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Location: London
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The IFRS Interpretations Committee met on 28–29 November 2023. 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 IFRS Foundation website. |
Agenda for the IFRS Interpretation Committee November 2023 meeting.
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Tuesday 28 November 2023
Wednesday 29 November 2023
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Agenda papers for this meeting are available on the IFRS Foundation website.
Overview of the IFRS Interpretations Committee November 2023 meeting.
The IFRS Interpretations Committee (IFRS IC) met in London on 28-29 November2023.
The IFRS IC discussed two new items, finalisation of one agenda decision and gave input to three International Accounting Standards Board (IASB)’s projects.
Initial consideration:
IAS 37 Provisions, Contingent Liabilities and Contingent Assets—Climate-related Commitment: The IFRS IC received a submission asking its views on how IAS 37 applies to climate-related commitments to a fact pattern where an entity manufacturer of household products publicly states a net-zero transition commitment. The manufacturer published a detailed plan for the modification of the manufacturing method to achieve 60% reduction in emissions in nine years and to buy carbon credits to offset its remaining emissions after those nine years. The submitter asked i) whether the public statement of a net zero transition commitment creates a constructive obligation as defined in IAS 37; ii) whether a constructive obligation created by a net zero transition commitment meets the criteria in IAS 37 for recognising a provision; and iii) if a provision is recognised, whether the expenditure required to settle it is recognised as an asset or as an expense when the provision is recognised. The staff analysed that whether there is a constructive obligation depends on different facts and circumstances. The present obligation and probable outflow criteria are satisfied only after nine years and thereafter as the entity emits greenhouse gases. Most of the IFRS IC members agreed with the analysis in the paper and agreed to publish a tentative agenda decision.
IFRS 8 Operating Segments—Disclosure of Revenues and Expenses for Reportable Segments: The IFRS IC received a submission asking about the application of IFRS 8:23 which requires an entity to report a measure of profit or loss for each reportable segment and to disclose specified amounts for each reportable segment. The submitter said that it observes diversity in its jurisdiction in the application of two aspects of IFRS 8:23: (a) how to read the requirement for an entity to disclose the specified amounts applying IFRS 8:23(a)-(i) for each reportable segment; and (b) how to determine ‘material items’ applying IFRS 8:23(f). The staff analysed that the principles and requirements in IFRS Accounting Standards provide an adequate basis for an entity to determine the accounting treatment or disclosure requirements for the above submission. The staff recommended not to add a standard-setting project to the work plan and instead to publish tentative agenda decisions. The IFRS IC members had a lively discussion on IFRS 8:23(f) and expressed different views. 7 out of 13 IFRS IC members agreed with publishing the tentative agenda decision.
Finalisation of agenda decision:
IAS 27 Separate Financial Statements—Merger between a Parent and Its Subsidiary in the Separate Financial Statements: In its June 2023 meeting, the IFRS IC discussed a submission about how an entity applies IAS 27 to account for a merger with its subsidiary (which contains a business) in its separate financial statements and whether the merger should be accounted for as a business combination applying IFRS 3 or whether the parent entity should recognise the subsidiary’s assets and liabilities at their previous carrying amounts (carrying amount method). In the meeting, the IFRS IC members generally agreed with the staff’s analysis. The respondents to the agenda decision provided comments on different perspectives of the agenda decision. The staff recommended that the agenda decision be finalised, with some proposed changes. Most of the IFRS IC members agreed finalising the agenda decision.
IFRS IC input to IASB projects:
Climate-related and Other Uncertainties in the Financial Statements: In its September 2023 meeting, the IASB discussed potential actions it could take to help address concerns about reporting the effects of climate-related risks in financial statements. The IASB decided to consult the IFRS IC on how entities apply the requirements in IAS 36 in measuring value in use when an asset is subject to highly variable future cash flows over an extended time horizon. The IASB seeks input from the IFRS IC on the concerns identified in respect of lack of compliance due to misunderstanding of the requirements, limitations of the requirements and insufficiently clear requirements in IFRS Accounting Standards. The IFRS IC members gave input on the uncertainties of the impairment assessment brought by the climate-related matters in various aspects.
Provisions—Targeted Improvements: The IASB is conducting a project to make three targeted improvements to IAS 37. The IASB seeks IFRS IC input on one of the proposed improvements with respect to: i) initial suggestions for possible amendments to the requirements and illustrative examples supporting the ‘present obligation’ recognition criterion in IAS 37; and ii) whether to add to IAS 37 application requirements specifying when an entity has a present obligation for costs payable if a measure of its activity—for example, its revenue or carbon emissions—exceeds a specified threshold. The IFRS IC members were supportive of this project and made some comments on the proposed amendments and the amendments to/newly added illustrative examples.
Power Purchase Agreements: In July 2023, the IASB added a project to its work plan to research whether narrow-scope amendments to IFRS 9 could be made to better reflect how financial statements are affected by Power Purchase Agreements (PPAs). The project team has conducted further research on the prevalence of PPAs and how to restrict the scope of any potential standard-setting solution to limit the risk of unintended consequences for other contracts or transactions to purchase non-financial items. The IASB seeks IFRS IC members’ input into the additional research performed. The IFRS IC members gave their thoughts on whether standard-setting is needed and which standard-setting option they favoured.
