IASB Update June 2019

Primary Financial Statements (Agenda Paper 21)

The Board met on 17 June 2019 to discuss the:

1. classification of exchange differences, and gains and losses on derivatives, in the statement(s) of financial performance;
2. classification of expenses relating to investments;
3. income tax effects relating to management performance measures;
4. differences between management performance measures and segment measures of profit or loss; and
5. transition requirements and the effective date of any new or amended Standard arising from the project.

Classification of exchange differences, and gains and losses on derivatives, in the statement(s) of financial performance (Agenda Paper 21A)

The Board tentatively decided:

1. to clarify that an entity is required to classify foreign exchange differences included in profit or loss in the same sections of the statement(s) of financial performance as the income and expenses arising from the items that gave rise to the foreign exchange differences. All 14 Board members agreed with this decision.
2. for financial instruments designated as hedging instruments in accordance with IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments, to require an entity to classify gains and losses included in profit or loss on those hedging instruments:
   1. in the operating section, if the instrument is used to manage risks relating to the entity’s main business activities—except when doing so would require the grossing up of gains and losses;
   2. in the financing section, if the instrument is used to manage risks relating to the entity’s financing activities—except when doing so would require the grossing up of gains and losses; or
   3. in the investing section in all other cases—including in the circumstances set out in (i) and (ii) involving the grossing up of gains and losses.

   All 14 Board members agreed with this decision.

3. to require an entity to also adopt the classification set out in (b) for gains and losses included in profit or loss on a non-designated derivative—except when such a classification would involve undue cost or effort. In such cases, an entity shall classify gains and losses on the derivative in the investing section. Thirteen of 14 Board members agreed and one disagreed with this decision.
4. to clarify that an entity is required to classify gains and losses included in profit or loss on a non-designated non-derivative financial instrument in accordance with the Board’s definitions of the sections. All 14 Board members agreed with this decision.

Expenses from investments (Agenda Paper 21B)

The Board tentatively decided to include incremental expenses related to an entity’s investments in the investing section of the statement(s) of financial performance. Incremental expenses are those expenses that the entity would not have incurred had the investments not been made. Nine of 14 Board members agreed and five disagreed with this decision.

Determining the income tax effect of management performance measure adjustments (Agenda Paper 21C)

The Board tentatively decided to:

1. specify that the income tax effect of items reconciling the management performance measure to the most directly comparable total or subtotal defined by IFRS Standards should be determined based on a reasonable pro rata allocation of the current and deferred tax of the entity in the tax jurisdiction concerned; or by another method that achieves a more appropriate allocation in the circumstances. Twelve of 14 Board members agreed and two disagreed with this decision.
2. require an entity to disclose how, in its particular circumstances, the income tax effect of management performance measure adjustments has been determined.

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

Differences between management performance measures and segment measures of profit or loss (Agenda Paper 21D)

The Board tentatively decided not to require an entity to disclose how and why a management performance measure differs from the total of the measures of profit or loss for its reportable segments. (This decision reverses a previous Board decision.) All 14 Board members agreed with this decision.

Transition requirements and effective date (Agenda Paper 21E)

The Board tentatively decided to:

1. require an entity to apply the general requirements concerning the retrospective application of changes in accounting policies, as set out in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, to new requirements arising from this project as follows:
   1. requirements other than those for unusual items and management performance measures. All 14 Board members agreed with this decision.
   2. requirements for unusual items. Twelve of 14 Board members agreed and two disagreed with this decision.
   3. requirements for management performance measures. Eight of 14 Board members agreed and six disagreed with this decision.
2. provide an implementation period of 18–24 months beginning from the date of issue of any new or amended Standard(s) arising from the project. Eleven of 14 Board members agreed and three disagreed with this decision.

Next step

The Board will discuss at a future meeting permission to begin the balloting process for the exposure draft.

Rate-regulated Activities (Agenda Paper 9)

Education session (Agenda Paper 9F)

The Board met on 17 June 2019 for an educational session on the Rate-regulated Activities project. The session summarised the main differences between:

1. the proposals for the accounting model (model) being developed for regulatory assets and regulatory liabilities arising when an entity subject to defined rate regulation supplies goods or services; and
2. requirements contained in Topic 980 Regulated Operations in the US Financial Accounting Standards Board’s Accounting Standards Codification.

The Board was not asked to make any decisions.

Package of proposals (Agenda Papers 9A-9E)

The Board met again on 18 June 2019 to discuss further analysis of the principles underlying the model in response to feedback from the May 2019 Board meeting. 

