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IFRS 5 — Issues relating to the requirements for scope and presentation in IFRS 5

Date recorded:

Scope of classification as held for sale

At its November 2014 meeting, the IFRS Interpretations Committee (“the Committee”) discussed an issue relating to the scope of IFRS 5 — namely, whether certain cases of ‘loss of control of a subsidiary’ (for example, loss of control through dilution, exercise of call options, or a change in a shareholder agreement) met the criteria for classifying the subsidiary as held for sale in IFRS 5.  As a result of the discussion, the Committee asked the staff to consider the broader question of whether ‘loss of control’ was key to the inclusion of an event within the scope of IFRS 5 or whether there also needed to be a disposal in order for the event to be classified as held for sale. 

Based on their analysis, the staff believed that:

  • The current requirements of IFRS 5 seem to indicate that a disposal activity has to occur in order for an event to be classified as held for sale or distribution.
  • Expected events resulting in loss of control of a subsidiary, irrespective of the form of loss of control, should be accounted for consistent with a sale plan involving loss of control of a subsidiary.
  • The current requirement in IFRS 5 is not clear on whether its principles should be applied to such expected events, because they are not specifically included within the scope of IFRS 5.

The staff believed the issue was worth considering further and recommended to the Committee that the staff continued exploring the issue further before deciding whether or how to amend IFRS 5.

The Chairman observed that the staff had concluded that, absent an amendment, these events would not fall within the scope of IFRS 5, and posed two questions to the Committee members:  (1) whether they agreed with the conclusion that these events would not fall within the scope of IFRS 5, and (2) whether they believed they ought to fall within the scope of IFRS 5, and that this was something that the Committee should recommend to the IASB.

A Committee member noted that he agreed with the principle that there needed to be an event or transaction, but that this was what was referred to as a disposal activity, and noted that very broadly, a distribution to owners or an abandonment could be considered a disposal activity.  He questioned whether what the staff meant by a disposal activity was a transaction in which a parent lost control and also received something of value.

The Director of Implementation Activities noted that there was typically something received in return, and that was the case even if, in the case of a distribution the entity was providing something to its shareholders and not necessarily getting something physical back in return.  He noted that IFRS 5 envisaged such transactions as being within its scope as an acceptable method of disposal – as either a sale or distribution to owners included an actual transfer across to the other party.

Another Committee member noted that, with respect to the first question, she did not believe that these events fell within the scope of IFRS 5, but added that she did not believe that they always should.  She noted that it was not just the act of losing control that resulted in an event falling within the scope of IFRS 5, but that it was also a question of whether the entity was going to recover the carrying value in a different way.  Accordingly, if an entity received something in return, it would be recovering the carrying value in a different way from continuing involvement, and in a situation where an entity was simply diluting its shareholding (resulting in an investment in an associate), it would still be recovering the carrying value through continuing involvement not in another way, and accordingly, she did not believe this should fall within the scope of IFRS 5.  She noted that the focus should not be so much on the transaction but the method of recovery on an ongoing basis.

The Chairman responded, noting that the entity would not recover all of the assets that were previously reported in the financial statements as they would have been collapsed into a new carrying amount at fair value, and the Director of Implementation Activities commented that the guidance added to IFRS 5 on the disposal of a part interest in a subsidiary that resulted in a loss of control emphasised the transition from it being a controlled entity where the individual assets and liabilities were included on the balance sheet to it being a significant influence entity where it was presented as one investment, and that it was this transformation that resulted in the IASB saying it fell within the scope of IFRS 5.

Another Committee member noted that his initial understanding was that IFRS 5 applied to something an entity was holding to dispose of, but noted that when the IASB amended IFRS 5 to include assets held for distribution to owners, this had heavily broadened the types of transactions that could fall within the scope, as other types of transactions that were not pure disposals could fall within the scope of IFRS 5.  He noted that if IFRS 5 was read broadly, he believed that these events could fall within the scope, but that it was not clear.  He noted that the Committee could possibly resolve the issue through a very wide Interpretation, but that it would be preferable for the IASB to make a clarification to the Standard.

Another Committee member noted that he agreed with other Committee members who had spoken that it was currently ambiguous as to whether these items would fall within the scope of IFRS 5.  With respect to whether these items should be within the scope of IFRS 5, he noted that the Committee needed to think about what IFRS 5 actually did, and what information it actually conveyed.  He noted that, for example, an entity could have 50% ownership in another entity and have control, and then a change to the shareholder agreement could result in the entity no longer having control, and IFRS 5 in some situations could involve the entity recognising some kind of write down based on 100% of the assets and liabilities, which would then be written up when doing IFRS 10 loss of control accounting; and questioned whether this would actually be useful information.

