Agenda for the meeting

Agenda papers for this meeting are available on the IASB's website.

The IASB met on Tuesday 17 and Thursday 19 March 2020, by video link. The meeting was cut to three topics because of the Covid-19 pandemic.

Rate-regulated Activities: The staff have been drafting the ED for the accounting model for regulatory assets and regulatory liabilities since last July. The Board decided to clarify whether some components included in the regulated rates in a period form part of total allowed compensation for the goods or services supplied by an entity in the same period or in a different period. In particular, the Board decided to clarify whether regulatory returns and performance incentives included in the regulated rates for a period form part of the total allowed compensation for to the goods or services supplied in the same period.

Management Commentary: The Board continued its discussions about the objective of management commentary, and decided that it should support primary users in assessing an entity’s prospects of future cash flows and assessing management’s stewardship of the entity’s economic resources. The primary users are existing and potential investors, lenders and other creditors and they are expected to have a reasonable knowledge of business and economic activities. The staff also introduced their thinking on developing disclosure objectives for various types of content to be included in management commentary.

Amendments to IFRS 17 Insurance Contracts: The Board decided to defer the effective date of IFRS 17 (incorporating the amendments) to annual reporting periods beginning on or after 1 January 2023 and to extend the fixed expiry date of the temporary exemption from applying IFRS 9 in IFRS 4 to the same date. The staff expect that the amendments will be issued in the second quarter of 2020.

Cover Paper (Agenda Paper 2)

At its March meeting, the IASB discussed the remaining issues resulting from the feedback received on the Exposure Draft ED/2019/4 Amend­ments to IFRS 17, which are the effective date of IFRS 17 and the expiry date of the IFRS 9 temporary exemption in IFRS 4.

Agenda Paper 2C (not summarised below) for the meeting offers an overview of all topics discussed and the Board's tentative decisions.

After its March 2020 meeting, the Board has now completed its planned redeliberations of the feedback on the ED. The Board gave permission to start the balloting process at this meeting. The staff now plan to draft the amendments to IFRS 17 and bring any issues they identify during the balloting of the amendments for discussion at a future meeting. The staff expect that the amendments will be issued in the second quarter of 2020, in line with the plan the Board set out in the ED.

Effective date of IFRS 17 and IFRS 9 temporary exemption in IFRS 4 (Agenda Paper 2A)

Background

In the original version of IFRS 17, the Board had set an effective date of 1 January 2021, with earlier application permitted (as long as IFRS 9 is applied as well). The ED proposed deferring this date by one year.

In the comment letters received, almost all respondents agreed with that proposed deferral. However, some respondents asked for a further deferral, while others raised concerns about another potential delay.

The staff analysed those comments as follows:

Those respondents who were concerned about a further deferral were specifically concerned about delaying much-needed improvements to existing accounting practices for insurance contracts or the loss of momentum in implementation projects and increased implementation costs.

Those who asked for a further deferral want to allow for a well-controlled and robust implementation. Despite significant resources being dedicated to IFRS 17 implementation, more time is required to implement the Standard.

While the Board had already given a long effective date, the staff agree with those respondents who stated that implementation by 2022 would be demanding. The staff also acknowledge that some of the amendments need more implementation work.

The staff agree with respondents who stated the importance of an aligned effective date of IFRS 17 around the world. Given the delays in some endorsement processes around the world, respondents fear that the effective date might be set differently by jurisdictions. An aligned effective date of 1 January 2022 might therefore not be achievable.

With regard to the IFRS 9 temporary exemption in IFRS 4, the staff think that the benefit of extending the relief by a further year is appropriate to maintain the alignment of the initial application of IFRS 17 and IFRS 9 for specified insurers. In the staff’s view this could outweigh the disadvantage of a further delay to the implementation of IFRS 9 by those insurers.

Staff recommendation

Consequently, the staff recommended that the Board:

• defer the effective date of IFRS 17 (incorporating the amendments) to annual reporting periods beginning on or after 1 January 2023; and
• extend the fixed expiry date of the temporary exemption from applying IFRS 9 in IFRS 4 to annual reporting periods beginning on or after 1 January 2023.