Agenda Paper 9G provided a summary of the Board’s tentative decisions to date, and how they would be affected by the staff recommendations discussed in this meeting.

General principles, including scope and definitions of regulatory assets and regulatory liabilities (Agenda Papers 9A-9B)

The Board discussed a refined description of the incremental rights and incremental obligations arising when an entity supplies goods or services in one period but charges some or all of the total allowed compensation for those goods or services to customers through the regulated rate(s) in a different period.  The Board tentatively decided:

1. to update the model’s scope to reflect the refined description and to confirm that the accounting model should apply to defined rate regulation established through a formal regulatory framework that:
   1. is binding on both the entity and the regulator; and
   2. establishes a basis for setting the rate that gives rise to the entity’s rights to add amounts to, and obligations to deduct amounts from, future rate(s) because of goods or services already supplied or because of amounts already charged to customers. 
2. to update the definitions of regulatory assets and regulatory liabilities to reflect the refined description as follows:
   1. Regulatory asset—the present right to add an amount to the rate(s) to be charged to customers in future periods because the total allowed compensation for the goods or services already supplied exceeds the amount already charged to customers; and
   2. Regulatory liability—the present obligation to deduct an amount from the rate(s) to be charged to customers in future periods because the total allowed compensation for the goods or services already supplied is lower than the amount already charged to customers; and
3. not to develop specific requirements for derecognition of regulatory assets and regulatory liabilities, or for fines imposed on an entity that are payable through deductions from the rate(s) charged to customers.

All 14 Board members agreed with these decisions.

The Board also tentatively decided to confirm that the model would use as its unit of account the incremental rights and obligations arising from individual timing differences.

Eleven of 14 Board members agreed and three disagreed with this decision.

Measurement (Agenda Papers 9C–9D)

The Board discussed an updated analysis of the model’s measurement principles, together with revised recommendations for how an entity would select a discount rate.  The Board tentatively decided:

1. that an entity would use the model’s proposed cash-flow-based measurement technique to measure all regulatory assets and regulatory liabilities, except those—discussed separately below—that relate to expenses or income to be included in or deducted from the future rate(s) when cash is paid or received;
2. to clarify that, when applying the model’s proposed cash-flow-based measurement technique, an entity should:
   1. include an estimate of all the future cash flows arising from a regulatory asset or regulatory liability, including the cash flows relating to the regulatory interest or regulatory return; and
   2. discount those estimated future cash flows to their present value. If the entity assesses that the regulatory interest rate or return rate is adequate, it should use that rate as the discount rate; and
3. that the model should not include:
   1. a separate step that requires an entity to assess whether the effects of the time value of money and of the uncertainty inherent in the cash flows are significant; or
   2. a practical expedient that would preclude the need for discounting if the effects of the time and risks were not likely to be significant.

All 14 Board members agreed with these decisions.

The Board tentatively decided that the model should:

1. apply an indicator-based approach to assessing whether the regulatory interest rate or return rate is adequate to compensate or charge the entity for the time value of money and for the uncertainty inherent in the cash flows arising from the regulatory asset or regulatory liability; and
2. include guidance on indicators to consider in making that assessment.

Twelve of 14 Board members agreed and two disagreed with these decisions.

The Board also tentatively decided that:

1. if, in limited circumstances, the regulatory interest rate or return rate is inadequate to compensate the entity for the time value of money and uncertainty inherent in the cash flows arising from a regulatory asset, an entity should determine a ‘minimum rate’ to use as the discount rate;
2. the model should specify that the ‘minimum rate’ is one that the entity would expect to receive for a stream of cash flows with the same timing and uncertainty as those of the regulatory asset; and
3. if, in limited circumstances, the regulatory interest rate or return rate provides excess compensation or excess charge for the time value of money and uncertainty inherent in the cash flows, an entity should:
   1. recognise that excess as regulatory income or regulatory expense immediately if it arises from an identifiable transaction or other event, such as the awarding of a bonus or imposition of a penalty; but
   2. use the regulatory interest rate or return rate as the discount rate if that excess does not arise from an identifiable transaction or other event.

All 14 Board members agreed with these decisions.

The Board tentatively decided to describe the cash-flow-based measurement technique as applying a modified historical cost measurement basis.

Eleven of 14 Board members agreed and three disagreed with this decision.