The IFRS IC received a submission asking its views on how IAS 37 applies to climate-related commitments in a fact pattern where an entity, which is a manufacturer of household products, publicly states a net-zero transition commitment.
The IFRS IC received a submission asking its views on how IAS 37 applies to climate-related commitments in a fact pattern where an entity, which is a manufacturer of household products, publicly states a net-zero transition commitment. The manufacture published a detailed plan for the modification of its manufacturing method to achieve 60% reduction in emissions in nine years and buy carbon credits to offset its remaining emissions after those nine years. The submitter asked i) whether the public statement of a net zero transition commitment creates a constructive obligation as defined in IAS 37; ii) whether a constructive obligation created by a net zero transition commitment meets the criteria in IAS 37 for recognising a provision; and iii) if a provision is recognised, whether the expenditure required to settle it is recognised as an asset or as an expense when the provision is recognised.
The staff did not perform outreach on this matter because the IASB’s discussions and decision to refer the topic to the IFRS IC provided evidence that the matters described in this submission have widespread and a material effect on those affected.
Regarding whether the statement of a net zero transition commitment in the fact pattern creates a constructive obligation, the submitter was of the view that there are other parties to whom the entity making a net zero transition commitment would owe an obligation as required by IAS 37:20 and whether the commitment raises a valid expectation among those other parties that the entity will discharge the commitment, which satisfies the definition of a constructive obligation. The staff agreed that there are other parties to whom the entity would owe a constructive obligation to reduce its greenhouse gas emissions. However, they did not agree with the submitters that this necessarily creates a constructive obligation. Factors to consider would include whether the statements indicate to the public at large that the entity has accepted a responsibility to fulfil its stated commitments and communicates that responsibility in a sufficiently specific manner to raise a valid expectation in the public at large. The staff said management could refer by analogy to the criteria set out in IAS 37:72 & 74 and they provided some examples of factors affecting the management’s conclusion. The factors may include a) the language used in the statement; b) the specificity and status of plans supporting the statement; c) the timing of the actions required to fulfil the commitment and d) publicly available evidence of progress to date, achieved milestones it committed to in previous statements may enhance expectations.
In respect of whether a constructive obligation created by a net zero transition commitment meets the criteria in IAS 37 for recognising a provision, the first criterion in IAS 37:14 is whether the entity has a present obligation as a result of past event. The submitter said this criterion is met because the statement of commitment is a past event that gives rise to a present obligation. The staff disagreed because the event that creates a present obligation is the action to which the statement or law applies, resulting in a requirement for an outflow of resources. The costs of modifying its manufacturing methods and the costs of purchasing and retiring carbon credits are costs to be incurred to operate in the future, i.e. the entity will never have a present obligation for those costs. Accordingly, only when the entity emits the gases it has committed to offset it will have a present obligation. Therefore, the staff was of the view that the present obligation and probable outflow criteria are satisfied only after nine years and thereafter if the entity emits greenhouse gases. It will therefore incur a present obligation for the expenditure required to offset its past emissions. If it has not already bought the carbon credits needed to offset its past emissions, and assuming that a reliable estimate can be made of the amount of the obligation, the entity recognises a provision for the cost of buying and retiring those carbon credits.
Regarding the question of how an entity accounts for the expenditure required to settle a net zero transition provision, the submitter suggested that an entity could capitalise the expenditure in analogy to the costs of settling asset decommissioning provisions. The staff commented that in a scenario where a provision is recognised, an entity recognises the expenditure required to settle that provision as an asset only if that expenditure gives rise to—or forms part of the cost of—an item that qualifies for recognition as an asset in accordance with an IFRS Accounting Standard.
The staff noted that regardless of whether a provision is recongised as a result of the net zero commitment, the actions the entity plans to take to fulfil that commitment could affect the amounts at which the entity measures its other assets and liabilities. For example, if the entity’s plans to involve replacing existing property, plant or equipment sooner than was previously expected, the entity might need to test impairment under IAS 36, reassess the useful life and the residual value applying IAS 16 and assess whether there is a change in decommissioning or environmental rehabilitation applying IAS 37 and IFRIC 1. Also, if the changes needed to reduce an entity’s emissions will increase the costs the entity incurs to produce its goods or supply its services, the entity has to consider onerous contracts applying IAS 37 and reflect changes in assumptions about those costs when testing impairment of non-current assets.
Moreover, the staff said that the commitment could affect the information the entity discloses in its financial statements about existing assets and liabilities whose carrying amounts could be affected by the actions needed to fulfil the net zero transition commitment, e.g. assumptions made about the future under IAS 1:125, key assumptions about the recoverable amount under IAS 36:134 and description of each class of provision under IAS 37:85.
Based on this analysis, the staff considered that the principles and requirements in IAS 37 provide an adequate basis for an entity to determine how to apply that Standard to climate-related commitments. Therefore, this matter does not satisfy the criterion in the Due Process Handbook to be added as a standard-setting project.
The staff recommended that the IFRS IC does not to add a standard-setting project to the work plan and instead publish a tentative agenda decision outlining how an entity applies IAS 37 to climate-related commitments.
IFRS IC members gave a lot of input to each question in the agenda decision.
