IASB Update October 2019

Implementation matters (Agenda Paper 12)

The Board met on 22 October 2019 to discuss implementation matters.

Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16) (Agenda Paper 12A)

The Board discussed the transition requirements and effective date for the amendments to IAS 16 Property, Plant and Equipment. The Board also discussed due process, including permission for balloting the amendments.

The amendments to IAS 16 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.

Transition and effective date

The Board tentatively decided to require an entity to apply the amendments retrospectively only to items of PPE made available for use on or after the beginning of the earliest period presented when the entity first applies the amendments.

Twelve of 14 Board members agreed and one disagreed with this decision. One member was absent.

The Board also tentatively decided to provide no transition relief for first-time adopters.

Eleven of 14 Board members agreed and two disagreed with this decision. One member was absent.

The Board tentatively decided that the effective date of the amendments be for annual periods beginning on or after 1 January 2022, with earlier application permitted.

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

Due process

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

Thirteen of 14 Board members agreed with this decision. One member was absent. Thirteen of 14 Board members confirmed they were satisfied the Board has complied with the applicable due process and has undertaken sufficient consultation and analysis to begin the balloting process for the amendments. One member was absent.

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

Onerous Contracts—Cost of Fulfilling a Contract (Amendments to IAS 37) (Agenda Papers 12B–12D)

The Board discussed feedback on the Exposure Draft Onerous Contracts—Cost of Fulfilling a Contract.

In the Exposure Draft, the Board proposed a narrow-scope amendment to IAS 37 to clarify which costs an entity includes in determining the ‘cost of fulfilling’ a contract for the purpose of assessing whether that contract is onerous. The Board proposed to clarify that such costs comprise those that relate directly to the contract. It also proposed to add to IAS 37 examples of costs that do, and costs that do not, relate directly to a contract.

The Board tentatively decided to replace the examples proposed in the Exposure Draft with a clarification that the costs that relate directly to the contract consist of:

1. the incremental costs of fulfilling that contract, and
2. an allocation of costs that relate directly to fulfilling that and other contracts.

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

The Board also tentatively decided to amend paragraph 69 of IAS 37 to refer to assets that relate directly to a contract, rather than assets dedicated to a contract. Twelve of 14 Board members agreed, and one disagreed with this decision. One member was absent.

The Board also tentatively decided:

1. not to permit the application of the amendments retrospectively applying IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors;
2. to clarify within the transition requirements that an entity applies the amendments to contracts under which the entity has not yet fulfilled all its obligations at the beginning of the annual period in which the entity first applies the amendments; and
3. to provide no exception or exemption for first-time adopters.

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

The Board decided not to expand the scope of the project to address:

1. the meaning of ‘economic benefits’ in the IAS 37 definition of an onerous contract;
2. whether and when an entity should combine or segment contracts; or
3. how an entity should measure an onerous contract liability.

Twelve of 14 Board members agreed, and one disagreed with this decision. One member was absent.

Next step

The Board will discuss the due process steps in relation to the project at a future meeting.

Sale of a single-asset entity containing real estate (IFRS 10) (Agenda Paper 12E)

The Board discussed a question submitted to the IFRS Interpretations Committee about a transaction in which an entity, as part of its ordinary activities, enters into a contract with a customer to sell real estate by selling its equity interest in a single-asset entity that is a subsidiary.

The Board decided to assess the feasibility of narrow-scope standard-setting to address this question. Eight of 14 Board members agreed and five disagreed with this decision. One member was absent.

Next step

The Board will discuss the feasibility of narrow-scope standard-setting at a future meeting.

IFRIC Update (Agenda Paper 12F)

The Board received an update on the September 2019 meeting of the IFRS Interpretations Committee. Details of this meeting were published in IFRIC Update September 2019.

The Board was not asked to make any decisions.

Business Combinations under Common Control (Agenda Paper 23)

The Board met on 22 October 2019 to discuss its research project on Business Combinations under Common Control. Specifically, the Board discussed how a predecessor approach should be applied.

