Cover paper (Agenda Paper 12)

In this session, the IASB discussed a potential standard-setting project on the international tax reform and the feedback received on its exposure draft on supplier finance arrangements.

International Tax Reform—Pillar Two Model Rules—Potential standard-setting project (Agenda Paper 12A)

In October 2021, more than 135 countries and jurisdictions—representing more than 90% of global GDP—agreed to a major international tax reform that introduces a global minimum tax for large multinational enterprises (MNEs). These countries and jurisdictions joined the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting statement on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy. The two-pillar solution comprises:

• Pillar One—which aims to ensure a fairer distribution of profits and taxing rights among countries for the largest MNEs
• Pillar Two—which aims to put a floor on tax competition by introducing a global minimum corporate tax rate set at 15% for large MNEs

In December 2021, the OECD released the Pillar Two model rules, also referred to as the ‘Global Anti-Base Erosion’ or ‘GloBE’ rules. These rules aim to ensure large MNEs pay a minimum amount of tax on income arising in each jurisdiction in which they operate. The rules provide a template that jurisdictions can translate into domestic tax law.

The Pillar Two model rules are intended to be implemented as part of an agreed-upon common approach and introduced via domestic tax law by 2023. The IASB has been informed that some jurisdictions are expected to enact the rules as early as the first half of 2023, although this is still uncertain.

In this session, the staff provided an overview of the Pillar Two model rules, discuss the potential implications of the rules on the accounting for income taxes applying IAS 12, provide the staff’s analysis of whether standard-setting is needed in response to the imminent implementation of the rules, and ask the IASB whether it agrees with the staff recommendation to undertake narrow-scope standard-setting.

Staff recommendations

The staff recommended that the IASB amend IAS 12 to:

• Introduce a temporary exception from accounting for deferred taxes arising from legislation enacted to implement the OECD’s Pillar Two model rules (including any qualified domestic minimum top-up tax). The exception would apply until such time that the IASB decides to either remove it or make it permanent.
• Require an entity to disclose:
  • Whether it is in the scope of the Pillar Two model rules and whether it operates in low-tax jurisdictions
  • The fact that it has applied the exception
  • Its current tax expense related to Pillar Two top-up tax
• Require entities to apply the amendments to IAS 12 immediately upon their issuance and retrospectively in accordance with IAS 8

Addendum to the agenda paper

After the meeting on 22 November, the staff added an addendum to the agenda paper with regard to the staff recommendation to require an entity to disclose whether it is in the scope of the Pillar Two model rules and whether it operates in low-tax jurisdictions. The purpose of this addendum was to explore alternatives to that recommendation that could balance the concerns raised by IASB members at the 22 November meeting.

Staff recommendation

In the addendum, the staff recommended amending IAS 12 to require an entity to disclose, in pre-effective date periods:

• Information about legislation enacted—or substantively enacted—to implement the Pillar Two model rules in jurisdictions in which the entity operates
• Whether the entity:
  • Operates in jurisdictions it reasonably expects to be low-tax jurisdictions based on the specific requirements of the Pillar Two model rules; or, alternatively
  • Operates in jurisdictions in which its effective tax rate (calculated based on IAS 12 requirements) is below 15% for the current period

The staff further asked whether the IASB wishes to amend IAS 12 to require entities to disclose additional information—described as alternatives A, B or C below—in pre-effective date periods? If ‘yes’, the staff asked whether the IASB wishes to require the disclosure or provide the exemption as set out below:

Alternatives A, B or C:

• Alternative A—Disclose the low-tax jurisdictions in which an entity operates
• Alternative B—Disclose the accounting profit before tax, the income tax expense and the resulting weighted-average effective tax rate for all low-tax jurisdictions in aggregate. In other words, an entity would be required to disaggregate information—already disclosed in the effective tax rate reconciliation—for (i) all low-tax jurisdictions in aggregate, and (ii) all non-low-tax jurisdictions in aggregate
• Alternative C—Disclose the accounting profit before tax, the income tax expense and the resulting effective tax rate for each low-tax jurisdiction. In other words, an entity would be required to disaggregate information—already disclosed in the effective tax rate reconciliation—for (i) each low-tax jurisdiction, and (ii) all non-low-tax jurisdictions in aggregate