For some regulatory assets and regulatory liabilities, expenses or income will be included in or deducted from future rate(s) when cash is paid or received, but the related liabilities and assets are recognised and measured using requirements in other IFRS Standards.  The Board tentatively decided that an entity should measure these regulatory assets and regulatory liabilities by:

1. using the same measurement basis that the entity uses when measuring the related liability or related asset; and
2. adjusting the measurement of the regulatory asset or regulatory liability to reflect any uncertainty not present in the related liability or related asset.

Eleven of 14 Board members agreed and three disagreed with these decisions.

Presentation and disclosure (Agenda Paper 9E)

The Board discussed an updated analysis about the presentation of regulatory income and regulatory expense and about the informational value of disclosures about regulatory income and regulatory expense arising from regulatory interest or regulatory return.  The Board tentatively:

1. decided that an entity should present in other comprehensive income (OCI) all regulatory income or regulatory expense related to items of expense or income presented in OCI, and present them immediately above or immediately below the related expense or income; and
2. confirmed that an entity should present in profit or loss all other regulatory income or regulatory expense, immediately below the line item(s) for revenue.

Eight of 14 Board members agreed and six disagreed with these decisions.

The Board also tentatively decided that an entity should disclose any regulatory interest or regulatory return arising on regulatory assets or regulatory liabilities as a separate caption in:

1. the breakdown of regulatory income or regulatory expense for the period; or
2. the reconciliation of the carrying amounts of regulatory assets and of regulatory liabilities from the beginning to the end of the period.

All 14 Board members agreed with this decision.

Next step

The Board expects to complete its discussion of the model in Q3 2019, when the staff expect to ask for permission to begin drafting an exposure draft. The Board anticipate publication of the consultation document in Q1 2020.

Goodwill and Impairment (Agenda Paper 18)

The Board met on 19 June 2019 to decide its preliminary views of what to include in the project’s forthcoming discussion paper.

Better disclosures for business combinations (Agenda Paper 18A)

The Board reached a preliminary view that it should develop a proposal to:

1. improve the disclosure objectives of IFRS 3 Business Combinations, with the aim of helping users of financial statements assess the performance of an acquired business after a business combination;
2. require entities to disclose information intended to indicate whether the objectives of a business combination are being achieved; and
3. require entities to disclose:
   1. the amount, or range of amounts, of expected synergies;
   2. any liabilities arising from financing activities and pension obligations assumed; and
   3. an acquiree’s revenue, operating profit or loss before acquisition-related transaction and integration costs, and cash flow from operating activities, after the acquisition date.

All 14 Board members agreed with this decision.

The Board reached a preliminary view that it should develop a proposal to require disclosure of the information the chief operating decision maker, as defined by IFRS 8 Operating Segments, uses to assess the extent to which the objectives of a business combination are being achieved.

Twelve of 14 Board members agreed and two disagreed with this decision.

The Board reached a preliminary view that it should not propose replacing paragraph B64(q)(ii) of IFRS 3 that requires disclosure of the revenue and profit or loss of the combined entity for the current reporting period as though the acquisition date for all  business combinations that occurred during the year had been as of the beginning of the annual reporting period.

Nine of 14 Board members agreed and five disagreed with this decision.

The Board decided to include in the discussion paper a discussion of the rejected proposal to replace paragraph B64(q)(ii) of IFRS 3. That proposal focused on providing information to help users understand the full-year effect of business combinations that occur close to the end of the reporting period or that involve a highly seasonal business.

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

Reintroduction of amortisation of goodwill (Agenda Paper 18B)

The Board reached a preliminary view that it should retain the existing impairment-only model for the subsequent accounting for goodwill, rather than develop a proposal to reintroduce amortisation of goodwill.

However, since only eight of 14 Board members agreed with this decision, and six disagreed, the discussion paper will describe the arguments for both approaches.

Presentation of total equity before goodwill subtotal (Agenda Paper 18C)

The Board reached a preliminary view that it should develop a proposal that an entity should present in its statement of financial position a subtotal of total equity before goodwill.

Eleven of 14 Board members agreed and three disagreed with this decision.

Relief from mandatory annual impairment test (Agenda Paper 18D)

The Board reached a preliminary view that it should develop a proposal:

1. to remove the requirement to carry out an annual quantitative impairment test for goodwill when no indicator of impairment exists; and
2. to apply the same relief to intangible assets with indefinite useful lives and intangible assets not yet available for use.

Eight of 14 Board members agreed and six disagreed with this decision.

