IASB Update December 2019

Implementation matters (Agenda Paper 12)

The Board met on 11 December 2019 to discuss implementation matters. 

Onerous Contracts—Cost of Fulfilling a Contract (Amendments to IAS 37) (Agenda Paper 12A)

The Board discussed the effective date for the amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The Board also discussed due process, including permission to begin the balloting process.

The amendments to IAS 37 clarify that the ‘cost of fulfilling’ a contract for the purpose of assessing whether that contract is onerous comprises the costs that relate directly to the contract.

Effective date

The Board tentatively decided that entities should apply the amendments for annual periods beginning on or after 1 January 2022, with earlier application permitted.

All 14 Board members agreed with this decision.

Due process

The Board agreed that the amendments do not require re-exposure.

All 14 Board members agreed with this decision.

All 14 Board members confirmed they were satisfied the Board has complied with the applicable due process requirements and has undertaken sufficient consultation and analysis to begin the balloting process for the amendments.

No Board members indicated they intend to dissent from the issuance of the amendments.

Next step

The Board plans to issue the amendments in the second quarter of 2020.

Annual Improvements to IFRS Standards 2018–2020 (Agenda Paper 12B)

The Board discussed the effective date for Annual Improvements to IFRS Standards 2018–2020. The Board also discussed due process, including permission to begin the balloting process.

Annual Improvements to IFRS Standards 2018–2020 includes the following amendments:

1. Subsidiary as a First-Time Adopter, which would amend IFRS 1 First-time Adoption of International Financial Reporting Standards;
2. Fees in the ’10 per cent’ Test for Derecognition of Financial Liabilities which would amend IFRS 9 Financial Instruments;
3. Lease Incentives, which would amend Illustrative Examples accompanying IFRS 16 Leases; and
4. Taxation in Fair Value Measurements, which would amend IAS 41 Agriculture.

Effective date

The Board tentatively decided that entities should apply the amendments to IFRS 1, IFRS 9 and IAS 41 for annual periods beginning on or after 1 January 2022, with earlier application permitted.

All 14 Board members agreed with this decision.

Due process

The Board agreed that the amendments:

1. meet the criteria for inclusion in the annual improvements process; and
2. do not require re-exposure.

All 14 Board members agreed with these decisions.

All 14 Board members confirmed they were satisfied the Board has complied with the applicable due process requirements and has undertaken sufficient consultation and analysis to begin the balloting process for Annual Improvements to IFRS Standards 2018–2020.

No Board members indicated they intend to dissent from the issuance of Annual Improvements to IFRS Standards 2018–2020.

Next step

The Board plans to issue Annual Improvements to IFRS Standards 2018–2020 in the second quarter of 2020.

Accounting Policies and Accounting Estimates (Amendments to IAS 8) (Agenda Paper 26)

The Board met on 11 December 2019 to discuss transition requirements and effective date for the amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. The Board also discussed due process, including permission to begin the balloting process.

Transition and effective date

The Board tentatively decided to:

1. require entities to apply the amendments only to changes in accounting policies and changes in accounting estimates that occur on or after the start of the first annual period in which the entity applies the amendments;
2. not include the last two sentences of proposed paragraph 54F(b) of the Exposure Draft;
3. require entities to apply the amendments to annual periods beginning on or after 1 January 2022, with earlier application permitted; and
4. not add a requirement for entities to disclose the fact that they have applied the amendments for an earlier period.

All 14 Board members agreed with these decisions.

Due process

All 14 Board members confirmed they were satisfied the Board has complied with the applicable due process requirements and has undertaken sufficient consultation and analysis to begin the balloting process for the amendments to IAS 8.

No Board members indicated they intend to dissent from the issuance of the amendments to IAS 8.

Next step

The Board plans to issue the amendments in the second quarter of 2020.

Financial Instruments with Characteristics of Equity (Agenda Paper 5)

The Board met on 11 December 2019 to discuss potential clarifications to IAS 32 Financial Instruments: Presentation that would help address challenges in practice in classifying financial instruments that will or may be settled in the issuer’s own equity instruments. In particular, the Board explored potential clarifications to the underlying principle for classifying derivatives on own equity.

The Board was not asked to make any decisions.

Next steps

The Board will further discuss this topic including applying the potential clarifications to common challenges in practice.

Amendments to IFRS 17 (Agenda Paper 2)

The Board met on 11 December 2019 to discuss the feedback on its Exposure Draft Amendments to IFRS 17 relating to:

1. proposed amendments for the Board to finalise without substantive redeliberation;
2. insurance acquisition cash flows; and
3. reinsurance contracts held—recovery of losses.

Proposed amendments to be finalised (Agenda Paper 2A)

The Board tentatively decided to finalise the following amendments to IFRS 17 Insurance Contracts as proposed in the Exposure Draft.

