Maintenance and consistent application

Date recorded:

Availability of a Refund (Amendments to IFRIC 14)—Project review (Agenda Paper 12A)

In June 2015, the IASB published Exposure Draft ED/2015/5 Remeasurement on a Plan Amendment, Curtailment or Settlement/Availability of a Refund from a Defined Benefit Plan which proposed narrow-scope amendments to IFRIC 14. Those proposals would have clarified how an entity assesses its right to a refund of a surplus in a defined benefit plan when other parties (for example, trustees) have particular rights. At a previous meeting, the IASB decided not to finalise those proposed amendments and, instead, perform further work. That work was intended to help the IASB decide whether to develop a more principles-based approach than that currently in IFRIC 14 for an entity to assess and measure its right to a refund of a surplus.

The IASB had not discussed this project for some time. The purpose of this meeting was to review the project’s prospects for progress and decide whether to keep the project on the IASB’s work plan.

In the paper, the staff analysed the development of a more principles-based approach, which would remove some of the arbitrary aspects of the proposals without making significant changes to IAS 19 and IFRIC 14. However, any possible amendments resulting from this approach would be narrow in scope and affect only a small subset of the requirements in IAS 19 and IFRIC 14 that apply to defined benefit plans—i.e. those possible amendments would address only the measurement of the economic benefit available in the form of a refund of a surplus. The IASB’s previous discussions on this topic and feedback on the proposed amendment highlight that there are other aspects of IFRIC 14 that this approach would not address but which stakeholders are likely to view as requiring amendment at the same time. The staff think considering these aspects would result in the project no longer being narrow in scope. Even if the scope could be contained, the staff think it would require quite some time and effort to develop the amendments.

Staff recommendation

For the reasons set out above, the staff recommended that the IASB withdraw the project from its work plan.

IASB discussion

Only one IASB member spoke in favour of retaining the project. In her view, IFRIC 14 is drafted too narrowly by focusing on the mechanics. It would be feasible to solve this problem and by that significantly improve the information provided to users of financial statements. In her view, the cost challenge was mostly the time that would have to be spent reaching out to stakeholders which could be managed.

However, all other IASB members who spoke supported the staff recommendation to withdraw the project. While they principally agreed with the IASB member who sees merit in retaining the project, they said that the project had continued for too long with no simple solution in sight. It was therefore either not narrow-scope as initially anticipated or simply not feasible from a cost-benefit perspective. The Chairman added that practice had developed by now, even if not towards the optimal solution from an information perspective. IASB members also mentioned that retaining this project while rejecting the project on Pension Benefits that Depend on Asset Returns might be perceived as inconsistent.

IASB decision

11 of the 12 IASB members voted in favour of withdrawing the project.

Provisions—Targeted Improvements—Project review (Agenda Paper 12B)

The IASB has on its work plan a project to make targeted improvements to IAS 37. The IASB had not discussed this project for some time. The purpose of this meeting was to review the project’s prospects for progress and decide whether to keep the project on the IASB’s work plan.

Some respondents to the Third Agenda Consultation suggested that the IASB reassess the priority of projects on its current work plan. A few respondents suggested that the IASB consider whether to proceed with or discontinue work on this project. Some of those respondents identified this project as one of several that have been on the work plan for a considerable time and, in their view, are unlikely to progress.

However, the staff think this project is capable of progressing efficiently:

  • Progress has been limited to date only because of competing priorities. The staff expect that they will have more time to spend on it soon. And they think the project will not be resource intensive because much of the thinking required to complete the project—for example, the development of new concepts for identifying liabilities—has already been done
  • The staff are not aware of any other possible obstacles to efficient progress. The IASB selected matters to address in this project only after examining a range of possible problems with IAS 37 and consulting stakeholders on each one. The three matters the IASB has included within the scope of the project are all matters for which stakeholders generally agreed:
    • There is a practical need for improvements to IAS 37
    • The solutions the IASB has identified and developed are feasible

It is possible that the need for this project is, if anything, growing. As explained further in the paper, the IAS 37 criteria for identifying liabilities are proving difficult to apply to some climate-related measures now being implemented by governments around the world. Aligning IAS 37 with the Conceptual Framework could provide preparers of financial statements with more robust criteria for judging whether and when an entity subject to such measures has an obligation that meets the definition of a liability.

Staff recommendation

For the reasons set out above the staff recommended that the IASB keep the project on its work plan.

IASB discussion

IASB members were generally supportive of the staff recommendation to retain the project. A significant amount of work had been performed on the project and there is a good opportunity to address the main issues now rather than later in a piecemeal approach.

However, most IASB members who spoke warned of the risk of scope creep. It seemed to be a consensus that the IASB should keep this project at its absolute minimum and finalise as quickly as possible, given the recent experience with the IFRIC 14 project (see above). At appropriate reflection points, the IASB should revisit its decision to retain the project.

It was acknowledged that IAS 37 is an old and imperfect Standard, so the risk of unintended consequences is high. There may be a cause for a wholesale review of the Standard in the future, however at this point the scope of the project needs to be contained. Topics to be included should be the alignment of the liability definition between the Conceptual Framework and IAS 37, discount rate, climate-related risks and levies.