Disclosure or exemption:

• Disclosure: Require an entity to disclose if the work it has already done in preparing to comply with the Pillar Two model rules indicates that there could be jurisdictions in which it could be exposed to paying top-up tax in addition to those identified as having an effective tax rate below 15% applying IAS 12 requirements
• Exemption: exempt an entity from disclosing any of the information discussed in the agenda paper if it has disclosed more useful information—based on the Pillar Two model rules—about its exposure to paying top-up tax either in the financial statements or elsewhere, in a statement such as management commentary, that is available to investors on the same terms as the financial statements and at the same time.

IASB discussion

At the beginning of the meeting, the Chair reminded the IASB that this project is time critical and therefore, as much as he would like it, there is not enough time to analyse and address all stakeholder concerns that have been raised to the IASB. This project is also not the place to solve all shortcomings of IAS 12. Instead, the objective of the project is to address the issue at hand, i.e. the incoming new global tax rules, as best the IASB can in the short amount of time available. IASB members acknowledged this and generally agreed with the recommendation to introduce the temporary exception from accounting for deferred taxes arising from legislation enacted to implement the OECD’s Pillar Two model rules.

However, IASB members had mixed views about the additional disclosure requirements recommended by the staff. Some IASB members held the view that the existing disclosure requirements in IAS 12 would be sufficient to provide users with the necessary information. However, others said that additional disclosure requirements are required.

Many IASB members said that it would be very difficult for entities to disclose whether they will be subject to the top-up tax. Especially the term ‘reasonable expectation’ was a concern as it had not been used in IFRS Standards before. One IASB member said that for jurisdictions that have a tax rate below 15%, it would be simple. However, in jurisdictions with a tax rate of higher than 15%, the entity could still have an effective tax rate of below 15%, for example if it receives tax credits.

One IASB member said that it will also be very challenging for entities to predict the effective tax rate. If it predicts a range for a jurisdiction and it is, say 14.5%-15.5%, the question is whether the entity would then have to disclose that jurisdiction as a low tax jurisdiction. Even if an entity could arrive at a rate, it would be completely arbitrary and would not have any predictive value for what the actual tax rate will be.

One IASB member asked whether predicting if a jurisdiction is a low-tax jurisdiction would be achieved by using forward-looking information. The staff replied that this is not the case and it would be predicted based on current information. If an entity wanted to provide a prediction using forward-looking information, it could do so in its management commentary. There was also some discussion on what the time horizon for such a prediction would be.

There was significant discussion around whether there should be a disclosure for current tax once the legislation is effective, and whether that should be the same information as for deferred tax. The staff replied that what the entity needs to disclose for current tax is a matter of fact, i.e. a calculation of what it expects in the current year. In that year, the entity will already know which of its subsidiaries will be subject to top-up tax. However, for deferred tax, entities will have to make that calculation ahead of knowing the tax rates and therefore it is much more difficult to provide that information. It follows that the required information for deferred tax should be much less detailed than that for current tax.

When discussing the potential amendment to IAS 12 to require entities to disclose additional information, most IASB members spoke in favour of Alternatives A and B, while Alternative C received only some support. Particularly Alternative B was supported as the pre-tax profit was the best starting point in the view of some IASB members.

However, one IASB member said that Alternative C would result in the most useful information, and the data needed for that information is already available. Some IASB members replied that this could result in entities having to disclose commercially sensitive information to which the IASB member who preferred Alternative C replied that an exemption from disclosing commercially sensitive information could be considered. Another IASB member said that Alternative C with the modification to provide the information in aggregate could solve the issue of commercial sensitivity. Other IASB members said that Alternative C would require information far beyond what is currently required, and this would not be appropriate.

