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Location: Video meeting
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The IFRS Interpretations Committee met via video conference on Wednesday 16 June 2020. The full agenda, overview, and our meeting summaries are available in the left navigation panel as well as below. Agenda papers for the meeting are available on the IASB's website. |
Full agenda for the IFRS Interpretations Committee's June 2020 meeting.
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Tuesday 16 June 2020
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Agenda papers for this meeting are available on the IASB's website.
Overview of the IFRIC Committee meeting.
The IFRS Interpretations Committee met on Tuesday 16 June 2020. The following items were discussed:
Supply Chain Financing Arrangements—Reverse Factoring: The Committee decided to publish a tentative agenda decision outlining how IFRS Standards apply to different aspects of accounting for reverse factoring arrangements (mainly presentation of the liability in the statement of financial position and presentation in the statement of cash flows). With regard to the recommended narrow-scope standard-setting on new disclosure requirements for arrangements entered in to fund payables to suppliers, no decision has been made and this will be reconsidered at a future meeting.
The comment period for the tentative agenda decision has been extended until the end of September 2020.
IFRS 16 Leases—Sale and Leaseback with Variable Payments: In March 2020, the Committee published a tentative agenda decision stating that for a sale and leaseback transaction with variable payments the seller-lessee recognises a lease liability at the date of the transaction, even if all the payments for the lease are variable and do not depend on an index or rate, reflecting how the right-of-use asset is measured to determine the gain or loss on the sale and leaseback transaction. The Committee decided to finalise the agenda decision, with some suggested changes to the drafting.
IAS 12 Income Taxes—Deferred Tax Related to an Investment in Subsidiary: In March 2020, the Committee published a tentative agenda decision that when an entity expects to recover the carrying amount of its investment in the subsidiary through distributions of profits by the subsidiary, the entity uses the distributed tax rate to measure the deferred tax liability related to its investment in the subsidiary. The Committee decided to finalise the agenda decision.
IAS 38 Intangible Assets—Player Transfer Payments: In November 2019, the Committee published a tentative agenda decision stating that when a football club transfers a player to another club it recognises the gain or loss in profit or loss applying IAS 38, and not revenue (IFRS 15). However, the agenda decision suggested that the intangible asset could be classified as inventory (IAS 2) if it was is acquired for development and sale in the ordinary course of business. The Committee decided to finalise the agenda decision, with the suggested removal of the analysis under IAS 2.
In this session, the Committee discussed the staff's recommendation based on research performed on supply chain financing arrangements.
In its April 2020 meeting, the staff presented its research performed on supply chain financing ("SCF") arrangements submitted. The submitter is concerned that such arrangements are widespread while the relevant disclosures in the financial statements are inadequate. Accordingly, the submitter requested the Committee give guidance on the disclosure requirements and classification of such liabilities. In view of this, the staff performed research and outreach and prepared a summary. This summary provided the Committee with a summary of the prevalence of SCF arrangements, the key terms of reverse factoring arrangements (which are a type of SCF arrangement) and the accounting for such arrangements. In the meeting, the Committee members echoed the findings set out in the submission and suggested different ways of how financial reporting might be improved.
The staff have now analysed the application of IFRS Standards to the reverse factoring arrangements in the statement of financial position, statement of cash flows and notes to the financial statements.
In the statement of financial position, when determining where to present liabilities that are part of the reverse factoring arrangement applying IAS 1, the entity would assess whether the size, nature or function of those liabilities are dissimilar to other items in trade and other payables, which would require separate presentation. To be presented as part of “trade and other payables”, the liabilities would need to be part of the working capital used in the entity’s normal operating cycle. If existing trade payables are part of the arrangement, the derecognition requirements in IFRS 9 should be applied to determine whether to derecognise those trade payables and recognise new financial liabilities.
In the statement of cash flows, the cash flows of such liabilities would follow their presentation in the statement of financial position. If an entity presents the liability as trade payable, the cash flows to settle the liability would be operating cash flows. If such liability is not a trade payable, cash outflows would be presented in financing activities.
