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Implementation matters

Date recorded:

Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16) (Agenda Paper 12A)

Background

In June 2017, the Board published ED/2017/4 Property, Plant and Equipment—Proceeds before Intended Use (Proposed amendments to IAS 16). The Board is currently discussing the finalisation of the amendments.

In previous Board meetings, the Board tentatively decided to prohibit deducting from the cost of an item of property, plant and equipment (PPE) any proceeds from selling items produced while bringing that asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

Staff analysis

This paper discussed the transition requirements and the due process steps.

With regards to transition the staff propose requiring entities to apply the amendments retrospectively but only to items of PPE made available for use on or after the beginning of the earliest period presented in the financial statements in which an entity first applies the amendments. Applying this approach, an entity would recognise the cumulative effect of initially applying the proposed amendments as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the beginning of that earliest period presented.

A small number of respondents noted that the transition requirements could be burdensome resulting in significant costs for some entities. Those respondents suggested applying the amendments prospectively.

The proposed transition relief aims to reduce the burden on entities by limiting the number of items of PPE that an entity would be required to reassess, and yet achieving consistent application of the amendments for all periods presented.

The staff recommended no specific transition relief for first-time adopters.

Staff expect the Board to issue the amendments during the first quarter of 2020, and recommend an effective date of 1 January 2022.

Staff recommendation

Staff recommended that the Board require entities to apply the amendments retrospectively, but only to PPE made available for use on or after the beginning of the earliest period presented, with no specific transition relief for first-time adopters.

Staff recommended that the Board finalise the amendments with an effective date of 1 January 2022.

Board discussion

One Board member suggested to clarify the wording with regards to transition that requires entities to apply the amendments retrospectively to items of PPE made available for use on or after the beginning of the earliest period presented in the financial statements in which an entity first applies the amendments. It will be made clear that this means PPE that became available for use on or after the beginning of the earliest annual period in order to avoid ambiguity in relation to adoption in an interim period as the intention for the wording of the ED is to narrow down the scope.

There was also a concern raised by another Board member over the retrospective application to proceeds received before the beginning of the earliest period, where the item of PPE is still not available for use. It would be a tenuous process for entities to identify those proceeds. He suggested instead to take into account only those proceeds received after the beginning of the earliest period presented. However, other members of the Board had reservations about this approach as it would move the amendment away from retrospective application.

In relation to the transition relief for first-time adopters, a Board member suggested providing a transition exemption in IFRS 1 to allow deemed cost for first time adopters of IFRS. It would be difficult for entities to adopt the amendments, specifically in the mining industry, as assets in that industry take a substantial amount of time to become available for use.

No discussion was held on the staff recommendation related to not to re-expose the amendments, dissent from the issuance of the amendments and permission to ballot.

Board decision

12:1 Board members (one absent) voted in favour of applying the amendments retrospectively and 11:2 Board members voted in favour of no specific transition relief for first-time adopters. All 13 Board members present voted in favour of 1 January 2022 as the effective date for the amendments.

13 Board members voted in favour of the staff recommendation not to re-expose the amendment and gave permission to ballot. Further, no Board member showed their intention to dissent from the finalisation of the amendments.

Onerous Contracts—Cost of Fulfilling a Contract (Proposed amendments to IAS 37)—Cover paper (Agenda Paper 12B)

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 tentatively decided to proceed with its project to make a narrow-scope amendment to IAS 37 to clarify which costs an entity includes in determining the ‘cost of fulfilling’ a contract for the purpose of assessing whether that contract is onerous. The Board also tentatively decided to specify, as proposed in the ED, that such costs comprise those that relate directly to the contract and to add to IAS 37 examples of costs that do, and do not, relate directly to a contract. Agenda Paper 12C includes details of comments on the proposed examples of costs. Agenda Paper 12D details other comments respondents had. The proposed examples in the ED are based on those listed in IFRS 15:97–98.

Onerous Contracts—Cost of Fulfilling a Contract (Proposed amendments to IAS 37)—Examples of costs that do, and do not, relate directly to a contract (Agenda Paper 12C)

Staff analysis

Some respondents suggested that the Board include in IAS 37 the principle that underpins the proposed examples i.e. “the directly related cost approach—includes all the costs an entity cannot avoid because it has the contract. Such costs include both the incremental costs of the contract and an allocation of other costs incurred on activities required to fulfil the contract.”