Value in use—cash flows from a future restructuring or a future enhancement (Agenda Paper 18E)

IAS 36 Impairment of Assets contains a restriction that excludes from the estimation of value in use of an asset (or a cash-generating unit) the cash flows that are expected to arise from a future restructuring or a future enhancement. The Board reached a preliminary view that it should develop a proposal to remove that restriction.

Eleven of 14 Board members agreed and three disagreed with this decision.

The Board reached a preliminary view that it should not develop proposals:

1. to set a ‘more likely than not’ threshold for the inclusion of cash flows from future restructurings or future enhancements. Twelve of 14 Board members agreed and two disagreed with this decision.
2. to require qualitative disclosures about future restructurings to which an entity is not yet committed and future enhancements of an asset which are yet to occur. Eight of 14 Board members agreed and six disagreed with this decision.

Value in use—use of post-tax inputs (Agenda Paper 18F)

The Board reached a preliminary view that it should develop a proposal:

1. to remove the requirement to use pre-tax inputs and a pre-tax discount rate to calculate value in use; and
2. to require an entity to use internally consistent assumptions about cash flows and discount rates and to disclose the discount rates used in the estimation of value in use.

Twelve of 14 Board members agreed and two disagreed with this decision.

Preliminary views (Agenda Paper 18G)

The Board reviewed the overall package of its preliminary views to be included in the discussion paper, as established by the decisions summarised above. No further decisions were made.

Next step

The Board will decide in its July 2019 meeting whether to begin the balloting process for the discussion paper which it plans to publish around the end of 2019.

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

The Board met on 18 June 2019 to discuss the 2019 Comprehensive Review of the IFRS for SMEs Standard (2019 Review). In particular, the Board discussed whether the Request for Information to be published as part of the 2019 Review should seek views on whether and how to align the IFRS for SMEs Standard with Standards and amendments not incorporated in the IFRS for SMEs Standard.

IFRS 13 Fair Value Measurement (Agenda Paper 30B)

The Board decided to seek views in the Request for Information on aligning the IFRS for SMEs Standard with IFRS 13 and, in particular, on:

1. aligning the definition of fair value in the IFRS for SMEs Standard with IFRS 13. Thirteen of 14 Board members agreed and one disagreed with this decision.
2. aligning the guidance on fair value measurement in the IFRS for SMEs Standard with IFRS 13 so the fair value hierarchy incorporates the principles of the IFRS 13 fair value hierarchy, and also includes examples that illustrate application of the hierarchy. Ten of 14 Board members agreed and four disagreed with this decision.
3. moving the general disclosure requirements to a single location, alongside the guidance for fair value measurement, and on moving the guidance relating to amortised cost. Thirteen of 14 Board members agreed and one disagreed with this decision.
4. moving the guidance for fair value measurement in the IFRS for SMEs Standard to Section 2 Concepts and Pervasive Principles. Thirteen of 14 Board members agreed and one disagreed with this decision.

The Board decided not to seek views in the Request for Information on requiring the level in the hierarchy at which fair value measurements are made to be disclosed. Twelve of 14 Board members agreed and two disagreed with this decision.

IFRS 9 Financial Instruments (Agenda Paper 30C)

The Board decided to seek views in the Request for Information on aligning the IFRS for SMEs Standard with IFRS 9 and, in particular, on:

1. introducing principles for the classification and measurement of financial assets based on contractual cash flows. Thirteen of 14 Board members agreed and one disagreed with this decision.
2. not amending the requirements of the IFRS for SMEs Standard for:
   1. the introduction of fair value through other comprehensive income option for equity instruments;
   2. the initial recognition of financial instruments at the transaction price;
   3. financial liabilities and own credit; and
   4. derecognition principles.

   All 14 Board members agreed with this decision.

3. the need for requirements on hedge accounting for entities applying the IFRS for SMEs Standard and, subject to clarifying those needs, on retaining the current requirements for hedge accounting in Section 12 Other Financial Instrument Issues. All 14 Board members agreed with this decision.
4. aligning the IFRS for SMEs Standard with the simplified approach in IFRS 9 for the impairment of financial assets.Twelve of 14 Board members agreed and two disagreed with this decision.
5. the need for the fall back to IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 for entities applying the IFRS for SMEs Standard, and subject to clarifying the need for the fall back, on changing the fall back to IAS 39 to a fall back to IFRS 9 if the IFRS for SMEs Standard is aligned with IFRS 9. Thirteen of 14 Board members agreed and one disagreed with this decision.