They first discussed the question of whether the statement of a net zero transition commitment in the fact pattern creates a constructive obligation. They generally commented that the analysis in the agenda paper is structured and helpful. They agreed that it would be based on judgement depending on the facts and circumstances. They appreciated the factors affecting management’s conclusion as set out in the agenda paper because it helps entities to determine what to consider to reach the conclusion on whether there is a constructive obligation. Given that there is no specific detailed fact pattern, IFRS IC members thought it was a good idea to set out the factors an entity has to consider. Some suggested to add the factors in the agenda decision. However, other members commented that these indicators are not what is stated in IAS 37 and preferred not to add them. Instead, they recommended referring to the factors to consider for restructuring provisions in IAS 37. Moreover, the IFRS IC members agreed that the first step of the assessment is to determine whether further analysis is needed to assess if there is present obligation in order to know if a provision should be recognised.
In respect of whether a constructive obligation created by a net zero transition commitment meets the criteria in IAS 37 for recognising a provision, IFRS IC members agreed with the staff’s analysis considering the three criteria in IAS 37 for the provision to be recognized. These are clearly explained in the agenda paper. They considered it is important to explain whether there is an obligating event as at the reporting date. It is useful to explain that the entity will never have a present obligation for the future modifications to the manufacturing method because the costs are to be incurred in the future, and only nine years later when it emits greenhouse gases would the entity have a present obligation which results in an outflow of resources to offset them. The timing of the existence of a present obligation is crucial for a provision to be recognised.
Several IFRS IC members considered that there is an expectation gap with regard to the users of the financial statements. When the users notice the commitment, they question why no provision was made for the entity’s promise. It is difficult to distinguish between an obligation and a present obligation under IAS 37. One IFRS IC member tried to explain in layman’s terms that an entity would have a present obligation when it makes a damage, for example, to a power station (analogy to making emissions) and is committed to fix it (analogy to committing to offset it). A number of IFRS IC members agreed with this and liked the analogy.
Some IFRS IC members considered it is important to distinguish between an exchange and a transfer of resources. If an entity makes a payment and gets something of value in return, it is an exchange but not a transfer of resources so no provision should be made. In the fact pattern, there is an exchange of resource to get the credits and they are used to offset the obligation. When there is transfer (i.e. outflow) of resources, this would result in a provision to be recognised. It is important to determine whether a provision should be made with this distinction in mind.
Another IFRS IC member raised the concern about the validity of the entity’s expectation to discharge its obligation. They raised the question of what happens if something outside the control of the entity happened and this triggers reversal of the provision. The staff responded that there would be no provision until nine years later, which is the only point when the entity could determine whether to recognise a provision, so there is nothing to reverse before that. That discussion was about the derecognition question, which is different from the recognition question raised in the submission. One IFRS IC member emphasised that it is important to note the scope of the agenda decision, which is “recognition” but not measurement or derecognition of provision. Another IFRS IC member said that the provision is measured at an estimated amount which is recognised initially, followed by a continuous assessment of whether the obligation still exists and the amount of resources needed to settle the obligation. Facts and circumstances could change, and the entity may come to the conclusion that the provision has to be reversed subsequent to initial recognition. However, this does not mean it was an error to recognise the provision in the first place.
One IFRS IC member suggested expanding the other considerations to include stating that the commitment could affect the amounts at which the entity measures its other assets and liabilities which is described in the agenda paper. Several IFRS IC members agreed that this is useful information and should be added in the text of the agenda decision. However, the Chair disagreed because it would make the agenda decision lengthy and go beyond the scope of the questions asked. Some IFRS IC members suggested that it could be published as explanatory material in addition to the agenda decision while others still considered it useful to add a short paragraph mentioning the factors in the agenda decision. The staff and the Chair said that the IFRS IC has not previously included such detail in agenda decisions and suggested to briefly lay out that entities have to consider the impact on other assets and liabilities.
The staff also discussed the proposed amendments to the agenda decision with the IFRS IC members. The main amendments considered were : 1) referring to the factors that need to be considered for restructuring provisions to determine whether there is a constructive obligation, (however, a few IFRS IC members pointed out that some of the criteria are not relevant to the provision described in the fact pattern and the staff finally decided not to make an analogy to this); 2) adding a sentence to describe that entities would have to consider how the commitment could affect the measurement of other assets and liabilities; and 3) emphasising that it is the outflow of resources instead of the purchase of credits that is the deciding factor in one of the criteria for the provision to be recognized. The staff will add simple examples for what is meant by “outflow of resources”.
The IFRS IC, by a unanimous vote, decided to publish a tentative agenda decision with the suggested changes discussed during the meeting.
In its September 2023 meeting, the IASB discussed its project Climate-related and Other Uncertainties in the Financial Statements. In particular, the IASB discussed potential actions it could take to help address concerns about reporting the effects of climate-related risks in financial statements. The IASB decided to consult the IFRS IC on how entities apply the requirements in IAS 36 in measuring value in use when an asset is subject to highly variable future cash flows over an extended time horizon.
In its September 2023 meeting, the IASB discussed its new project titled Climate-related and Other Uncertainties in the Financial Statements. In particular, the IASB discussed potential actions it could take to help address concerns about reporting the effects of climate-related risks in financial statements. The IASB decided to consult the IFRS IC on how entities apply the requirements in IAS 36 in measuring value in use when an asset is subject to highly variable future cash flows over an extended time horizon.
