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Annual improvements (2012–2014 cycle)

Date recorded:

Exposure Draft ED/2013/11 was issued in December 2013, comprising five proposed amendments under the Annual Improvements Project (2012–2014 cycle). The IASB had received 64 comment letters on the ED. The meeting's agenda papers provide an analysis of these comment letters:

  • Agenda Paper 17A: IFRS 5 — Changes in method of disposal
  • Agenda Paper 17E: IAS 34 Disclosure of information ‘elsewhere in the interim financial report’
  • Agenda Paper 17B: IFRS 7 Servicing Contracts
  • Agenda Paper 17C: IFRS 7 — Applicability of the amendments to IFRS 7 on offsetting disclosures to condensed interim financial statements
  • Agenda Paper 17D: IAS 19 — Discount rate: regional market issue

 

Agenda Paper 17A: IFRS 5 — Changes in method of disposal

The project manager introduced the agenda paper. She said that the proposed amendment to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations would clarify the accounting for a change in a disposal plan from a plan to sell a division to a plan to spin off a division and distribute a dividend in kind to its shareholders and would also provide guidance for the discontinuation of held-for-distribution accounting.

The respondents to the exposure draft had generally supported the proposed amendment, however some were asking for further clarification. On the one hand, constituents had asked whether the date of classification would change when the classification was changed from ‘held for sale’ (HFS) to ‘held for distribution’ (HFD). On the other hand, they were asking for guidance on the difference between ‘fair value less cost to sell’ (FVLCTS) and ‘fair value less cost to distribute’ (FVLCTD). Respondents had also asked the Board to explain the meaning of ‘direct reclassification’ from HFS to HFD or vice versa. The project manager said the staff agreed with those comments and suggested to add clarification to this effect. However, she did not agree with the comments to include additional references to the notions of ‘HFD’ or ‘costs to distribute’.

One Committee member wondered how many details were needed in one disposal plan. Also, she said that there were questions on how often the classification could be prolonged. She understood that this would be provided in the Basis for Conclusions. However, she preferred to have it in the standard. She said that the date of classification would be dependent on whether the entity stated upfront that they did not know the way of disposal (i.e. by sale or by distribution) or whether they decided on one way and then chose the other. The Director for Implementation Activities replied that there was specific guidance on extensions and that continuous qualification was required to reclassify from HFS to HFD or vice versa without stopping the classification. He said that the staff had concluded that these factors combined would provide sufficient guidance in the standard. Therefore they had only explained it in the Basis for Conclusions.

Another IFRS IC member generally agreed with the proposed amendment. He asked nonetheless, why the staff had drafted the Basis for Conclusions in the way that there should not be a significant time lag between moving from one method of disposal to the other. He was surprised as this would allow for an insignificant time lag which would, in turn, conflict with the notion of ‘no interruption on the application of the requirements in IFRS 5’. The staff agreed to remove the word ‘significant’ from the Basis for Conclusions.

The ESMA representative challenged the reasoning in the agenda paper for the prospective application of the proposed amendment. The staff said in the paper that prospective application was in line with the transition that had been required by IFRIC 17 Distributions of Non-cash Assets to Owners when it had amended IFRS 5 to provide guidance for HFD classification. The ESMA representative argued that this had only been done to prevent use of hindsight. He did however not see that hindsight would be a problem with the proposed amendment. One committee member disagreed and said that for application of the proposed amendment it was necessary to look back whether the criteria had been continuously fulfilled. He said that in case of retrospective application the use of hindsight would be problematic. The Chairman agreed with this and said that the application should be prospective.

The Chairman asked whether the IFRS IC recommended to the IASB that it should proceed with the proposed amendment to IFRS 5. The Committee agreed.

 

Agenda Paper 17E: IAS 34 Disclosure of information ‘elsewhere in the interim financial report’

The project manager introduced the agenda paper. She said that the proposed amendment dealt with the meaning of ‘information elsewhere in the financial report’ and required cross-reference of this information. She said that about one third of the responses agreed with the proposed amendment, whilst two thirds conditionally agreed or disagreed with the proposals. Main concerns included the proposed amendment being unnecessary and/or too broad. She said that the staff did not share those concerns. She continued by saying that some respondents had asked for a definition of ‘interim financial report’ and for a clarification of the meaning of information being presented ‘at the same terms’ and ‘at the same time’. She asked the Committee whether they agreed with the analysis provided and the proposed amendment to the wording set out in agenda paper 17E(i).