1. a scope exclusion for loans;
2. the contractual service margin attributable to investment services—coverage units for insurance contracts with direct participation features;
3. presentation in the statement of financial position—by portfolio instead of group level;
4. the applicability of the risk mitigation option—for reinsurance contracts held;
5. transition reliefs for business combinations; and
6. transition reliefs for the risk mitigation option—the application from the transition date and the option to apply the fair value approach.

All 14 Board members agreed with these decisions.

Expected recovery of insurance acquisition cash flows (Agenda Paper 2B)

The Board tentatively decided to:

1. finalise the proposed amendment to IFRS 17 that would require an entity to allocate insurance acquisition cash flows directly attributable to a group of insurance contracts applying a systematic and rational method:
   1. to that group; and
   2. to any groups that include contracts that are expected to arise from renewals of the contracts in that group.
2. clarify that:
   1. the amounts allocated to a group of insurance contracts cannot be revised after the group has been recognised; and
   2. the amounts allocated to groups of insurance contracts yet to be recognised should be revised at each reporting date, to reflect any change in the assumptions that determine the inputs to the method of allocation.
3. confirm that the unit of account for an asset for insurance acquisition cash flows is the group of insurance contracts to which those cash flows have been allocated.
4. finalise the proposed requirements for an entity to assess the recoverability of an asset for insurance acquisition cash flows if facts and circumstances indicate the asset may be impaired.
5. finalise the proposed requirements for an entity to disclose:
   1. a reconciliation from the opening to the closing balance of assets for insurance acquisition cash flows, showing separately any recognition of impairment losses and reversals of impairment losses; and
   2. quantitative information, in appropriate time bands, about when an entity expects to derecognise an asset for insurance acquisition cash flows and include those cash flows in the measurement of the group of insurance contracts to which they are allocated.
6. retain, unchanged, the requirement in IFRS 17 for an entity to present any assets for insurance acquisition cash flows in the carrying amount of the related insurance contracts.

All 14 Board members agreed with these decisions.

Reinsurance contracts held—recovery of losses (Agenda Paper 2C)

The Board tentatively decided to:

1. extend the scope of the proposed amendment to IFRS 17 to require an entity to adjust the contractual service margin of a group of reinsurance contracts held, and as a result recognise income, when the entity recognises a loss on initial recognition of an onerous group of underlying insurance contracts, or on addition of onerous contracts to that group.
2. amend the proposed calculation of the income, as a consequence of the extension of the scope of the proposed amendment, to require an entity to determine the amount of a loss recovered from a reinsurance contract held by multiplying:
   1. the loss recognised on underlying insurance contracts; and
   2. the percentage of claims on underlying insurance contracts the entity expects to recover from the reinsurance contract held.
3. confirm that the amendment to IFRS 17 described in paragraph (a) would apply only when the reinsurance contract held is recognised before or at the same time as the loss is recognised on the underlying insurance contracts.

The Board also tentatively decided to: 

1. omit the proposed footnote to paragraph BC304 of the Basis for Conclusions on IFRS 17 Insurance Contracts.
2. clarify, in the final amendments to IFRS 17, that paragraph 66(c)(ii) of IFRS 17—for subsequent measurement of a group of reinsurance contracts held when a group of underlying insurance contracts become onerous—applies also when underlying insurance contracts are measured applying the premium allocation approach.

All 14 Board members agreed with these decisions.

Next steps

At its future meetings, the Board will redeliberate the remaining topics for discussion in response to the feedback on the Exposure Draft Amendments to IFRS 17.

Updating a Reference to the Conceptual Framework (Amendments to IFRS 3) (Agenda Paper 10)

The Board met on 11 December 2019 to discuss feedback on the Exposure Draft Reference to the Conceptual Framework, in which the Board proposed amendments to IFRS 3 Business Combinations.

The Board tentatively decided to confirm the proposals set out in the Exposure Draft to:

1. add to IFRS 3 an exception to its recognition principle, but only for liabilities and contingent liabilities within the scope of IAS 37 Provisions, Contingent Liabilities and Contingent Assets or IFRIC 21 Levies. The Board tentatively decided not to add an exception for current tax assets and liabilities within the scope of IFRIC 23 Uncertainty over Income Tax Treatments.
2. locate all the recognition requirements for provisions, contingent liabilities and contingent assets within the section headed ‘Exception to the recognition principle’.

All 14 Board members agreed with these decisions.

The Board also tentatively decided to delete paragraph BC125 from the Basis for Conclusions accompanying IFRS 3.

Thirteen of 14 Board members agreed and one disagreed with this decision.

Next steps

At a future meeting, the Board will discuss the transition requirements and effective date for the amendments, and consider whether it has complied with its due process requirements for this project.

2019 Comprehensive Review of the IFRS for SMEs Standard (Agenda Paper 30)

The Board met on 11 December 2019 to review the steps undertaken in developing the draft Request for Information, publication of which would complete the first phase of the 2019 Comprehensive Review of the IFRS for SMEs Standard.

Development of the draft Request for Information and permission to publish (Agenda Paper 30A)

The Board was informed that the draft Request for Information was developed to reflect both the Board’s discussions and input from the SME Implementation Group.