Based on the initial work performed by the project’s staff, some concerns related to how entities reflect climate-related risks in impairment calculations performed applying the requirements in IAS 36:33(a)-(b), 35-36 and 38. The effects of climate-related risks can result in the potential for high variability in future cash flows. Some of that variability may extend well beyond the five-year period specified in IAS 36:33(b) and also affect the extrapolation of cash flow projections based on financial budgets/forecasts, as required by IAS 36:36. The staff’s work highlighted concerns about potential:
The IASB seeks input from the IFRS IC on the concerns identified. Specifically:
The IFRS IC members commented on the uncertainties brought by climate-related matters in the impairment assessment in various aspects.
Some of them said that the cost of equity and discount rate have not been adjusted for the premium brought by different risks, one of which is the sustainability factors, because of lacking data for it. In addition, the beta in the discount rate calculation may also need to be adjusted considering climate-related matters. However, one IFRS IC member did not agree that the discount rate should consider an entity-specific risk adjustment as this is full of uncertainty. Instead, these risks would be factored in by preparing multiple scenarios of cash flow forecast. One IFRS IC member commented that only the base case is approved by the management and other cases are prepared by the personnel doing the impairment assessment. She also commented that the forecast approved may be based on the particular purpose of the management in achieving some target but may not be reasonable and supportable. The staff responded that IAS 36 requires entities to use a forecast which is consistent with other information on hand, so entities should revisit it until it is reasonable and supportable in accordance with IAS 36 for the purpose of impairment assessment. Another IFRS IC member commented that there is a fair amount of judgement to be made and it would be difficult to factor in all climate-related matters in the cash flows. She gave the example that if something severe and unexpected happened, significant judgement is required to consider how to reflect that in the future forecast. Some entities might adopt a prudent approach when calculating the value in use, which results in significant impairment while it might be reversed in later periods. In view of the uncertainties and judgements required, several IFRS IC members said making disclosure requirements and performing a sensitivity analysis as required by IAS 1 and IAS 36 would be useful when uncertainties are difficult to be captured into the cash flows forecast or discount rate.
A few IFRS IC members were of the view that entities tend to use a country-specific growth rate without considering factors specific to the entity and asked for guidance and examples for determining the growth rate in the value in use calculation. They said the growth rate should not be too aggregated and should consider different factors. Negative growth rates would have to be used in some scenarios.
In terms of diversity in practice, one IFRS IC member said that the diversity is due to not all entities using multiple scenarios in projecting cash flows. Another said that there is a lack of comparability in the disclosures because they applied different judgment on what to disclose. One IFRS IC member was of the view that it is natural to have diversity in the application of the IAS 36 requirements, which results in different accounting consequences because the impairment assessment involves a high degree of judgement.
Some IFRS IC members raised the issue that there is a need to reconcile the value in use amount to the market capitalisation when it is far above it. It would be contradictory if the forecasted cash flows were much better than what market participants expect. They suggested amending IAS 36 by requiring the reconciliation of these amounts.
Most of the IFRS IC members considered that there is nothing wrong with the framework of IAS 36 itself and that there is sufficient guidance in IAS 36 on what entities should consider with regard to time horizons and risks, which exist in different uncertainties. Climate-related matters are new but not fundamentally different from what entities have to consider for other uncertainties. Instigating standard-setting may not be effective when considering the costs and benefits. They recommended adding application guidance or examples (e.g. disclosures, determination of growth rate, distinguishing replacement and enhancement, etc.). The Chair asked whether IFRS IC members would prefer this to making amendments to the standards. One IFRS IC member said that it would be an efficient approach after considering the benefits and costs and publishing an article with an illustration of examples would be helpful. However, rather than giving an oversimplified fact pattern for illustration, one IFRS IC member would prefer expanding Appendix C of IAS 36 by adding more consideration for climate-related matters in the mechanism of conducting impairment assessments to indicate factors to consider for climate-related matters.
The IFRS IC received a submission asking about the application of IFRS 8:23 which requires an entity to report a measure of profit or loss for each reportable segment and to disclose specified amounts for each reportable segment.
The IFRS IC received a submission asking about the application of IFRS 8:23 which requires an entity to report a measure of profit or loss for each reportable segment and to disclose specified amounts for each reportable segment. The submitter asked i) whether an entity is required to disclose the specified amounts in IFRS 8:23(a)-(i) for each reportable segment if those amounts are not reviewed separately by the chief operating decision maker (CODM); ii) whether an entity is required to disclose the specified amounts in IFRS 8:23(f) for each reportable segment if the entity presents or discloses those specified amounts applying a requirement in IFRS Accounting Standards other than IAS 1:97; and iii) how an entity determines ‘material items’ in IFRS 8:23(f).
The staff sent an information request to members of the International Forum of Accounting Standard Setters, securities regulators and large accounting firms. To assist respondents in answering the questions, the staff included implied fact patterns that they developed based on those questions:
Fact Pattern 1: An entity does not disclose the specified amounts in IFRS 8:23(a)-(i) for each reportable segment. Those specified amounts are included in the measure of segment profit or loss reviewed by the CODM but are not considered by the entity to be reviewed separately by management (or by the CODM).