The Chair suggested that a combination of Alternatives A and B could be considered. One IASB member spoke vehemently against any of the alternatives as the information produced by the alternatives would not be a prediction of what the actual effective tax rate would be when the legislation comes into effect. It would be mixing local tax rules with OECD tax rules. However, other IASB members disagreed and said that some information is better than no information. Including the alternatives in the Exposure Draft (ED) would be helpful to initiate conversations with stakeholders.

As with regard “disclosure or exemption”, most IASB members did not support exemption. One IASB member said that the objective of the IASB should be to word the requirements in a way that they result in the most useful information for users. If successful, this would mean that there could not be any better information elsewhere. In addition, the information should be provided fully in the financial statements and not in management commentary. Incorporation by cross-reference would also be difficult as it is unclear whether auditors would have to audit the information that is included by cross-reference and therefore not required by IAS 12.

The IASB then discussed the effective date. One IASB member said that he agreed with ‘effective on issuance’ for the temporary exception but not for additional disclosures. Entities would need some time to gather data for the disclosures. The staff agreed and said that the idea was that entities apply the temporary exception immediately, including the disclosure that the temporary exception has been applied. However, for the additional disclosures they recommend an effective date for annual periods beginning on or after 1 January 2023. In that case, if the ED was published in the second quarter of 2023, it would earliest be applied in 31 December 2023 reports, which gives entities at least six months to gather the data. One IASB member asked whether this would be unfairly beneficial for entities with, say, a 30 November year end, as they would only have to provide the disclosures in the 30 November 2024 report, and, because of that, might not even have to do pre-effective period disclosures. The staff replied that this would apply to all amendments the IASB issues and was therefore not seen as a problem.

IASB decision

All IASB members voted in favour of:

• Introducing the temporary exception
• Requiring entities to apply the proposed amendments to IAS 12 immediately upon their issuance and retrospectively in accordance with IAS 8
• Requiring information in pre-effective periods about legislation enacted—or substantively enacted—to implement the Pillar Two model rules in jurisdictions in which the entity operates

9 of the 11 IASB members voted in favour of requiring information in pre-effective date periods about whether the entity:

• Operates in jurisdictions it reasonably expects to be low-tax jurisdictions based on the specific requirements of the Pillar Two model rules; or, alternatively
• Operates in jurisdictions in which its effective tax rate (calculated based on IAS 12 requirements) is below 15% for the current period

On the alternatives proposed by the staff on disclosure of additional information, the IASB voted as follows:

• 8 of the 11 IASB members supported Alternative A
• 9 of the 11 IASB members supported Alternative B
• Only 2 of the 11 IASB members supported Alternative C

The vote allowed for supporting more than one alternative to gauge whether a combination of alternatives would be possible.

On whether the IASB should require disclosure or provide an exemption, the IASB voted as follows:

• 10 of the 11 IASB members supported the disclosure
• None of the IASB members supported the exemption

All IASB members voted in favour of a 60-day comment period, subject to approval from the Due Process Oversights Committee, which, in the meanwhile, has been obtained.

All IASB members confirmed that due process has been served for the upcoming ED and gave permission to the staff to start the balloting process.

Two IASB members indicated that they may dissent from publishing the ED, if the ED would not, in sufficient detail, explain the discussions that were held at the IASB and the concerns that were raised by some IASB members with regard to the additional disclosure requirements. They emphasised that they did not object to providing the temporary exemption.

Supplier Finance Arrangements—Cover Paper (Agenda Paper 12B)

The purpose of this meeting was to provide the IASB with the staff’s analysis and recommendations on how to proceed on the Exposure Draft (ED) Supplier Finance Arrangements and ask the IASB whether it agrees with the staff recommendations.