IFRS 14 Regulatory Deferral Accounts (Agenda Paper 30D)

The Board decided to seek views in the Request for Information on not aligning the IFRS for SMEs Standard with IFRS 14 Regulatory Deferral Accounts. Thirteen of 14 Board members agreed with this decision. One member was absent.

IFRS 16 Leases (Agenda Paper 30E)

The Board decided to seek views in the Request for Information on aligning the IFRS for SMEs Standard with IFRS 16 and, in particular, on:

1. simplifications to the requirements in IFRS 16, namely:
   1. introducing recognition exemptions for leases of 12 months or less (short-term leases) and leases of low-value assets;
   2. exempting entities from the requirement to separate lease component from any associated non-lease components; and
   3. simplifying measurement requirements for some variable lease payments, and for optional payments, such as those relating to extension options.

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

2. additional simplifications, namely:
   1. removing the quantitative threshold for low value assets and introducing a list of examples to assist companies identifying such assets, and on whether the Board should retain the US$5,000 threshold for leases of low value assets. Twelve of 14 Board members agreed and two disagreed with this decision.
   2. providing additional relief to assist entities with identifying the discount rate to be applied when determining the liability. Eleven of 14 Board members agreed and three disagreed with this decision.
   3. providing additional relief to assist entities with determining and reassessing the lease term. Thirteen of 14 Board members agreed and one disagreed with this decision.
   4. simplifying the requirements for subsequent measurement (reassessment) of lease liability. Twelve of 14 Board members agreed and two disagreed with this decision.
   5. retaining the existing finance lease disclosures applying the IFRS for SMEs Standard. Thirteen of 14 Board members agreed and one disagreed with this decision.

Next step

In July 2019 the Board will continue discussing whether and how to align the IFRS for SMEs Standard with Standards and amendments not incorporated in the IFRS for SMEs Standard.

Financial Instruments with Characteristics of Equity (Agenda Paper 5)

The Board met on 18 June 2019 to hear a summary of feedback on proposals for classification of financial instruments in the Discussion Paper Financial Instruments with Characteristics of Equity, including:

1. Section 2—The Board’s preferred approach;
2. Section 3—Classification of non-derivative financial instruments;
3. Section 4—Classification of derivative financial instruments; and
4. Section 5—Compound instruments and redemption obligation arrangements.

The Board was not asked to make any decisions.

Next steps

At future Board meetings, the Board will receive summary of feedback on the remaining sections of the Discussion Paper.

Business Combinations under Common Control (Agenda Paper 23)

The Board met on 19 June 2019 to discuss the research project on Business Combinations under Common Control. 

Transactions that do not affect non-controlling shareholders (Agenda Paper 23A)

The Board discussed:

• whether transactions that do not affect non-controlling shareholders of a receiving entity are different both from transactions that do affect such shareholders and from business combinations that are not under common control; and
• if so, whether the Board could pursue an approach that is not based on the acquisition method for transactions that do not affect non-controlling shareholders, such as a form of predecessor approach.

Next step

The Board expects to continue its discussion on methods of accounting for transactions within the scope of the project at future meetings.

Implementation matters (Agenda Paper 12)

The Board met on 19 June 2019 to discuss implementation matters.

Property, Plant and Equipment: Proceeds before Intended Use (Agenda Paper 12)

The Board continued its discussion on the Exposure Draft Property, Plant and Equipment—Proceeds before Intended Use

The proposed amendments to IAS 16 Property, Plant and Equipment would prohibit an entity from deducting from the cost of an item of property, plant and equipment (PPE) any proceeds from selling items produced while bringing that asset to the location and condition necessary for it to be capable of operating in the manner intended by management. 

The Board tentatively decided:

1. to amend IAS 16 to require an entity to identify and measure the cost of items produced before an item of PPE is available for use applying the measurement requirements in paragraphs 9–33 of IAS 2 Inventories.
2. to develop neither presentation nor disclosure requirements for the sale of items that are part of an entity’s ordinary activities.
3. for the sale of items that are not part of an entity’s ordinary activities (and to which an entity does not apply IFRS 15 and IAS 2), to require an entity to:
   1. disclose separately the sales proceeds and their related production costs recognised in profit or loss; and
   2. specify the line item(s) in the statement of profit or loss and other comprehensive income that include(s) the sales proceeds and the production costs.
4. not to amend IFRS 6 Exploration for and Evaluation of Mineral Resources or IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine as a consequence of these proposed amendments.

Thirteen Board members agreed with these decisions. One member was absent.

Next steps

The Board will discuss due process steps at a future meeting.