Most respondents said Fact Pattern 1 is not common or they could not determine whether it is common, and it has no material effect. Some respondents said that they observed diversity in practice. Many respondents provided their view that, if the specified amounts in IFRS 8:23(a)-(i) are included in a measure of segment profit or loss reviewed by the CODM or are otherwise ‘regularly provided’ to the CODM, even if not included in the measure of segment profit or loss, those specified amounts are required to be disclosed for each reportable segment. The staff agreed with the respondents’ view because the placement of “or” in the paragraph is important. The specified amounts are not required to be ‘separately reviewed’ by the CODM for those amounts to be separately disclosed. Accordingly, an entity is required to disclose the specified amounts for which either of the conditions in IFRS 8:23 is met.
Regarding the requirements in IFRS 8:23(f), most respondents said that Fact Patterns 2-3 are not common, or they could not determine whether it was common, and they do not have a material effect. The respondents shared their views on the different fact patterns as below:
Fact Pattern 2: A number of respondents provided a range of responses about how to consider the reference in IFRS 8:23(f) to IAS 1:97. The majority said that an entity is not required to disclose the specified amount under IFRS 8:23(f) if those specified amounts are in its financial statements applying a requirement in IFRS Accounting Standards other than IAS 1:97.
Fact Pattern 3a: Many respondents to the information request said that “material” in the context of IFRS 8:23(f) is assessed based on both qualitative and quantitative factors. However, a few respondents considered, when applying IAS 1:97 in combination of IAS 1:98, only qualitative material should be disclosed.
Fact Pattern 3b: Most respondents did not share observations about whether “material items” in IFRS 8:23(f) include amounts that are an aggregation of individually quantitatively immaterial items.
Fact Pattern 3c: Many respondents said materiality is assessed at the reporting entity level.
The staff analysed Fact Patterns 2-3 together as to the main aspect of the questions for the meaning of “material items of income and expense” in the context of IAS 1:97 as referenced in IFRS 8:23(f). The staff observed that, in applying IFRS 8:23(f), an entity applies IAS 1:7 and assesses whether the disclosure of information is material in the context of its financial statements taken as a whole. Therefore, an entity assesses whether an “item of income and expense” represents material information based on the financial statements taken as a whole. With regard to aggregation of information, in applying IFRS 8:23(f) and determining material items of income and expense to disclose, an entity applies the requirements in IAS 1:29-31 when considering how to aggregate information in the financial statements.
With respect to Fact Pattern 3a, the staff did not agree with the view of respondents that material items of income and expense in IFRS 8:23(f) are those that arise from only a qualitatively material event or circumstance, because a qualitative-only assessment of materiality does not align with the definition of “material” in IAS 1:7. Therefore, the entity considers both qualitative and quantitative factors, representing the nature or magnitude of information (or both) in assessing whether an item of income and expense is material.
With respect to Fact Pattern 2, IAS 1:97 sets out the overarching principle for when separate disclosure of an “item of income or expense” is required in the financial statements and are not necessarily ‘top-up’ requirements. However, IAS 1 sets out overarching principles that an entity needs to consider providing users of financial statements with the information they need to understand the entity’s financial statements. Therefore, an entity cannot omit material items on the basis that those items are presented or disclosed applying a requirement in IFRS Accounting Standards other than IAS 1:97.
Based on the analysis, the staff considered that the principles and requirements in IFRS 8 provide an adequate basis for an entity to determine required disclosures applying IFRS 8:23(f). Therefore, this matter does not satisfy the criterion in the Due Process Handbook to be added as a standard-setting project.
The staff recommended that the IFRS IC does not to add a standard-setting project to the work plan and instead publishes a tentative agenda decision outlining how an entity applies IFRS 8:23.
IFRS IC members had a lively discussion on this agenda paper, and they had diverse views on it. The focus of their discussion was the interpretation and application of IFRS 8:23(f).
Some IFRS IC members considered the paper well written and the analysis in the paper as helpful to users to understand the application of IFRS 8:23. They agreed that there is diversity in practice in respect of what kind of information should be disclosed under IFRS 8:23. The analysis makes it clear that the disclosure under IFRS 8:23(f) for material items should be at the financial statement level as a whole and not at the segment level. Granular information is provided in the segment disclosures of some entities, and it is therefore a good idea to clarify this in the agenda decision.
However, some IFRS IC members were of the view that the paper could bring confusion and result in diversity in the interpretation of the agenda decision. One IFRS IC member expressed concerns on the logic of the agenda decision. He said that the agenda decision is not answering the questions submitted and even the IFRS IC members had different interpretations of the requirements. He agreed that “material” should be based on quantitative and quantitative consideration. He also agreed that entities cannot directly refer to US GAAP for “unusual items”. However, given it is not clear which items are in IAS 1:97, it might be reasonable to consider US GAAP where “unusual items” are well defined. In contrast, a few IFRS IC members did not think this analogy was appropriate given IAS 1:97 refers to IAS 1:98, which distinguishes it from US GAAP because the items listed in IAS 1:98 do not all look like “unusual items” as defined in US GAAP.