Board discussion

Many Board members expressed discomfort with delaying IFRS 17, however ultimately supported the staff recommendation as the benefit of delaying outweighs its cost.

One Board member said that many users of financial statements have requested the earlier effective date as urgent action is needed. He said that it would be seven years between publication of the Standard and the first set of financial statements being published under IFRS 17. On the other hand, he acknowledged the longer than expected implementation time of IFRS 17 and the longer time to endorse the Standard in some jurisdictions. Another Board member agreed and said that the delay would enable all countries to apply IFRS 17 at the same time and would reduce challenges in developing systems, especially for smaller companies. These arguments were supported by several Board members.

The Chairman said that he supported the staff recommendation so that jurisdictions that have worked hard and fast to implement the Standard into local law are not punished by being exposed to the Standard before those jurisdictions that have taken a longer time to endorse. He said that this is regrettable as he wanted the Standard to be effective before the next financial crisis, which is now no longer possible. He found it especially concerning that the insurance sector is not only working with an outdated insurance standard, but also with an outdated financial instruments standard.

On the temporary exemption to apply IFRS 9, one Board member said that this proposal made him think whether delaying IFRS 9 for insurers was a good idea in the first place. The decision to delay was originally taken so that insurers would not have to implement two big Standards in a short time. However, it is now not a short time anymore and with hindsight, the Board might have taken a different route. On the other hand, there is some benefit of insurers applying the two Standards at the same time. Also, if the staff proposal is not supported today, the situation that the Board wanted to avoid would arise (i.e. the two Standards would have to be implemented within one year of each other). Other Board members supported that and said the practical implication of having to implement IFRS 9 first and then IFRS 17 should be considered. Many companies have a joint implementation project for both Standards. The disclosures required by IAS 8 and IFRS 4 would help to understand the impact of IFRS 9 on insurance companies. Also, the temporary exemption is optional and insurers could therefore apply IFRS 9 earlier than IFRS 17.       

One Board member rejected the staff recommendation as the benefits of IFRS 9 are significant, especially in these difficult times.

Board decision

On the deferral of the effective date of IFRS 17 to annual reporting periods beginning on or after 1 January 2023, 12 of the 14 Board members supported the recommendation (1 was absent).

On the extension of the fixed expiry date of the temporary exemption from applying IFRS 9 in IFRS 4 to annual reporting periods beginning on or after 1 January 2023, the Board supported the recommendation with 12:2 votes.

Due process steps and permission to balloting (Agenda Paper 2B)

This paper set out the due process steps that the Board has taken in developing the amendments and asked the Board:

• to confirm that it is satisfied that it has complied with the due process requirements.
• to give permission to begin the balloting process for the amendments to IFRS 17.
• whether any Board member intends to dissent from the issuance of the amendments.

The staff recommended that the amendment to IFRS 4—reflecting the extension of the fixed expiry date for the temporary exemption from applying IFRS 9—is balloted separately from the amendments to IFRS 17 (including consequential amendments to other IFRS Standards). This will give jurisdictions with an endorsement process the possibility to endorse the temporary exemption independently (and possibly more quickly) and so avoid endorsement after the current temporary exemption has run out (January 2021).

Board decision

All Board members:

• confirmed that they are satisfied that the Board has complied with the due process requirements.
• gave permission to begin the balloting process for the amendments to IFRS 17 and IFRS 4.

No Board member signalled intent to dissent from the issuance of the amendments.

Cover Paper (Agenda Paper 9)

In July 2019, the Board gave the staff permission to start the balloting process for the publication of an Exposure Draft (ED) for the accounting model for regulatory assets and regulatory liabilities (the model).

When developing the model, the Board discussed ‘total allowed compensation’ and its components. However, in drafting the ED, the staff observed that the earlier Board discussions were not detailed enough to determine whether some components included in the regulated rates in a period form part of total allowed compensation for the goods or services supplied by an entity in the same period or in a different period.

In particular, the discussions were not explicit about whether the following elements of target profit included in the regulated rates for a period form part of the total allowed compensation for to the goods or services supplied in the same period: (a) regulatory returns; and (b) performance incentives. Therefore, the staff has prepared a set of papers that provide further clarification and specific recommendations on this aspect of the model.