One Committee member said that he disagreed with the staff’s proposed amendment to the ED where it now said that without cross-reference the financial report was incomplete. He was happy with the original wording of ‘financial statements’ instead of ‘financial report’. The project manager replied that this proposed amendment was made to accommodate the notes and not only the financial statements as IAS 34 states that the interim financial report was made up by the interim financial statements and the notes. The Chairman said that what the Committee member probably meant was that without cross-reference to information outside the financial statements, the financial statements were incomplete and not the financial report. The IC member confirmed this. Upon taking a vote on the wording, the majority of the Committee members favoured ‘statements’. The Committee nonetheless continued to discuss the appropriateness of either ‘report’ or ‘statements’. One Committee member pointed out that IAS 34 Interim Financial Reporting never referred to ‘interim financial statements’. She said that this AIP would also create some uncertainty with regard to the level of assurance of data that was not included as the part of the interim financial report. Another IC member replied that he thought the assurance that applied to the financial statements also applied to the cross-referenced data. Also he said that this issue was to be addressed by regulators and not by the Board. One IFRS IC member said that the words ‘interim financial statements’ were indeed used in IAS 34 but that they were not defined. He said that this would be an opportunity to define ‘interim financial statements’, ‘interim financial report’ and ‘condensed financial statements’. The chairman said that this was not an option as the definitions had not been exposed. Another Committee member said that IAS 34 seems to use some of the definitions interchangeably. The chairman called a second vote on the wording. This time, the majority of the Committee members voted for ‘report’.

The ESMA representative was surprised by the mass of disclosures (IAS 34.16A(a)-(k)) that could be made outside of the financial statements after the proposed amendment. He said that for the short-term this solution was acceptable but he would prefer, in the longer term, an alignment between IAS 1 Presentation of Financial Statements, where only IFRS 7 disclosures were allowed to be made outside of the financial statements, and IAS 34.

The Chairman asked the Committee whether they wanted to recommend to the IASB to proceed with the proposed amendment. The Committee agreed.

 

Agenda Paper 17B: IFRS 7 Servicing Contracts

The project manager explained that the proposed amendment would give guidance on how IFRS 7.42C should be applied with regard to servicing contracts. IFRS 7.42C provided guidance on when the entity had ‘continuing involvement’ for the purposes of applying the disclosure requirements on transfers of financial assets. The proposed amendment also dealt with transition requirements. The project manager pointed out that about two thirds agreed with the proposed amendment without further comments whilst one third agreed only conditionally. Those respondents said that there was a lack of principles in the proposed guidance. They proposed to remove the presumption that the right to earn a fee for servicing the financial asset is generally continuing involvement. The staff agreed with those comments. Some of the constituents had expressed concerns about the usefulness of transfer disclosures with regard to servicing contracts as the risk profile was different to that of other financial assets. However, the staff thought that this exceeded the scope of the project. The project manager said that most of the respondents agreed with the transition requirements and therefore they should remain unchanged.

One Committee member feared diversity in practice as the existing disclosures in IFRS 7 Financial Instruments: Disclosures did not fit the risk profile of servicing contracts.

One observing IASB member said that the clarification on continuing involvement could also have impact on the accounting (i.e. the derecognition criteria). A Committee member replied that the words ‘continuing involvement’ had different meanings under IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7. She said that it would be helpful to acknowledge this in the proposed amendment. The Chairman agreed and said this should be added to the Basis for Conclusions at least. One IC member said that for disclosure purposes it might be helpful to rename ‘continuing involvement’ to ‘continuing servicing’. The Chairman replied that if the Committee decided to do that, it would have to be amended in all of IFRS 7.

The Chairman asked the Committee whether they wanted to recommend to the IASB to proceed with the proposed amendment. The Committee agreed.

 

Agenda Paper 17C: IFRS 7 Applicability of the amendments to IFRS 7 on offsetting disclosures to condensed interim financial statements

The project manager began by explaining the proposed amendment. The proposal clarified that the offsetting disclosures of IFRS 7 were not specifically required for all interim periods but only when their inclusion was required by the requirements of IAS 34. He continued by saying that almost all respondents agreed with the proposal. However one respondent did not agree with the reference in the proposed amendment to the Basis for Conclusion that interim financial reports included all information that is relevant to understanding an entity’s financial position and performance during the interim period. The respondent said that this could be read as requiring a similar level of disclosures as in annual financial statements. The staff agreed with deleting this reference.

One Committee member asked to what extent, in general, a new disclosure needed to be made in the first interim period that followed the introduction of a new standard. She agreed with the staff that this issue was too broad for this proposed amendment but asked the Senior Director for Technical Activities how it was intended to address the issue. He replied that there was a project in the Disclosure Initiative called ‘principles of disclosure’ and one subtopic of that project was ‘interim financial statements’. The detail of disclosures was a broad issue, particularly with the US as they had a different level of detail in their requirements. He said that the Board members were divided on that topic and that they were negotiating with a national standard-setter to do work on that project. He conceded it might be two to three years until they had the first results.