Several IFRS IC members commented that if an entity chooses to disclose additional items under IAS 1:97 in the notes to the financial statements, it would mean that these items are considered material. Therefore, readers may misinterpret that all items included in the financial statements (including the notes) represent material items under IFRS 8:23(f) and should be presented in a segment. A number of IFRS IC members did not disagree with the technical analysis regarding the interpretation of IFRS 8:23(f), but they shared the same concern that all items could be interpreted to be disclosed because there is a lack of clarify for the interaction of IFRS 8:23(f) and IAS 1:97. It would be helpful to point out that the “material” items are referring to the financial statements as a whole and not only those items disclosed under IAS 1:97. Therefore, one of the IFRS IC members suggested removing the reference to IAS 1:97 from IFRS 8:23(f) if they are referring to the “material” items generically under IAS 1. However, several IFRS IC members did not consider it problematic to refer to IAS 1:97 and at the same time, they did not interpret IFRS 8:23(f) as requiring disclosure of all items in the relevant notes to the financial statements if they are considered material under IAS 1:97. One of the IFRS IC members suggested to add a sentence to explain in order to bridge the expectation gap.
Moreover, one IFRS IC member raised the concern that there is ambiguity about whether ‘material’ should be by function or nature or both. Some of these entities may interpret that both items material by function (in a scenario when profit or loss is presented by function) and by nature (those items identified as material by nature and disclosed in the notes) would be required to be disclosed in segmental information.
Several IFRS IC members considered that standard-setting is needed due to the great diversity in practice and there being no consensus on what items are required to be disclosed under IFRS 8:23(f), even for the IFRS IC members.
On the other hand, the remaining IFRS IC members did not consider the standards are broken but acknowledged that there is diversity in interpretation. One of these members said that although the analysis in the agenda paper is not what the market is doing, it is the appropriate interpretation of IFRS 8:23. These IFRS IC members considered standard-setting not to be a productive path and preferred publishing an agenda decision instead.
With so many concerns raised by the IFRS IC members on the agenda decision, the Chair said that even if the tentative agenda decision was published, it would not stop the IASB from considering a standard-setting project like it had done before (e.g. supplier finance arrangement).
7 out of 13 IFRS IC members agreed with publishing the tentative agenda decision, the remaining IFRS IC members considered standard-setting is required.
In its June 2023 meeting, the IFRS IC discussed a submission about how an entity applies IAS 27 to account for a merger with its subsidiary (which contains a business) in its separate financial statements and whether the merger should be accounted for as a business combination applying IFRS 3 or whether the parent entity should recognise the subsidiary’s assets and liabilities at their previous carrying amounts (carrying amount method). 14 comment letters were received and the respondents provided comments on different perspectives of the agenda decision.
In its June 2023 meeting, the IFRS IC discussed a submission about how an entity applies IAS 27 to account for a merger with its subsidiary (which contains a business) in its separate financial statements and whether the merger should be accounted for as a business combination applying IFRS 3 or whether the parent entity should recognise the subsidiary’s assets and liabilities at their previous carrying amounts (carrying amount method).
14 comment letters were received and the respondents provided comments on different perspectives of the agenda decision.
Seven respondents agreed with the IFRS IC’s decision not to add the matter to its standard-setting agenda. Some respondents said that merger transactions are prevalent and most of them agreed with the IFRS IC’s observation about entities not generally applying the acquisition method to account for the merger transaction. However, some of those respondents suggested that the agenda decision should explain how an entity applies IFRS Accounting Standards when considering the matter described in the submission. The feedback on the tentative agenda decision supports the IFRS IC’s conclusion that the matter does not have widespread effect. Consistent with the IFRS IC’s decisions on previous issues that did not meet the ‘widespread and material’ criterion, the staff is of the view that the IFRS IC should not include explanatory material in this agenda decision.
Moreover, some respondents said that there is diversity in how entities apply the carrying amount method and generally suggested clarifying how entities apply the carrying amount method and/or referring the matter to the IASB. A few respondents suggested that the IASB consider this matter as part of the IASB’s Business Combinations under Common Control (BCUCC) project. The staff considered addressing how entities should apply the carrying amount method to the merger transaction would go beyond the question asked and therefore recommended not to do so. Moreover, the staff explained the IASB did consider how an entity applies the carrying amount method as part of its BCUCC project. However, the IASB decided to discontinue the BCUCC project at its November 2023 meeting. Consequently, the staff is of the view that the IFRS IC would not be able to address this matter efficiently within the confines of existing IFRS Accounting Standards and the Conceptual Framework.
At the same time, the staff acknowledged that the current drafting of the agenda decision may incorrectly imply that the IFRC IC also observed no diversity in how entities apply the carrying amount method, while the IFRS IC’s observations were limited to whether entities apply the acquisition method. The agenda decision will be updated to avoid misinterpretation.
The staff recommended finalising the agenda decision with some changes compared to the wording of the tentative agenda decision.
IFRS IC members generally agreed with finalising the agenda decision.
One IFRS IC member commented that given the IFRS IC does not provide technical advice on the issue submitted, adding a statement would be helpful to make it clear that no explanatory material is given on this issue. The staff had concerns about the suggestion because the IFRS IC did not do this for previously published agenda decisions when no technical analysis is given. The staff therefore considered this addition as not necessary.