In the notes to the financial statements, various disclosures would be required. These include the liquidity risk arising from such an arrangement applying IFRS 7, information enabling users to evaluate changes in liabilities to the extent it classifies such cash flows as financing cash flows applying IAS 7, the significant judgements that management has made in the process of applying the entity’s accounting policies and additional information about the arrangement that is relevant to an understanding of financial statements applying IAS 1.
After considering the relevant criteria, the staff recommended issuing a tentative agenda decision on the classification of liabilities and on disclosures about liquidity risks arising from such arrangements. The tentative agenda decision would outline how IFRS Standards are applied to different aspects of accounting for those arrangements. However, for arrangements entered in to fund payables to suppliers, a narrow-scope standard-setting project is proposed with a view to develop disclosure requirements.
There was a long and lively discussion on the various aspects of the application of IFRS Standards to reverse factoring arrangements. The Committee members generally agreed with the flow of the analysis but raised a number of concerns on the conclusion and the staff’s suggestion for clarification or amendments.
For the presentation of the liabilities on the statement of financial position, some would like to have a clarification on the possible classification of the new financial liability as trade payable, other payable or borrowing when the original trade payable meets the derecognition criteria as a result of entering into the reverse factoring arrangement. In the current analysis presented in the tentative agenda decision, only trade and other payable and borrowings are mentioned. Some would like a trade payable to be clearly defined in IAS 1 in order to distinguish trade payables from other payables. Some Committee members were concerned that an entity may argue that the new borrowing, which is to repay the payable for the purchase of goods and services, is still considered part of the working capital of an entity and should not be classified as "borrowing". It would be better to emphasise that the new lender is a bank/financial institution. Such nature could not be part of the daily operating activity and should be presented as "borrowing".
In relation to the two factors for consideration of derecognition set out in the tentative agenda decision, some raised concerns that these are not directly quoted from the Standards and are not the only factors to consider. Citing these may create more questions than it intended to respond to. Others considered that it is helpful to be included in the agenda decision as guidance for the assessment for derecognition but suggested amending the wording to reflect a more generic description of the substantial changes in credit terms without referring to the exact number of days.
A number of Committee members disagreed with the staff conclusion that the presentation in the cash flow statement should follow that of the statement of financial position. They considered that the nature of the cash flows should be considered in accordance with IAS 7 instead and that judgement is involved. The presentation in the statement of financial position is just one of the factors to consider and may be helpful in the assessment rather than an absolute answer to the question of how to present cash flows. One Committee member gave the view that even though the liability is considered a borrowing, it may still be possible that such cash flows are presented in operating activities if they are ultimately payments for purchase of goods and services. Another Committee member quoted the US standard as a reference, saying that the presentation of the payments for the purchasing of inventories as financing may not depict the nature of the cash flows because the bank/financial institution may merely be a payment agent. In response to these comments, the staff suggested to amend the wording in the tentative agenda decision to state that the presentation of the liability in the statement of financial position may help to answer the question of how to classify the cash flows.
A few Committee members considered the analysis related to "disaggregation" in presentation is unclear and suggested to quote IAS 1:55 in the tentative agenda decision. In view of the nature of such reverse factoring arrangements, it would be useful to present the liability, even if it is still considered as trade and other payable, as an additional line item to help the readers of the financial statements to understand the entity's financial position. The staff agreed with this and suggested adding this to the tentative agenda decision.
The Committee decided, by a vote of 9:5, not to add the classification of liability and cash flows to the Committee’s standard-setting agenda, and instead to publish a tentative agenda decision. In view of COVID-19, the end of comment period is proposed to be extended from the end of July to the end of September 2020 to allow the respondents to digest the matters.
Regarding the narrow-scope standard-setting project to develop disclosure requirements for arrangements entered in to fund payables to suppliers, some considered it a useful project but it should expand to other types of supply chain financing arrangements instead of just the reverse factoring arrangement. One suggested to discuss the disclosure requirements for the suppliers as well. Others considered the existing Standards already provide sufficient requirements for disclosures and it is therefore not necessary to start a narrow-scope project. The staff responded that the narrow-scope project is actually aimed at discussing supply chain financing as a whole and that reverse factoring is just quoted as an example.