A fellow Committee member agreed with the proposals, but thought that the proposed amendment should be available without applying the proposed amendment for servicing contracts (see above) at the same time. He said that the proposed offsetting amendment mainly provided clarification whilst the proposed servicing contracts amendment actually added new disclosure requirements.  He did therefore not share the staff’s conclusion that different requirements for both proposed amendments would cause confusion. The Chairman replied that usually two amendments to the same standard needed to be applied at the same time. The Director for Implementation Activities added that they would try to consolidate the changes to avoid having different changes at different times.

The Committee decided to recommend to the IASB to proceed with the proposed amendment as proposed by the staff.

 

Agenda Paper 17D: IAS 19 — Discount rate: regional market issue

The project manager introduced the agenda paper that provided an analysis of the comment letters received to the proposed amendment to IAS 19 Employee Benefits. He reminded the Committee that the proposed amendment would clarify that the depth of the market of corporate bonds should be assessed at a currency level. He said that many respondents had been concerned about the proposed amendment. Some asked for clarification whether entities in countries with deep markets for corporate bonds would be prohibited to use only corporate bonds that were issued in their country. In the staff’s view, entities would be allowed to use only corporate bonds that were issued in their country if the proposed amendment was finalised. Some respondents asked which government bonds should be used when there is no deep market for high quality corporate bonds. In the staff’s view this should not be specified as this was beyond the scope of the proposed amendment. Constituents also requested guidance on backed currencies. The staff suggested treating the underlying currency as a separate currency. Respondents were concerned on the effect on economies that had adopted a stronger currency as their official currency without being members of the original market. If a high corporate bond from the original market was taken, this would be inconsistent to inflation rate and other factors that prevail in that country. The project manager said that the staff agreed with this concern and suggested an analysis of the effects. He said that a full retrospective application of these proposals could be bothersome and suggested to wait for the effect analysis before recommending the IASB to proceed with the proposed amendment. Should the Committee propose to the IASB to go forward with the proposed amendment, the staff recommended prospective application from the earliest period presented.

The Chairman asked how long the effect analysis would take. The project manager replied that it would take some time as they would have to do the analysis in countries where the IASB had not many contacts (i.e. Panama, Zimbabwe, El Salvador, Ecuador). The Chairman asked whether the list of countries was complete. The project manager negated that.

One Committee member said that at the time when IAS 19 was written, the terms ‘currency’ and ‘country’ could be used interchangeably. If the proposed amendment was only about rectifying that, he was not sure what benefit the study would provide. He continued by saying that the proposed amendment was about matching obligation and assumptions, therefore he saw no difference between Ecuador using the US-Dollar and Greece using the Euro. He said the concern was the same, regardless of whether the official currency of the country was a regional market currency or the currency of another country. The project manager replied that the study was necessary to gather information about those countries. A Committee member supported the view that the effects analysis was only delaying the process. He said that with regard to the discount rate the Committee had previously agreed that although different inflation rates prevailed in the Eurozone, the discount rate had to reflect the inflation rate of the entire zone. Another Committee member shared this position.

One Committee member asked whether in Ecuador, for example, that did not have a deep market for high quality corporate bonds and therefore had to resort to government bonds that, in Ecuador, typically were issued in US-Dollar, only government bonds issued in the country should be taken or all government bonds worldwide issued in US-Dollar. A Committee member replied that the proposed amendment clarified that the currency was taken to determine whether there was a deep market. However, it did not give any guidance on the population of the bonds to be used. The Chairman added that the issue was raised by ESMA. The problem arose with countries in the Eurozone that did not have a deep market themselves and reverted to government bonds although there was a deep market in the Eurozone.

One Committee member said he would like to wait for the effects analysis as he would like to see the implications of the proposed amendment. He said that if the assessment of the market and the population of the bonds would be looked at separately, the word ‘market’ would be used differently within the standard. Nobody shared his view.

Upon calling a vote, three out of fourteen Committee members disagreed with recommending to the Board to proceed with the proposed amendment. The Chairman therefore proposed to go forward but to notify the IASB of the issue. The observing Board members around the table agreed. A Committee member said that it should be highlighted to the Board that the proposed amendment was about the connection of currency and mutually compatible assumptions and suggested to show them where exactly the guidance is needed.

The project manager asked whether the Committee agreed with the recommendation to propose prospective application from the earliest comparative period presented. One Committee member asked where the catch-up amount would go in this case. The Committee discussed the accounting. Following the discussion, the Chairman called a vote on whether the Committee wanted the catch-up in opening retained earnings or in the current period (i.e. OCI or profit or loss ). The Committee voted in favour of opening retained earnings.

Correction list for hyphenation

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