Background and Regulatory Capital Base (RCB) (Agenda Paper 9A)

This paper provided background information about total allowed compensation and analyses how to determine whether regulatory returns on regulatory capital base (RCB) for a period should be regarded as forming part of total allowed compensation for goods or services supplied in that period or in a different period. The answer to this question will determine when those returns affect profit.

This paper did not ask the Board to make any decisions. However, it provides analysis that is used further in Agenda Paper 9B.

At the meetings held in 2019, the Board discussed the following description of total allowed compensation: “The total allowed compensation is the amount that an entity is entitled to charge customers for the goods or services supplied.” Total allowed compensation is a key concept in the model because it is compared with the amounts already charged to customers in a reporting period, that is amounts that an entity recognised as revenue in that reporting period in accordance with IFRS 15. That comparison determines whether the entity:

• (a) has not charged all or part of the compensation to which it is entitled for the goods or services it already supplied and, consequently, whether it has a present right to include outstanding compensation in determining the regulated rate(s) in future period(s); or
• (b) has already charged customers compensation for goods or services it has not yet supplied and, consequently, whether it has a present obligation to deduct that compensation in determining the regulated rate(s) in future period(s).

At meetings held in 2019, the Board discussed the components of total allowed compensation as follows:

• (a) allowable expenses and chargeable income
• (b) target profit, the main elements of which are:
  • i. margins on allowable expenses
  • ii. regulatory interest
  • iii. performance incentives (ie bonuses and penalties); and
  • iv. regulatory returns on the regulatory capital base (RCB).

The Board´s previous discussions did not explicitly address a general principle for when target profit and one of its elements (regulatory returns on RCB) should be regarded as forming part of total allowed compensation for goods or services supplied.

The staff is of the view that the fact the regulatory agreement entitles an entity to charge customers target profit in a specified period (by including those amounts in the regulated rates to be charged for the period), establishes that that target profit relates to goods or services supplied to customers in that period, unless there is a compelling reason to link it to goods or services supplied in a different period.

Board discussion

Many Board members supported the staff’s recommendation. Those who spoke found the clarification of the general principle useful and liked that the ED will make clear where it departs from the general principle. While agreeing with mirroring what is proposed for the expense side for the income side, one Board member found that this aspect of the ED would add a layer of complexity without adding much useful information. In her view, the guidance relied too much on how an agreement is written, rather than the economic reality. Another Board member highlighted practical difficulties with this approach. One Board member would have preferred a simpler solution to the issue, but conceded that it is needed in this complexity.

The Board did not make a decision.

Regulatory returns on construction work in progress base (Agenda Paper 9B)

This paper continues the analysis in Agenda Paper 9A and applies it to a specific situation—that is, whether regulatory returns on a construction work in progress (CWIP) base included in the regulated rates charged to customers during the construction period should be regarded as forming part of total allowed compensation for goods or services in the construction period, or of total allowed compensation for goods or services supplied when the asset is being used in supplying goods or services to customers.

Entities that are expected to have regulatory assets or regulatory liabilities often undertake construction work for long periods of time to build up the infrastructure necessary for the supply of goods or services. Long construction periods imply that significant amounts of capital are tied up in construction for many years. As compensation for that capital, regulatory agreements typically provide entities with regulatory returns applied to a base that consists of CWIP. Two approaches commonly used by regulators for including regulatory returns on CWIP base in the regulated rates are as follows:

• (a) regulatory returns accumulate during the construction period and are included in the regulated rates charged to customers after the construction works have been completed—i.e. during the operating period of the asset; or
• (b) regulatory returns are included in the regulated rates charged to customers during the construction period of the asset.

The staff analysed both fact patterns and recommended the following principles for when target profit and regulatory returns should be regarded as forming part of total allowed compensation:

• (a) Target profit that a regulatory agreement entitles an entity to charge customers for a specified period forms part of total allowed compensation for goods or services supplied in that period.
• (b) Regulatory returns on an RCB that a regulatory agreement entitles an entity to charge customers for a specified period form part of total allowed compensation for goods or services supplied in that period.
• (c) Regulatory returns on a CWIP base that are included in the regulated rates during the construction period form part of total allowed compensation only during the operating period(s) of the asset (i.e. when goods or services are being supplied with the asset to which those regulatory returns relate (i.e. over its useful life)).