The Committee did not decide on starting a narrow-scope project. Instead, that topic will be discussed again at a future meeting.
In this session, the Committee discussed sale and leaseback transaction with variable payments the seller-lessee recognises a lease liability at the date of the transaction.
In its November 2019 and March 2020 meeting, the Committee discussed a submission about a sale and leaseback transaction with variable payments. In the fact pattern described, the entity (seller-lessee) enters into a sale and leaseback transaction whereby it transfers the asset to another entity (buyer-lessor) and leases back the asset for ten years with variable lease payments based on a percentage of the seller-lessee's revenue derived from that asset. The transfer satisfies requirements of IFRS 15 to be accounted for as a sale of an asset. The submitter asked how the seller-lessee measures the right-of-use (ROU) asset arising from the leaseback, whether it is (i) zero because of variable lease payments, based on measurement requirements of IFRS 16:24, or (ii) a proportion of the asset's previous carrying amount, based on requirements in IFRS 16:100(a)). The amount of the ROU asset would determine the amount of any gain or loss recognised at the date of the transaction. In the meetings, most Committee members agreed not to develop an Interpretation regarding the accounting of such a sale and leaseback transaction at the date of the transaction. However, they recommended that the IASB propose an Annual Improvement that clarifies the subsequent measurement of the associated liability by the seller-lessee.
Of the 20 responses received to the tentative agenda decision, eight agreed with the Committee's analysis and conclusion. However, these respondents expressed concerns on using "lease liability" to describe the liability arising or recommended amending IFRS 16 to address the matter. The remaining twelve respondents disagreed with the analysis and conclusion.
Among those who disagreed with the Committee's analysis and conclusion, some noted that the conclusion on the initial measurement of the liability that arises in the sale and leaseback transaction results in the recognition of a liability for variable lease payments which conflicts with the measurement requirement in IFRS 16:27. They agreed on the application of IFRS 16:100(a) to the initial measurement of the ROU asset but not to the initial measurement of liability arising from it and considered IFRS 16:26-28 should apply to the liability instead. Some of these respondents considered IFRS 16:23-28 applies to all leases, including sale and leaseback transactions, in the accounting of the ROU assets and liability, and IFRS 16:100(a) only serves as a guidance on how to apportion the gain on sale. The staff continued to support the seller-lessee applying the requirement in IFRS 16:100(a) instead of IFRS 16:26-28 to the initial measurement of the liability. Although IFRS 16:100(a) does not specify how to measure the associated liability, it is necessary to measure the liability in such way to arrive at the ROU asset and the gain on the rights transferred as required by IFRS 16:100(a). The staff further commented that IFRS 16:BC169 is trying to explain the rationale for IFRS 16:26-28 in a standalone lease but it does not override the applicable requirements in IFRS 16 to sale and leaseback transactions. Furthermore, the staff continued to agree that IFRS 16:100(a) provides adequate basis for an entity to measure the ROU asset and liability at initial recognition and standard-setting is not required.
For those who agreed with the Committee's analysis and conclusion, most expressed concerns that the agenda decision concluded the liability arising in the sale and leaseback transaction as a "lease" liability because the variable lease payments do not meet the definition as a lease liability in IFRS 16 and IFRS 16 did not contemplate a liability arising from such situations. The staff still considered that the liability meets the definition of a lease liability to which IFRS 16 applies. However, considering the feedback and the Board's future narrow-scope standard-setting project which would clarify the nature of the liability and the seller-lessee's subsequent measurement of such liability, the staff recommended removing the reference to "lease" from the description of the liability in the agenda decision.
The staff recommended that the Committee finalise the tentative agenda decision with some suggested changes to the wording.