Summary of recommendations

The staff recommended that the IASB proceed with its proposals in the ED with the following changes:

• For scope—revise one aspect of the scope and consider in drafting whether to add examples to illustrate the types of payment arrangements or instruments that are outside the scope of the disclosure requirements
• For the disclosure objective—add a reference to liquidity risk and risk management
• For the level of aggregation—change the proposed level of aggregation to require an entity to aggregate information provided about its supplier finance arrangements (SFAs) and disaggregate particular information—when required—to not omit or obscure material information;
• For the disclosure requirements—refine the requirements to disclose terms and conditions, the carrying amount and presentation of financial liabilities that are part of SFAs, and the range of payment due dates of trade payables that are not part of these arrangements
• For examples added to IAS 7 and IFRS 7:
  • Not proceed with adding an example of a non-cash change to IAS 7 and instead require disaggregation of particular information including the effect of non-cash changes
  • Not proceed with adding an example to paragraph B11F(a) of IFRS 7

IASB discussion

There was no discussion on this paper.

Suppler Finance Arrangements—Project Approach (Agenda Paper 12C)

This paper set out the staff’s analysis and recommendations having considered comments received on the approach taken in the ED to address information needs of users of financial statements (investors) by adding disclosure requirements about an entity’s supplier finance arrangements (SFAs).

Respondents’ feedback

Most respondents said there is a need to improve disclosure about an entity’s SFAs. A few respondents disagreed with the need for, or expressed concerns about, the project. Some of these respondents said the current disclosure requirements are sufficient and adding new specific disclosure requirements each time there is a ‘gap’ in the requirements may not be the most efficient way to proceed.

Many respondents suggested that the IASB either expand the scope of the current project or pursue a future project to address classification and presentation of liabilities and cash flows associated with SFAs. These respondents said additional work is needed on classification and presentation to enhance transparency and consistency in application.

Staff recommendations

The staff recommended that the IASB:

• Proceed with adding disclosure requirements about SFAs to IFRS Accounting Standards
• Make no change to the approach to this narrow scope, disclosure-only, project

IASB discussion

IASB members expressed support for the way the project was managed and agreed with the staff recommendations. They agreed with the focus being on the disclosure.

IASB decision

The IASB agreed unanimously to support the staff recommendations.

Suppler Finance Arrangements—Scope (Agenda Paper 12D)

This paper set out the staff’s analysis and recommendations having considered comments received on the scope of the proposals in the ED.

Summary of feedback

Many respondents agreed with the IASB’s approach for describing SFAs and with the proposed description itself. Some respondents suggested changes to the proposed description. The staff analyse the main suggested changes as follows:

• Adding characteristics
• Clarifying the term ‘finance providers’
• Clarifying the phrases ‘finance providers offering to pay amounts an entity owes its suppliers’ and ‘the entity agreeing to pay the finance providers’
• Restricting the scope
• Other comments

Staff recommendations

The staff recommended that the IASB:

• Make no change in response to suggestions to add characteristics
• Make no change to further define or describe ‘finance providers’
• Make no change to the scope related to suppliers financing their receivables
• Revise the scope to specify that an SFA is characterised by the entity ‘agreeing to pay according to the terms and conditions of the arrangement’ rather than ‘agreeing to pay the finance providers’
• Make no change to introduce scope restrictions based on:
  • Particular effects—or degrees of effect—of an arrangement as determined by the entity
  • Application of the derecognition requirements in IFRS 9 Financial Instruments
• Make no change to add explicit scope exclusions for arrangements involving particular types of payment instruments—and consider in drafting whether to add examples to the scope paragraph to illustrate the types of payment arrangements or instruments that are outside the scope of the disclosure requirements

IASB discussion

IASB members expressed agreement that examples would be helpful to support the disclosure requirements. One IASB member said that the recommendation to revise the scope to specify that an SFA is characterised by the entity ‘agreeing to pay according to the terms and conditions of the arrangement’ rather than ‘agreeing to pay the finance providers’ is particularly helpful. Another IASB member expressed concern that it may be interpreted such that an SFA, which was determined to be a debt arrangement, is not within the scope of the disclosure requirements. However, the intention was that they would be. It was suggested to include an example in the ED which clarifies this.