Board discussion

Board members welcomed the staff’s effort to enhance the model. Revenue recognition would not be accurate under the general principle. Several Board members highlighted that the staff should also analyse a case in which the useful life of the assets is different for IFRS and regulatory purposes.

Board members asked whether the construction is considered a service in this approach. The staff confirmed it would not be a service as it is not delivered to the customer. This would be clarified in the ED. Board members raised some concerns about whether construction could always be clearly distinguished from other goods and services. The Vice-Chair named the example of maintenance and repairs. The drafting would have to be clear to avoid ambiguity.

Performance incentives (Agenda Paper 9C)

This paper discusses when performance incentives form part of total allowed compensation and gives special consideration to incentives for construction-related activities of the entity.

During this project, the Board has learnt that performance incentives are a common feature of rate regulation in many jurisdictions. Incentive-based regulation will often incorporate financial rewards and penalties in the basis for setting the regulated rates to induce an entity to achieve desired regulatory objectives.

In July 2019, the Board discussed performance incentives—bonuses for achieving (or penalties for failing to achieve) specified performance criteria (e.g. targeted levels of service quality or reliability, customer satisfaction, etc.) and how the model would apply when, at the financial reporting date, it is not yet certain whether an entity will become entitled to such a bonus (or liable for such a penalty). The incentives discussed in July 2019 were those of an operational or non-construction-related nature.

The staff’s analysis presented in July 2019 concluded that non-construction-related performance incentives form part of total allowed compensation for goods or services supplied during the period to which the performance incentive relates—that is, the period in which the performance criteria for the performance incentive are monitored and evaluated.

In the staff’s view, aligning the treatment of when amounts for non-construction-related and construction-related performance incentives form part of total allowed compensation has the following advantages:

• (a) It provides more useful and understandable information to the users of financial statements than using different approaches to reflect compensation for different types of incentives—having different requirements may only add confusion for users and not result in any added information value.
• (b) It means lower costs for preparers from not having to develop and implement different policies and processes to account for performance incentives according to their type (except those construction-related incentives that are conditional on satisfying requirements when supplying goods or services in future periods).

Therefore, the staff recommended that performance incentives, whether construction-related or non-construction-related, should form part of total allowed compensation for goods or services supplied in the period when the relevant performance criteria are monitored and evaluated.

Board discussion

Board members generally agreed with the staff recommendation with one Board member suggesting to add an example in the ED to illustrate the logic.

One Board member asked whether the recommendation is consistent with the general principle if goods and services have not been supplied and it the entity has therefore no right to the bonus. The staff replied that if there was a condition attached to the bonus, then the entity should recognise the part of the bonus that relates to the ongoing business in the operating period. However, the staff did not want to be overly prescriptive and not provide a bright line for this. Board members agreed with this approach.

Another Board member asked whether IFRIC 12 would have to be applied first. The staff confirmed this.

Summary of staff recommendations (Agenda Paper 9D)

This paper set out the following staff recommendations relating to agenda papers 9A–9C prepared for the meeting and asked the Board related questions.

Recommendation 1 (Agenda Paper 9A): Target profit that a regulatory agreement entitles an entity to charge customers for a specified period forms part of total allowed compensation for goods or services supplied in that period.

Recommendation 2 (Agenda Paper 9B): Regulatory returns on a RCB that a regulatory agreement entitles an entity to charge customers for a specified period form part of total allowed compensation for goods or services supplied in that period.

Recommendation 3 (Agenda Paper 9B): Regulatory returns on a CWIP base that are included in the regulated rates during the construction period form part of total allowed compensation only during the operating period(s) of the asset (i.e. when goods or services are being supplied with the asset to which those regulatory returns relate—i.e. over its useful life).

Recommendation 4 (Agenda Paper 9C): Performance incentives, whether construction-related or nonconstruction-related, form part of total allowed compensation for goods or services supplied in the period when the relevant performance criteria are monitored and evaluated.

Board decision

Recommendation 1: 13:1 Board members support this recommendation.