IASB decision

11 of the 12 IASB members supported the staff recommendation to retain the project.

Lease Liability in a Sale and Leaseback (Amendments to IFRS 16)—Transition, effective date and due process (Agenda Paper 12C)

In November 2020, the IASB published Exposure Draft ED/2020/4 Lease Liability in a Sale and Leaseback. The comment period ended on 29 March 2021. In December 2021, the IASB decided to proceed with its proposed amendments to IFRS 16, with some changes to the proposals.

The purpose of this paper was to:

  • Ask the IASB whether it agrees with the staff’s recommendations with respect to the transition requirements and effective date for the amendments to IFRS 16
  • Set out the steps in the IFRS Foundation Due Process Handbook that the IASB has taken in developing the amendments
  • Ask the IASB to confirm it is satisfied that it has complied with the due process requirements
  • Ask whether any IASB member intends to dissent from the amendments

Transition requirements

Entities already applying IFRS Accounting Standards

The staff recommended requiring seller-lessees to apply the amendments retrospectively in accordance with IAS 8, thereby removing the specific transition requirements proposed in the ED. In the staff’s view, the expected benefits of retrospective application would outweigh the expected costs. The amendments:

  • Are expected to affect only sale and leaseback transactions:
    • With variable leaseback payments
    • For which the seller-lessee’s existing accounting policy for the leaseback liability fails to comply with paragraphs 36–46 of IFRS 16 applied in a way that does not result in the recognition of any amount of the gain or loss that relates to the right of use retained
    • Occurring from 2019
  • Change only the subsequent measurement of the leaseback liability. The IASB’s tentative decisions in December 2021 removed from the proposals the requirement for a seller-lessee to determine, at the commencement date, the proportion of the previous carrying amount of the asset that relates to the right of use retained by comparing the present value of the expected lease payments to the fair value of the asset sold. Consequently, on applying the amendments a seller-lessee need not restate its accounting at the commencement date of a sale and leaseback transaction occurring before the effective date
  • Do not require the seller-lessee to estimate expected lease payments. The seller-lessee would be able to use the initial carrying amount of the leaseback liability (as previously determined) to develop its accounting policy for the subsequent measurement of the leaseback liability.

For these reasons, the staff saw no need for specific transition requirements. The reason for proposing such requirements no longer exists in the light of the IASB’s tentative decisions in December 2021.

First-time adopters

Paragraphs D9–D9E of IFRS 1 specify requirements for leases. Those requirements mean that a first-time adopter applies the sale and leaseback requirements in IFRS 16 only to sale and leaseback transactions occurring after its date of transition to IFRS Standards. A first-time adopter is, therefore, in a similar position to entities already applying IFRS Standards in that the amendments will apply only to particular sale and leaseback transactions after a particular date, which in the case of a first-time adopter is its date of transition to IFRS Standards.

For the same reasons as set out above, the staff recommended no specific transition exemption for first-time adopters.

Effective date

The IASB generally allows at least 12-18 months between the issue of a new Standard or amendment and its effective date. If the IASB agrees with the staff recommendations set out in the paper, the staff expect the IASB to issue the amendments during the third quarter of 2022.

In the staff’s view entities would have sufficient time to prepare for the new requirements if the IASB were to set an effective date of annual reporting periods beginning on or after 1 January 2024, that is approximately 15 months after the end of the third quarter of 2022. The amendments are expected to affect only sale and leaseback transactions with variable payments occurring since 2019. The staff also note the changes made to the proposed amendments in response to feedback received, which for example result in no change to the initial measurement requirements for sale and leaseback transactions in IFRS 16.

Further, the staff think such an effective date would allow jurisdictions sufficient time to incorporate the new requirements into their legal systems. The staff therefore recommend that the IASB require entities to apply the amendments for annual reporting periods beginning on or after 1 January 2024.

The IASB received no feedback on its proposal to permit earlier application. The staff therefore recommended permitting such earlier application, with a requirement to disclose the fact that the amendments have been applied early when that is the case.

Board discussion

One Board member expressed his concerns with the amendments. In his view, the amendments will lead to overvaluation of sale and leaseback transactions, which does not provide useful information to users. Also, the requirements in IFRS 16 about sale and leaseback transactions are already quite complex. The amendments will add another layer of complexity after the IASB’s revision compared to the ED. He therefore proposed to re-expose the proposed amendments to get user views.

The Vice Chair suggested to do an educational webcast to illustrate the credits and debits that are required on transition. One Board member said that there should also be a communication to preparers that even though the amendments only become effective in 2024, they have to start now to assess their contracts as otherwise they would be inclined to use hindsight. It was suggested to also include that communication in the webcast.

One Board member noted that the guidance for first-time adopters included in the agenda paper should be added to the amendments.

Board decision

11 of the 12 IASB members agreed with the staff’s recommendation with respect to the transition requirements, effective date and no re-exposure of the amendments.

All IASB members confirmed that they are satisfied that the IASB has complied with the due process requirements.

One IASB member indicated his intent to dissent from the amendments.

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