IASB decision

All IASB members supported the staff recommendation.

Suppler Finance Arrangements—Disclosure objectives and requirements (Agenda Paper 12E)

This paper set out the staff’s analysis and recommendations having considered comments received on the proposed disclosure objective and requirements in the ED.

Respondents’ feedback

Most respondents agreed (or did not disagree) with the proposed disclosure objective.

Materiality judgements

A few respondents suggested that the IASB include a reference to ‘materiality’ to avoid entities providing excessive information. A preparer said the disclosure objective requires entities to predict what information investors may need and this ‘second-guessing’ imposes undue burden on entities. One respondent questioned why the IASB proposed to make use of a disclosure objective and requirements when it had not finalised the project Disclosure Initiative: Targeted Standards-level Review of Disclosures (TSLR).

Liquidity risk and risk management and financial performance

A few respondents suggested that the disclosure objective include the effects of SFAs on an entity’s exposure to liquidity risk and risk management. A few other respondents suggested that the disclosure objective include the effects of SFAs on an entity’s financial performance

Liquidity risk and risk management and financial performance

A few respondents suggested that the disclosure objective include the effects of SFAs on an entity’s exposure to liquidity risk and risk management. A few other respondents suggested that the disclosure objective include the effects of SFAs on an entity’s financial performance

Effects vs information to calculate effects

A few respondents, including investors, suggested that the IASB require an entity to disclose particular effects of SFAs rather than provide information to be used to calculate those effects. These respondents suggested, for example, that an entity disclose the effect of SFAs on its operating cash flows, or on the component of trade payables that is akin to bank debt and the associated effect on operating cash flows. Respondents said this approach would simplify the proposals and would avoid providing investors with ‘raw data’ and expecting them to do their own calculations.

Summary of staff recommendations

The staff recommended that the IASB:

• For the disclosure objective:
  • Not add a reference to ‘materiality’
  • Add a reference to liquidity risk and risk management
  • Not add a reference to the effects of SFAs on an entity’s financial performance
  • Proceed with requiring disclosure of information to be used by investors to calculate effects, rather than requiring disclosure of the effects
• For the level of aggregation—require an entity to aggregate information provided about its SFAs and disaggregate particular information—when required—to not omit or obscure material information
• For disclosure of the terms and conditions—add the word ‘key’ to the requirement to disclose the terms and conditions, and not prescribe a list of terms and conditions to be disclosed
• For disclosure of the carrying amount and presentation of financial liabilities that are part of SFAs:
  • For the statement of financial position—clarify that if the carrying amount of financial liabilities that are part of SFAs is presented in more than one line item, an entity would disclose each line item and the associated carrying amount presented in that line item
  • For the statement of cash flows—not add a requirement for an entity to disclose the line items in which changes in financial liabilities that are part of SFAs are presented
• For disclosure of the carrying amount of financial liabilities for which suppliers have already received payment from the finance providers—proceed with requiring disclosure of this information
• For disclosure of the range of payment due dates—clarify that when an entity discloses the range of payment due dates of trade payables that are not part of an SFA—in comparison to the range of payment due dates of financial liabilities that are part of an SFA—the trade payables and financial liabilities should be on a comparable basis, such as within the same business line or jurisdiction
• For comparative information—proceed with requiring disclosure of quantitative information as at the beginning and end of each reporting period

IASB discussion

Generally, IASB members expressed agreement with the staff recommendations. The debate centred on two of the recommendations which were more contentious. These were the recommendation to add the word ‘key’ in reference to the requirement to disclose terms and conditions and the recommendation to disclose liabilities already settled by the financer.

Objections were raised to the use of the word ‘key’ on the basis that it undermined the importance of the disclosure and it is not clear if this means terms must be material. Views were expressed that use of the word ‘key’ in IFRS 16 was a bad precedent and its use in the standard would not support the objectives.