Recommendation 2: 13:1 Board members support this recommendation.

Recommendation 3: All Board members support this recommendation.

Recommendation 4 [with the suggestions around allocation and specific drafting of monitoring and evaluating]: 12:2 Board members support this recommendation.

Cover paper (Agenda Paper 15)

In previous meetings, the Board has discussed the objective of management commentary, guidance on the characteristics of useful information in management commentary and particular aspects of guidance on the business model.

At this meeting, the staff presented further work relating to the objective of management commentary (refer to Agenda Paper 15A) and disclosure objectives for particular types of content in management commentary (refer to Agenda Paper 15B).

The objective of management commentary (Agenda Paper 15A)

The staff provided a recap of previous Board discussions relating to the topic (please refer to the summary of the November 2018 meeting) in addition to providing explanations for their latest recommendations.

In this meeting, the staff asked the Board whether they agree that the Practice Statement:

• (a) describes the objective of management commentary as follows:
  
  The objective of management commentary is to support primary users in assessing an entity’s prospects for future cash flows and assessing management’s stewardship of the entity’s economic resources by providing useful information and analysis which:
  • (i) enhance the primary users’ understanding of the entity’s performance and position as depicted in the related financial statements; and
  • (ii) give insight into factors that could affect the entity’s prospects.
• (b) retains the statement that management commentary is prepared for existing and potential investors, lenders and other creditors and refers to them as ‘primary users’; and
• (c) explains that primary users are expected to have a reasonable knowledge of business and economic activities and to review and analyse the information diligently, but are not expected to have knowledge of the entity.

Discussion and voting

The discussion around the objective of management commentary focused on the link between the ‘prospects for future cash flows’ and ‘value creation’. Many Board members want to ensure that this link is clearly identified early in the Practice Statement. Furthermore, ‘value creation’ is to be considered in the narrow sense i.e. the creation of value for the entity and its shareholders. In addition, it should be clarified that something may be value-creating despite the actual cash flows only occurring in the distant future.

When asked to vote on (a) above, taking into account suggestions provided regarding clarifications and drafting, 13:1 Board members voted in favour of the staff recommendation.

When discussing the primary users and their assumed knowledge, there was general agreement with the staff’s recommendation. Two clarifications were sought: that the primary users are expected to have a general knowledge of business and economic activities, rather than an entity-specific knowledge; and how standing information was to be treated.

Staff confirmed that a general knowledge, consistent with the Conceptual Framework, was assumed for users. Given this, standing information in management commentary is important, as users are not expected to have entity-specific knowledge. As a result, management commentary should not just highlight changes from year to year but should contain some standing information, but drafting could help preparers to assess what this should be.

When asked to vote on (b) and (c) above, 14 Board members voted in favour of the staff recommendation.

The staff also provided a discussion of the related supporting guidance that could be included in the revised Practice Statement. This could include guidance on management’s view and the types of information in management commentary. No vote was required and the Board made limited comments centred on terminology, specifically non-financial and operational.

Disclosure objectives (Agenda Paper 15B)

The staff introduced their thinking on developing disclosure objectives for various types of content to be included in management commentary. Staff suggest that, for each type of content in management commentary, an explicit disclosure objective be introduced and guidance should be provided to assist preparers to meet each disclosure objective.

This seeks to assist preparers in identifying what information they should provide to help primary users to assess the entity’s prospects for future cash flows and management’s stewardship and for regulators and assurers to determine whether management commentary meets its objective.

The Board was not be asked for decisions at this meeting, but they were asked to comment.

Discussion

A few Board members mentioned that, despite the staff saying that the order of topics provided was not an indicator of how information should be presented, they should consider that some preparers may decide to follow any order provided.

The layout the practice statement was discussed and it was clarified that staff intend to present each objective with the related guidance and disclosures rather than creating a single disclosures section.

The linkage, replication and consistency of information provided was also discussed.

Next steps

The staff intend to bring further topics in clusters based on the interaction between topics. For example, business model, resources and relationships and strategy and opportunities; operating environment and risks and performance, position and progress, will be grouped together.

Further discussions will take place in the future relating to the status of the Practice Statement and the approach to be taken in developing guidance in support of the disclosure objectives.