The Board confirmed it was satisfied with the steps undertaken in developing the draft Request for Information and that it has complied with the applicable due process requirements. The Board:

1. decided to allow 180 days for comment on the Request for Information. All 14 Board members agreed with this decision.
2. instructed the staff to publish the Request for Information for public comment. All 14 Board members agreed with this decision.

Next step

The Board will publish the Request for Information in January 2020.

IBOR Reform and its Effects on Financial Reporting—Phase 2 (Agenda Paper 14)

The Board met on 11 December 2019 to discuss the hedge accounting issues that could result from the reform of interest rate benchmarks (IBOR reform). Agenda Paper 14 provided a summary of the Board’s tentative decisions to date for information only.

Hedge accounting (Agenda Paper 14A)

The Board tentatively decided to:

1. retain the requirements in IFRS 9 Financial Instruments and IAS 39 Financial Instruments: Recognition and Measurement that determine whether a hedging relationship should be discontinued after:
   1. a substantial modification that results in derecognition of the hedged item or the hedging instrument; or
   2. a modification that does not result in derecognition and is not required as a direct consequence of IBOR reform or is not done on an economically equivalent basis.
2. amend IFRS 9 and IAS 39 to provide an exception from the current requirements so that the following changes in hedge documentation necessary to reflect modifications that are required as a direct consequence of IBOR reform and are done on an economically equivalent basis do not result in the discontinuation of hedge accounting:
   1. redefining the hedged risk to refer to an alternative benchmark rate; and
   2. redefining the description of the hedging instruments or the hedged items to refer to the alternative benchmark rate.
3. amend IAS 39 to provide an exception from the current requirements so that a change to the method used for assessing hedge effectiveness does not result in the discontinuation of hedge accounting when, due to IBOR reform, it is impractical to continue using the same method defined in the hedge documentation at the inception of the hedging relationship.

The Board also tentatively decided to amend IAS 39 to require an entity changing the hedged risk in the hedge documentation for a portfolio hedge of interest rate risk, as noted in (b)(i) above, to assume that all items included in the portfolio of financial assets or financial liabilities share the risk being hedged.

All 14 Board members agreed with these decisions.

For changes in hedge documentation noted in (b) and (c), an entity is required to continue to apply requirements in IFRS Standards to measure the hedging instrument and the hedged item and to recognise hedge ineffectiveness that may arise due to any consequential valuation adjustments required by IFRS 9 and IAS 39.

Thirteen of 14 Board members agreed with this decision. One Board member was absent.

With regard to hedges of a group of items, the Board tentatively decided to amend IFRS 9 and IAS 39 so that, when items within a designated group are amended for modifications that are required as a direct consequence of IBOR reform and are done on an economically equivalent basis, an entity is permitted to:

1. amend the hedge documentation to define the hedged items by way of two subgroups within the designated group of items—one referencing the original interest rate benchmark and the other, the alternative benchmark rate;
2. perform the proportionality test separately for each subgroup of items designated in the hedging relationship;
3. treat the hedge designation as a single hedging relationship and amend the hypothetical derivative to reflect the combination of the subgroups of items; and
4. treat IBOR and its alternative benchmark rate as if they share similar risk characteristics (but only in relation to a group of items designated under IAS 39).

All 14 Board members agreed with these decisions.

Next steps

At future Board meetings, the Board will discuss:

1. when the application of the exceptions provided in Phase 1 of the project will expire;
2. the impact of IBOR reform on other IFRS Standards;
3. disclosures; and
4. transition and effective date of the proposed amendments.

Subsidiaries that are SMEs (Agenda Paper 31)

The Board met on 12 December 2019 to receive a presentation by Kris Peach, Chair of the Australian Accounting Standards Board (AASB) on the AASB’s proposed simplified disclosure standard.

The Board was not asked to make any decisions.

Next step

The Board will be asked whether it wishes to move the Subsidiaries that are SMEs project to the standard-setting programme.

Business Combinations under Common Control (Agenda Papers 23 and 23A)

The Board met on 12 December 2019 to discuss how the receiving entity in a business combination under common control should apply a current value approach based on the acquisition method set out in IFRS 3 Business Combinations.

The Board tentatively decided:

1. to require the receiving entity to recognise any excess fair value of the acquired identifiable net assets over the fair value of the consideration transferred as an increase in the receiving entity’s equity (contribution), and not as a gain on a bargain purchase in the statement of profit or loss. Eleven of 14 Board members agreed and three disagreed with this decision.
2. not to require the receiving entity to identify, measure and recognise a distribution. All 14 Board members agreed with this decision.

The Board will discuss at a future meeting what information about the transaction price the receiving entity should provide in the notes to its financial statements to help users assess whether the fair value of the consideration transferred exceeds the fair value of the acquired interest.

Next step

At future meetings, the Board will discuss how a predecessor approach should be applied and what information should be provided in the notes to the financial statements.