With regards to the recommendation to disclose liabilities already settled by the financer, one IASB member expressed concerns on a practical and conceptual level, which mirrored concerns raised by a number of other members. Practically, it would be costly for entities to obtain the information from the financing entity and entities would also need to perform control assessments and other procedures to support the disclosure. Conceptual concerns were that entities are not generally expected to report on transactions to which they are not party. One member also noted that the FASB had considered the same requirement and concluded that the disclosure did not meet cost benefit criteria therefore would not be required. A question was therefore raised as to why the staff recommendation went in the opposite direction.

It was discussed that staff had engaged extensively with finance providers, and the feedback was that they would not anticipate barriers to providing entities with the required information in aggregate, although it would be more challenging on a per supplier basis. The staff noted that the disclosure did not require to disaggregate the information by supplier. Therefore, the staff did not foresee high practical difficulties in implementing the requirements. Stakeholders engaged had expressed the strong opinion that this information was of upmost importance for meeting the objectives of the requirements. It was discussed that one of the driving forces for the amendments was due to corporate failures, which occurred due to supplier financing arrangements being withdrawn. Knowing what payments would have been made to suppliers was seen as vital for investors to be able to understand the liquidity risk of an entity in the event that financing is withdrawn, highlighting the benefit of this requirement.

IASB decision

IASB members supported the staff recommendations unanimously, except as follows:

• 6 of the 11 IASB members voted against using the word ‘key’ in reference to the requirement to disclose terms and conditions and instead voted in favour of revising the wording to emphasise the terms that should be disclosed
• 9 of the 11 IASB members voted in favour of disclosing liabilities already settled by the financer

Suppler Finance Arrangement—Examples and other comments (Agenda Paper 12F)

Non-cash changes in IAS 7

Most respondents agreed with the proposals, largely for the reasons explained in the ED, to add SFAs as an example within the requirements to disclose information about changes in liabilities arising from financing activities.

Many respondents raised questions about the applicability of the non-cash changes example to operating cash flows. In particular, many respondents said proposed paragraph 44B(da) focuses only on the effect of SFAs on the changes in liabilities arising from financing activities; that paragraph either is unclear about, or explicitly excludes, the corresponding effect on changes in liabilities arising from operating activities. Some respondents suggested that the IASB address this by extending the disclosure requirement for non-cash transactions in paragraph 43 of IAS 7 to operating transactions.

Liquidity risk and concentrations of risk in IFRS 7

Most respondents agreed with the proposals, largely for the reasons explained in the ED, to add SFAs as an example within the requirements to disclose information about an entity’s exposure to liquidity risk.

Staff recommendations

The staff recommended that the IASB:

• Not proceed with the proposed change to paragraph 44B of IAS 7 to provide SFAs as an example of a non-cash change in liabilities arising from financing activities. The staff make an alternative recommendation in Agenda Paper 12E for this meeting
• Proceed with the proposed amendments to paragraphs B11F(j) and IG18 of IFRS 7 but not proceed with adding an example to paragraph B11F(a) of IFRS 7
• Make no changes in response to feedback to be more prescriptive about the required disclosures of liquidity risk and concentrations of risk arising from SFAs

IASB discussion

IASB members expressed a desire for the wording in IAS 7 to be consistent with that of IFRS 7 and it was expected that the treatment in the cash flow statement as operating or financing cash flows would follow the treatment in the balance sheet with regards to whether the SFA liability was a payable or debt.

IASB decision

6 of the 11 IASB members voted against proceeding with the proposed amendments to paragraph 44B of IAS 7.

All IASB members voted in favour of proceeding with the proposed amendments to paragraphs B11F(j) and IG18 of IFRS 7—without making those proposed amendments more prescriptive.

All IASB members agreed not to proceed with the proposed amendments to paragraph B11F(a) of IFRS 7.