Several respondents commented on the similarities and differences between the ‘directly related’ costs that would be specified by IAS 37 and the ‘directly related’ or ‘directly attributable’ costs specified by the other Standards.

A few respondents asked for clarification of whether the costs entities would be required to include differ from those previously required by IAS 11. IAS 11, for example, prohibited the inclusion of selling costs but required entities to include borrowing costs if those borrowing costs are attributable to contract activity in general and can be allocated to the contract.

Some respondents recommended that the Board undertake a project (separate from this narrow-scope amendment) to harmonise the wording used to describe costs across IFRS Standards. Other respondents suggested that the Board include more examples of costs that do not relate directly to a contract. 

The staff, however, think that a wider scope project to align the wording describing costs across IFRS Standards is beyond the scope of this project.

Staff recommendation

Based on the feedback provided, staff recommend that the Board replace the examples proposed in the ED with a clarification that the costs that relate directly to the contract consist of both:

  • a) The incremental costs of fulfilling that contract
  • b) An allocation of costs that relate directly to fulfilling that and other contracts

If the Board disagrees with the staff recommendation and would prefer the requirements to take the form of examples the staff will prepare a further paper on how the examples could be amended.

Board discussion

Board members generally supported the staff recommendation to replace the examples in the ED with a clarification on the costs that directly relate to the contract. One of the Board members advised to make the examples consistent with IFRS 15 rather than IAS 2 since the ED is about onerous contracts and IFRS 15 defines the characteristics of a contract, while usually in IAS 2 there are no contracts. It was also suggested to provide further explanation on the terminology used in the ED (i.e. explain the cost of fulfilling a contract).

Board decision

13 Board members (one absent) voted in favour of the staff recommendation.

Onerous Contracts—Cost of Fulfilling a Contract (Proposed amendments to IAS 37)—Other comments (Agenda Paper 12D)

Scope of the project

Staff analysis

Some respondents said it would not be beneficial to consider the cost of fulfilling a contract without also considering the meaning of economic benefits. The main questions raised around economic benefits where:

  • Do economic benefits refer only to contract revenue or do they also include wider benefits, such as access to new markets?
  • How should an entity measure variable consideration?
  • How should economic benefits be determined when a contract does not generate cash inflows largely independent of other assets of the entity?
  • Are economic benefits considered to be nil when an entity determines the unavoidable cost of a contract to be the compensation or penalties arising from failure to fulfil it?

Some respondents also suggested clarifying whether and when an entity combines or segments separate legal contracts when performing the onerous contract test. When developing the ED, the Board decided not to address the definition of economic benefits as part of the proposed amendments because (a) it is not a question prompted by the withdrawal of IAS 11 (as was the case for the cost of fulfilling a contract) and (b) expanding the scope of the project could cause delay.

Staff recommendation

Staff recommended that the Board does not expand the scope of this project to address:

  • a) the meaning of ‘economic benefits’ in the IAS 37 definition of an onerous contract
  • b) whether and when an entity should combine or segment contracts
  • c) how an entity should measure an onerous contract liability

Board discussion

A Board member said that after changing the definition of unavoidable cost some stakeholders believed that the unavoidable cost is the incremental cost. The Board member suggested to include some of the considerations in the basis for conclusions (BC) to provide more insight on accounting implication related to recognition and measurement of the liability. However, the staff clarified that the BC on the ED already covers some of the discussion around measurement because the change addresses the treatment of the cost of fulfilling a contract, while the measurement requirements already exist in the Standard. Another Board member said it would not be beneficial to consider the cost of fulfilling a contract without also considering the meaning of economic benefits.

Board decision

12:1 Board members (one absent) voted in favour of the staff recommendation.

Interaction with impairment requirements

Respondents to the ED suggested clarifying what ‘dedicated’ in IAS 37:69 means in the context of assets that are used to fulfil several contracts and suggested to replace the word ‘dedicated’ with ‘that relate directly’.

Staff recommendation

Staff recommended changing IAS 37:69 to be consistent with the wording of the amendments and refer to assets that relate directly to a contract, rather than assets dedicated to a contract.