Most of the Committee members agreed to publish the final agenda decision but added some comments on the staff’s proposed changes to the wording of the agenda decision. Some still held the view that the liability arising is a "lease liability" and suggested to retain the term instead of just "liability" as proposed by the staff. They considered that this conclusion had been debated at length in the last meeting and it had been agreed that this term would clearly represent the nature of the liability arising from the sale and leaseback arrangement described in the fact pattern. Others agreed to the proposed change of “lease liability” to "liability" because it allows for flexibility and the planned future amendments to IFRS 16 with regard to the subsequent accounting of such a liability may make its nature clearer.
In relation to the suggested sentence added which described that the ROU asset cannot be nil in accordance with IFRS 16:100(a), some disagreed adding this sentence, because it may place restrictions on the measurement of ROU assets arising from such transactions, e.g. subsequent impairment. The staff explained that the added sentence only clarifies the accounting treatment of an ROU asset on initial recognition but not for subsequent accounting.
The Committee decided, by a vote of 11:3, to finalise the agenda decision with the above suggested amendments to the tentative agenda decision.
In this session, the Committee discussed when an entity expects to recover the carrying amount of its investment in the subsidiary through distributions of profits by the subsidiary, the entity uses the distributed tax rate to measure the deferred tax liability related to its investment in the subsidiary.
In its March 2020 meeting, the Committee discussed a submission on the accounting for deferred tax related to an investment in a subsidiary. In the fact pattern described, the subsidiary operates in a jurisdiction in which a 20% tax rate applies only when it makes a profit distribution. The tax paid by the subsidiary is its own tax liability and not a withholding tax paid on behalf of its parent. The submitter asks if deferred tax should be recognised on the temporary difference arising on any undistributed profit. View 1 stated that, applying IAS 12:52A, no deferred tax should be recognised, because the tax is payable only upon actual distribution. Therefore, a 0% tax rate is applied to the undistributed profits that create the taxable temporary difference. View 2 stated that the entity should recognise deferred tax on the taxable temporary difference applying IAS 12:39-40. IAS 12:52A and the newly added IAS 12:57A are not applicable in relation to investments in subsidiaries. In the meeting, the staff concluded View 2 should be taken and did not recommend to add the matter to the Committee's standard-setting agenda but to publish a tentative agenda decision. Most of the Committee members agreed with that conclusion.
Of the eleven responses received to the tentative agenda decision, eight agreed with not adding the matter to the Committee's standard-setting agenda. Two respondents did not provide a view on the technical analysis and conclusion but expressed concerns on the consequences of the agenda decision's application on different transactions. One respondent considered IAS 12 does not provide an adequate basis for the Committee's conclusion.
The respondents who did not provide a view on the conclusion expressed concerns about the outcome of application of the accounting described in the agenda decision to two changes in a group's legal structure—these are: creating a new parent and combining a parent and subsidiary into a single legal entity. One of these respondents highlighted that such changes in legal structures may result in an entity recognising (or derecognising) deferred tax associated with an investment in a subsidiary, yet neither the tax position of the entity nor the taxes payable upon distribution of profits is affected. These respondents therefore asked whether applying such an accounting treatment to these transactions meets the qualitative characteristics of useful financial information and appropriateness of the application of the true and fair override in IAS 1:19. The staff acknowledged that different legal structure can lead to different tax consequences. However, the different accounting outcome is actually reflecting the differing nature, i.e. tax arises from the recovery of the investment in the subsidiary and tax arises from the distribution to the group's shareholder. In addition, the staff commented that the applicability of the requirements in IAS 1:19 to the transactions described (change in the legal structure) is beyond the scope of the matter addressed in the submission.
Another respondent disagreed with the Committee's conclusion that the principles and requirements in IAS 12 provide an adequate basis for the accounting of the fact pattern described. The respondent considered that the conclusion in the tentative agenda decision constitutes an interpretation of the requirements in IAS 12 because the staff analysed not only the wording in IAS 12 prior to amendments made to the Standard in 2000 but also the purpose of the amendment and an agenda paper for an IASB meeting in October 2000. The staff continued to consider IAS 12 provides adequate basis and quoted IAS 12:39 & 51 as the basis of the conclusion. They further explained that the discussion on amendments made to IAS 12 in 2000 was to ensure the Committee had all relevant information available in reaching an informed decision.