Another IFRS IC member commented that such a fact pattern could occur frequently in unlisted entities and was not convinced that it is uncommon. The staff responded that the outreach and comment letters indicated that the matter is not widespread which did not mean that it is not frequent. However, entities rarely apply IFRS 3 acquisition accounting and therefore no diversity is noted. They acknowledged that someone might consider the acquisition method to be appropriate, but they have no evidence that it is widespread. One IFRS IC member commented that this matter is an important issue and there is diversity on how entities apply the carrying amount method.
The IFRS IC, by a vote of 12 out of 13, decided to finalise the agenda decision.
The update from September 2023 meeting was presented to the IFRS IC.
IFRIC Update September 2023 (Agenda Paper 1)
This paper was not discussed.
Work in progress (Agenda Paper 8)
There was no new matter that has not yet been presented to the IFRS IC. This paper was not discussed.
The IASB is conducting a project to make three targeted improvements to IAS 37. One of these improvements would affect a criterion for recognising a provision in the financial statements—specifically, the requirement for an entity to have a present obligation as a result of a past event.
The IASB is conducting a project to make three targeted improvements to IAS 37. One of these improvements would affect a criterion for recognising a provision in the financial statements—specifically, the requirement for an entity to have a present obligation as a result of a past event.
The staff had the following questions to the IFRS IC on the initial suggestion for possible amendments to IAS 37:
In addition, the drafting suggestions in Appendix A to Agenda Paper 6A include requirements that specify when an entity has a present obligation as a result of a past event. Several of those requirements might be applicable to provisions for costs payable if a measure of an entity’s activity exceeds a specified threshold. The IASB could consider adding specific application requirements for such circumstances in IAS 37.
The staff had the following questions to the IFRS IC on “thresholds”:
IFRS IC members generally supported updating IAS 37. They considered it would be good to include the concept in the Conceptual Framework to IAS 37 and to be consistent with IFRIC 21 Levies (which would be withdrawn if the amendments are concluded). IFRS IC members expressed their views on both the proposed amendments and proposed update to the illustrative examples (“IE”) accompanying IAS 37.
One IFRS IC member suggested that the general guidance that a provision is not recognised for costs to be incurred in the future is not clear enough in the standard. She suggested adding this important principle at the beginning of the standard to emphasise the importance of it. Another IFRS IC member said that he struggled with the fact that the proposed IAS 37:16C indicated that there is an obligation for an outflow whenever there is an unfair exchange. He cited an example that fair value of the consideration of an executory contract might decrease after the executory contract is signed. He was not convinced that everything unfavorable would result in recognising a provision for that contract. Both costs and benefits from the contract should be considered for a provision to be recognised. Another member shared the same thought and specifically pointed out that many intergroup transactions might be “unfavourable” and suggested to exclude them from the assessment under the proposed IAS 37:16C. Several IFRS IC members said there were inconsistencies among the proposed paragraphs 14, 18, 19A and 19B. They said it is important to identify the action taken that results in a present obligation, but it is not clear how to identify this in these paragraphs.
One IFRS IC member suggested adding a decision tree in IAS 37 to illustrate step by step what to consider for a provision to be recognised. The Chair and some other IFRS IC members favoured this idea and the staff said it is an insightful idea.
A few IFRS IC members suggested that more work is needed to clarify the differences between “exchange” and “transfer”. When an asset acquired meets the recognition criteria and there will be cash to pay for it, it is clearly an “exchange”. On the other hand, it is a “transfer” of resources when entities are required to pay for something that is not an asset.
IFRS IC members had some comments on proposed amendments/additions to the illustrative examples.
Illustrative Example 5: One IFRS IC member said the critical point which results in a provision would be “no practical ability to avoid an outflow of resource” instead of “the closing down of the division” and suggested to amend the example for this.
Illustrative Example 13C: One IFRS IC member had concerns about using a balance sheet position to illustrate the cumulative amount of a provision when an obligation could be time-apportioned. He was of the view that it is easier to use profit or loss items to illustrate it. However, another IFRS IC member considered it helpful to use balance sheet positions for illustrations because some charges levied on the actions of entities in certain industries are based on the liabilities position.
Illustrative Example 12: One IFRS IC member considered that the conclusion that there is no provision because there is a further condition which is outside the control for the entity is not consistent with the proposed IAS 37:14F that would require a provision to be made when the responsibility is conditional, but the entity has no practical ability to avoid it.
Illustrative Example 13E: One IFRS IC member said it is not clear whether it is “not disposing the property” or “retaining of the legal ownership” that is the past event which results in the obligation. He said it is not clear why the provision is made on 1 January 20X1 but not at the prior year end when the entity also holds the legal ownership of the property. The IFRS IC member suggested to make it clearer.
One member compared Illustrative Example 12 and Illustrative Example 13B and questioned why the conclusion is different for them given they both have double trigger circumstances. Illustrative Example 12 concluded that the entity waits until a second triggering event to make the provision while Illustrative Example 13B concluded that the provision should be made because the second condition has not been met. It looked like the difference between the two examples is the one where the second triggering event happened two years later while the other one is happening within one year. The staff replied that there is only one triggering event in Illustrative Example 13B which is the selling in market in the current year. Therefore, they are not contradictory to each other.