Board discussion

Most of the Board members agreed with the staff recommendation. However, one Board member was concerned as the change in IAS 37 could lead to unintended consequences. That Board member suggested to refer this recommendation to the Provisions research project.

Board decision

12:1 Board members voted in favour of the staff recommendation.

Transition requirements

The Board proposed to require entities to apply a ‘modified retrospective’ approach on transition—i.e. apply the amendments to contracts existing at the beginning of the annual reporting period in which the entity first applies the amendments. Entities would not be permitted to restate comparative information.

Respondents had mixed views, with some supporting the proposal and some preferring full retrospective application.

It was also suggested that the Board provide a transition relief for first-time adopters. They said if a first-time adopter elects to apply the transition requirements in IFRS 1 in relation to variable consideration applying IFRS 15, the basis used to recognise revenue and the basis used to assess whether the contract is onerous could be different.

Staff recommendation

Staff recommended that the Board:

  • does not permit the application of the proposed amendments retrospectively applying IAS 8;
  • clarify within the transition requirements that an entity applies the proposed requirements to contracts for which the entity has not yet fulfilled all its obligations under the contract at the beginning of the annual reporting period in which the entity first applies the amendments; and
  • does not provide any exception or exemption for first-time adopters.

Board discussion

One Board member agreed with the recommendation but advised to write up the amendments carefully as there could be multiple contracts with numerous impairments.

Board decision

13 Board members (one absent) voted in favour of the staff recommendation.

Sale of a single asset entity containing real estate (IFRS 10) (Agenda Paper 12E)

Background

In June 2019, the IFRS Interpretations Committee discussed a submission about the sale of a single asset entity containing real estate. Specifically when an entity enters into a contract with a customer to sell real estate by selling 100% of its equity interest in a single asset entity, where that entity is a subsidiary. The Committee did not reach a decision on how to process, and this paper discusses a possible narrow-scope amendment on this topic.

Staff analysis

On obtaining more information from international standard-setters and large firms, it appears the fact pattern is common, and that there is diversity in practice: some entities apply IFRS 10 and others apply IFRS 15.

The Committee agreed with the staff’s analysis that the transactions are scoped out of IFRS 15 as they are within the scope of IFRS 10.

The Committee, however, could not conclude on the question of whether an entity presents any gain or loss from disposal of the single asset entity on a ‘gross’ or ‘net’ basis. The staff had previously recommended a ‘net’ basis.

Some Committee members noted that it is difficult to say that the corporate wrapper around the real estate affects what would otherwise be a sale, given the activity of selling real estate is the only activity of the entity. Some members noted that US GAAP requires an entity to apply the revenue standard to the deconsolidation of entities.

In light of the discussion, the staff considered if the Board should either undertake a narrow-scope amendment to IFRS 10 and IFRS 15, or if the matter should be considered more broadly, as part of the post-implementation review (PIR) of IFRS 10.

If the Board decided to complete a narrow-scope amendment the staff would suggest a rules-based targeted amendment to the scope of IFRS 15, so as to include this fact pattern.

If the Board decided to consider this issue more widely as part of the PIR of IFRS 10, they could also consider the requirements of US GAAP and other fact patterns (such as a sale of less than all of the shares, or an entity with other assets or liabilities in addition to the real estate).

Staff recommendation

The staff acknowledged that the Board could address the transaction described in the submission through a narrow-scope amendment to the scope of IFRS 15. However in their view, there is insufficient evidence to suggest such a project should be a priority for the Board.

Consequently, the staff recommended that the Board consider the matter as part of the PIR of IFRS 10.

Board discussion

Board members acknowledged the recommendations by the Interpretations Committee and the staff, however, some of the Board members raised concerns over the fact pattern and scope of the project given there could be similar entities, but with a different type of asset. Board members suggested to conduct a further analysis of the fact patterns in order to be able to respond to wider scenarios rather than restricting the analysis to real estate. The majority of Board members ultimately did not agree with the staff recommendation to consider it as part of the PIR (1:13 votes) and, instead, asked the staff to conduct more research towards narrow-scope standard-setting, especially if the scope could be contained (8:6 votes). The staff will therefore bring back a paper that explores the scope of the project, before the Board makes a decision on whether this will become a standard-setting project.

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