Another Committee member noted that he agreed that the revisions to IFRS 5 had made it ambiguous as to whether a transaction needed to be driven by a physical disposal to fall within the scope of IFRS 5 or whether it was broader, and noted that there was diversity in practice on this issue and that clarification on the issue would be beneficial.  He also noted that the Committee was discussing the application of IFRS 5 to situations where control was lost, but highlighted the fact that IFRS 5 also applied to assets, and questioned whether if an entity wrote a put on a property (that was deeply in the money) it could be said that it was highly probable the property was going to be disposed of and therefore, should also fall within the scope of IFRS 5, or whether the loss of control notion only applied to subsidiaries.  Accordingly, he noted that there were a lot of questions that would need to be answered in trying to clarify the scope.  He expressed his preference that a fundamental review of IFRS 5 was undertaken, noting that the Standard had a number of issues that the IASB needed to reconsider.

Another Committee member noted that he agreed with a number of the previous comments that had been made.  He noted that as soon as the IASB included assets held for distribution in IFRS 5, they moved away from a sale type notion, and he believed that the scope of IFRS 5 today and the definition of a disposal group “a group of assets to be disposed of by sales or otherwise…” introduced enough ambiguity that one could read the Standard to either include or exclude the events in question.  He pointed out that this issue had come back to the Committee a number of times and that stressed the need for the Committee to make a decision as to whether this long list of things should not be dealt with through an Interpretation (as something fundamental needed to be done to IFRS 5) but be passed onto the IASB, or whether the Committee could address the issue through an Interpretation, and if this was the case, they should get on with doing so.

The Chairman brought the discussion to a close, noting the general consensus of Committee members that while the scope of IFRS 5 had originally been clear, a series of revisions had either made the scope ambiguous or needed to be viewed as exceptions to the scope without changing the fundamental principle.  He noted that he did not believe it was obvious which of the two it was, and that the revisions had resulted in a lack of understanding with respect to the scope of IFRS 5.  He proposed that the next step on this issue should be for the staff to bring a paper to the Committee that fundamentally looked at the scope of IFRS 5 again, and that the Committee needed to reach a series of decisions from which they would be able to determine whether this issue could be dealt with through an Interpretation or a series of Interpretations because the Committee believed they understood what the scope of IFRS 5 was, or whether the Committee needed to recommend changes to IFRS 5 to the IASB.

All Committee members agreed with this proposal.

Issues relating to the requirements for scope and presentation in IFRS 5

The second agenda paper discussed several further issues relating to the requirements for scope and presentation in IFRS 5.

The first issue (Issue 1B) discussed related to whether IFRS 5 applied to a disposal group consisting mainly or entirely of financial instruments.  Paragraph 4 of IFRS 5 states that the disposal group may include any assets and liabilities and requires the disposal group to be measured in accordance with IFRS 5, whereas paragraph 5 of IFRS 5 states that financial assets are excluded from the scope of the standard for measurement purposes.  The issue arose because the submitter believed that it was unclear whether IFRS 5 applied to disposal groups that consisted mainly, or fully, of financial assets.  The issue is particularly relevant if it is expected that the disposal group will be sold at a loss, as paragraph 5 would imply that the loss is recognised only when the sale effectively occurs, rather than upon reclassification as a disposal group.  The staff believed that the issue was another case of one of the (old) issues previously discussed by the Committee, and the staff recommended that the Committee should consider this issue when deciding how to proceed with the (old) issues.

A Committee member noted that he believed IFRS 5 was very clear on this matter, noting that an entity was in the scope of the Standard if the requirements of IFRS 5 were met, and that the measurement was done under IFRS 9.

Another Committee member noted that he also agreed with the staff analysis, noting that he believed that such a disposal group would be within the scope of IFRS 5, and the measurement thereof would not be, and therefore, agreed with the staff’s conclusion.

A further Committee member noted that he did not believe IFRS 5 was clear enough on this issue.  He did not believe IFRS 5 was clear that an entity would not start by measuring the disposal group as a whole at FVLCTS and that this could be seen as an acceptable approach in some circumstances, and that if the disposal group was going to be sold, this better reflected the economics.

The second issue discussed (Issue 2) was about how to interpret the definition of ‘discontinued operation’, in terms of the concept of an ‘operating segment’ as defined in IFRS 8.  The staff believed that this issue also related to one of the (old) issues that was currently on hold under the IASB’s project on Financial Statement Presentation, which was reported to the September 2014 Committee meeting, and the staff recommended that the Committee should consider this issue when deciding how to proceed with the (old) issues.

A Committee member noted that he believed that this was an issue that the Committee could make progress with through an agenda decision if the Committee members wanted to.  He noted that it could be a few years before the financial statement presentation project resulted in any clarification.  He noted that fundamentally, this was a matter of judgement, and suggested that an agenda decision that mentioned judgement and explained something about the relationship or difference between an operating segment and a major line of business in an IFRS 5 context would do what needed to be done.

Another Committee member disagreed with an agenda decision, noting that because this was a question of judgement, he did not believe that the Committee could achieve much by putting out an agenda decision at this point in time.

The Chairman asked the Senior Director, Technical Activities what the timeframe was for the financial statement presentation project, who responded that the project was active, but that it could take one or two years to reach Exposure Draft stage.

The Chairman asked the Committee members if they would be in support of pursuing an agenda decision.  Only six of fourteen Committee members supported this, and accordingly, the Committee agreed with the staff recommendation that this issue should be considered when deciding how to proceed with the (old) issues.

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