Some IFRS IC members suggested that it would be helpful to add examples for interim periods when the compliance period is for one year or each year for a multi-year levy/emission obligation. There was quite a lot of debate on whether provisions should be made based on conditions accumulating over the course of the compliance period. However, one IFRS IC member said that the examples proposed already provided enough information to help users to understand what you should do at interim date. If entities are at a point part way through the compliance period, they should consider IAS 37:14B to assess whether there is a practical ability to avoid outflow of resources. Another IFRS IC member suggested expanding the reasoning in the conclusion of each illustrative example would be helpful to users to under the rationale for them.
The staff acknowledged that the project is at the initial stage and that there is still a large drafting exercise to arrive at the final text of the proposed amendments. The input by IFRS IC members are useful to try to address the common concerns raised.
In July 2023, the IASB added a project to its work plan to research whether narrow-scope amendments to IFRS 9 could be made to better reflect how financial statements are affected by purchase power agreements (PPAs) (both physical and virtual). The project team has conducted further research on prevalence of PPAs and how to restrict the scope of any potential standard-setting solution to limit the risk of unintended consequences for other contracts or transactions to purchase non-financial items. As part of the research, the IASB seeks IFRS IC members’ input into the additional research performed.
In July 2023, the IASB added a project to its work plan to research whether narrow-scope amendments to IFRS 9 could be made to better reflect how financial statements are affected by purchase power agreements (PPAs) (both physical and virtual). The project team has conducted further research on prevalence of PPAs and how to restrict the scope of any potential standard-setting solution to limit the risk of unintended consequences for other contracts or transactions to purchase non-financial items. As part of the research, the IASB seeks IFRS IC members’ input into the additional research performed.
In the agenda paper, summary of research findings in respect of prevalence, business strategies and risk management—producers, business strategies and risk management—consumers, scope of, and approach to, potential narrow-scope standard-setting has been presented to the IFRS IC. The questions to the IFRS IC are as follows:
Are there any other characteristics that IFRS IC members would suggest and why?
IFRS IC members made valuable contributions to the project.
A few IFRS IC members considered that IFRS 9 has clear principles on how to determine whether the contracts meet the own use exception and how they should be accounted for. These kinds of contracts are not uncommon. One of which are energy contracts which have been prevalent for a long time. The market is changing and some different circumstances arise, but the IFRS IC members said that the principles in IFRS 9 can still be applied to them. However, many stakeholders did not like the consequence that IFRS 9 applies. They were of the view that standard-setting is not required and did not favour any of the proposed approaches. An IFRS IC member shared the same view but understood why this issue is brought into discussion.
The staff explained that PPAs are different from other commodity contracts, and they have specific characteristics, i.e. not being able to be stored and the sale of them is “forced”. This is because if entities cannot use the power at the time it is produced, they have to sell it. The remaining IFRS IC members agreed with the staff that PPAs are different and there is an urgent need to resolve their accounting. These IFRS IC members had different views on the options to explore.
One IFRS IC member said that short term contracts that create a mismatch with the usage are a common issue such as in wind and solar power generation. This was incredibly unpredictable, according to the IFRS IC member. He questioned why the discussion only focused on long-term contracts and he was of the view that long-term would be more predictable on average. The staff responded that the average output over long-term contract could be predicted but entities do not know the specificity on how much and at what time (for a point in time recognition).
Some IFRS IC members considered physical and virtual PPAs should be addressed together. There is no choice for some markets for entities to choose whether entering into physical or virtual PPAs for certain types of power. It would be unfair to leave the virtual ones unattended. Nonetheless, a number of IFRS IC members said that the accounting of virtual PPAs is different from that of physical PPAs. Addressing them together would delay the progress of determining the appropriate accounting treatment for each type of contract.
Many IFRS IC members agreed that Option 1 is an ideal option because it is a principles-based approach which fits with what the IFRS Accounting Standards are currently based on. However, some of them were of the view that this approach would be the most time consuming one and not cost effective.
Some IFRS IC members were supportive of Option 2. One of them said that it is not easy to prove “highly probable” if hedging were to apply and recommended that the IASB provide guidance on that. He said the business model test in IFRS 9 would be useful to be introduced to the hedging of PPAs and a threshold could be added. If entities know how much they are going to use, that portion could be hedged. This would reflect the economics of the market more.
There was one IFRS IC member who said it would be ideal if Options 1 and 2 could be combined, i.e. hedging should be allowed for physical PPAs that fail Option 1.
For Option 3, some IFRS IC members said that they did not support it because it excludes all PPAs without assessing consumption or usage. However, most IFRS IC members favoured this option because they thought it is the quickest way to resolve this urgent matter and to give direction to entities who enter into such kind of PPA. Some of those that supported the option suggested not exempting all PPAs but only those with certain characteristics. A few of them suggested requiring entities to disclose PPAs when they are temporarily scoped out of IFRS 9. Another IFRS IC member suggested Option 3 could be temporary and the IASB could develop more principles-based requirements when the temporary exception is in place for a period of time.
The Chair said entities should apply the principle-based standards to their PPAs. The accounting outcome should be the consequence but not the driver of whether an entity decides to enter into the contract. However, he agreed that it is worthwhile to see what can be done to address unfavorable outcomes for this issue.
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