments.  Therefore, the Staff requested permission to start the balloting process. The amendments are planned for issuance in the second quarter of 2020.

Board discussion

One Board member highlighted that the Board should make it clear in the transition requirements, that the amendment is applied from the first interim period in the year of initial application. Another Board member raised concerns with the short period between issuing the amendment and the effective date, as it was highlighted in the comment letters that it might be a significant change to systems for some manufacturing and construction preparers. The staff explained that the change was sufficiently narrow that 18 months was appropriate.

Board decision

All Board members supported the staff recommendation. The Board gave the staff permission to start the balloting process. None of the Board members indicated intention to dissent.

Annual Improvements to IFRS Standards 2018–2020— Effective date and due process (Agenda Paper 12B)

Background

At its November 2019 meeting, the Board discussed feedback on the ED Annual Improvements to IFRS Standards 2018-2020. The ED included the following four proposed amendments:

  1. Subsidiary as a first-time adopter—Amendment to IFRS 1
  2. Fees included in the ‘10 per cent’ test for de-recognition of financial liabilities—Amendment to IFRS 9
  3. Lease incentives—Amendment to Illustrative Examples accompanying IFRS 16
  4. Taxation in fair value measurements—Amendment to IAS 41

The summary of the Boards’ discussion on the above can be found at IAS Plus.

Staff analysis and recommendation

Effective date

The amendment to IFRS 16 would amend material that accompanies, but does not form part of, IFRS 16. Accordingly, effective date considerations are not relevant for this amendment.

With respect to the amendments to IFRS 1, IFRS 9 and IAS 41, the Board did not propose an effective date but proposed that earlier application be permitted. The staff mentioned that the amendments are narrow in scope and considered that the entities and jurisdictions would have sufficient time to apply and incorporate the amendments if the Board were to set an effective date of 1 January 2022—i.e. approximately 18 months after the end of the second quarter of 2020. Accordingly, staff recommend that the Board require entities to apply the amendments for annual periods beginning on or after 1 January 2022.

Due process steps and permission for balloting

The Staff recommended that the Board not re-expose these amendments

The Staff considered that the Board has undertaken all the due process activities identified and requested permission to start the balloting process. The amendments are planned for issuance in the second quarter of 2020.

Board decision

All Board members supported the staff recommendation. The Board gave the staff permission to start the balloting process. None of the Board members indicated intention to dissent.

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