The staff recommended that the Committee finalise the tentative agenda decision with an editorial change to the wordings.
The Committee members had no comments on this issue.
The Committee decided, by a unanimous vote, to finalise the agenda decision.
In this session, the Committee discussed whether to finalise the tentative agenda decision when a football club transfers a player to another club it recognises the gain or loss in profit or loss applying IAS 38, and not revenue (IFRS 15).
In its November 2019 meeting, the Committee discussed a submission asking whether a football club transferring a player to another club recognises the transfer payment received as revenue applying IFRS 15, or instead recognises the gain or loss in profit or loss applying IAS 38. The player is registered in an electronic transfer system managed by a third party. Registration means that the player is unable to play for another football club. In the meeting, the staff concluded that an entity should recognised the gain or loss applying IAS 38 if such right is recognised as an intangible asset. Only when the ordinary activities of an entity include the development and transfer of players and the registration rights associated are recognised as inventories, the entity would recognise the transfer payments as revenue under IFRS 15.
Of the 18 responses to the tentative Agenda Decision, eight agreed with the Committee's analysis. Five respondents expressed concerns about classifying registration rights as inventory. Two respondents disagreed with the technical analysis and considered the transfer payments could be recognised as revenue under IFRS 15 even the registration right is classified as an intangible asset.
Some respondents raised concerns on including fact patterns in which a registration right is recognised as inventory and the fact that this goes beyond the fact pattern in the submission. A number of questions would have to be addressed in order to provide helpful and informative material for the discussion on the possibility of classifying it as an inventory. Moreover, no football clubs currently report registration rights as inventory and such discussion may create differences in reporting practice. The staff continued to consider the registration rights could meet the definition of inventories under IAS 2 as long as the entity intends to sell the right and the development and transfer of players is part of the club's ordinary activities. However, assessment of whether a registration right meets the definition of inventories require judgement with consideration of particular facts and circumstances. Providing more information addressing those questions for the classification of the right as inventory in this agenda decision would be difficult and go beyond an agenda decision responding to the question specified. Therefore, the staff recommend deleting all references to IAS 2 and the responses to the possibility of recognising the transfer payment received as revenue applying IFRS 15 from the tentative agenda decision.
Two respondents were of the review that an entity could apply the principle in IAS 16:68A similarly to the disposal of intangible assets if developing and selling the intangible assets is part of the ordinary activities. Accordingly, such right is transferred to inventory and the proceeds are recognised as revenue applying IFRS 15. The staff disagreed and explained IAS 16:68A is an exception to the general derecognition requirements in IAS 16 which is not applicable to IAS 38. IAS 38:113 specifies the derecognition requirements on disposals of intangible assets and should be applied in the fact pattern described. These respondents also suggested amending IAS 38 to include a similar exception to the general derecognition requirement. The staff responded that this aspect of IAS 38 has not been identified by the Board as a potential project in the 2020 Agenda Consultation but they may share the comment letters with the Board to consider.
The staff recommend finalising the agenda decision, with the deletion of certain discussion and changes in the wording as stated above.
The main discussion was on whether to remove the analysis with regard to IAS 2 in the agenda decision. A few preferred keeping it because they considered it is relevant in responding to a question raised in the fact pattern. Most of the Committee members agreed with removing because it is not relevant in the particular fact pattern set out and similar transactions are widespread in other industries, adding this may result in diversity in current practice. Instead, a future project for the related issues on IAS 38 will be suggested to the Board.
The Committee decided, by a vote of 13:1, to finalise the agenda decision without referring to IAS 2 and revenue recognition, but with some changes to the wording.
In this session, the Committee was presented with items in progress.
There were two matters that have yet to be presented to the Committee:
There were no questions or comments from Committee members on this agenda point.
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