Predecessor approach—pre-combination carrying amounts (Agenda Paper 23A)

The Board tentatively decided that a receiving entity should recognise and measure assets and liabilities transferred in a business combination under common control at the carrying amounts included in the financial statements of the transferred entity.

Eleven of 14 Board members agreed and two disagreed with this decision. One Board member was absent.

Predecessor approach—pre-combination information (Agenda Paper 23B)

The Board tentatively decided that pre-combination information in the primary financial statements should be provided only about the receiving entity.

Twelve of 14 Board members agreed and one disagreed with this decision. One Board member was absent.

The Board will discuss at a future meeting whether particular pre-combination information should be provided in the notes to the financial statements.

Next steps

At future meetings, the Board will complete its discussion of how a predecessor approach should be applied, discuss whether and how the acquisition method should be modified for transactions within the scope of the project, and discuss what information should be provided in the notes to the financial statements.

Management Commentary (Agenda Paper 15)

The Board met on 22 October 2019 to discuss:

1. possible guidance on enhancing qualitative characteristics to be included in an exposure draft of a revised IFRS Practice Statement 1 Management Commentary (Practice Statement)—Agenda Paper 15A; and
2. research and preliminary analysis to be used in developing possible guidance on the business model—Agenda Paper 15B.

Enhancing qualitative characteristics in management commentary (Agenda Paper 15A)

The Board tentatively decided that the revised Practice Statement should:

1. include a description of comparability reflecting paragraphs 2.24, 2.26 and 2.28 of the Conceptual Framework for Financial Reporting (Conceptual Framework);
2. explain that although comparability with other entities is desirable, it should not override the requirement to provide relevant entity-specific information;
3. state that in preparing management commentary, an entity’s management should consider the fact that primary users need to make comparisons with information provided by other entities, with information reported in management commentary in previous periods and with other information published by the entity; and
4. require an entity’s management to:
   1. explain the assumptions made and methods of calculation used in producing a performance measure, and state whether the performance measure in question is a commonly used metric;
   2. explain any changes since the previous year in those assumptions and methods, and the reason for them;
   3. highlight where new information is provided on a matter reported in previous management commentary;
   4. provide comparative information for each performance measure over a period that is long enough to show the emergence of trends; and
   5. consider whether information presented in management commentary is consistent with information reported in the entity’s financial statements, in investor presentations, in other reports in the public domain, and on the entity’s website.

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

The Board tentatively decided that the revised Practice Statement should:

1. include in its discussion of understandability the current guidance in the Practice Statement on presentation;
2. explain that making management commentary concise is an important part of making it understandable;
3. permit the incorporation of information in management commentary by cross-reference, subject to the overarching principle that the information incorporated by cross-reference is part of management commentary and, therefore, must possess the qualitative characteristics of useful financial information. To help management apply the overarching principle, the revised Practice Statement should include guidance:
   1. on enhancing the understandability of management commentary when information is incorporated by cross-reference; and
   2. on conditions that must be met by a report when management commentary incorporates information by cross-reference to that report.

Twelve of 14 Board members agreed with this decision. Two members were absent.

The Board tentatively decided that the revised Practice Statement should:

1. include a description of verifiability based on paragraphs 2.30 and 2.32 of the Conceptual Framework;
2. require management to:
   1. distinguish information based on judgement from factual information; and
   2. explain the process and sources used to produce the information, describe the assumptions and methods used to calculate it, and state the information’s limitations; and
3. retain the statement that it does not mandate the level of assurance to which management commentary should be subjected.

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

The Board tentatively decided that the revised Practice Statement would not include guidance on timeliness. Seven of 14 Board members agreed with this decision. One member was absent.

Introduction to the business model (Agenda Paper 15B)

The Board discussed an overview of the staff’s research on the business model and the staff’s preliminary analysis of questions that the Board will need to consider in developing possible guidance on the business model.

The Board was not asked to make any decisions.

Next step

The Board will discuss possible guidance on the business model.

Amendments to IFRS 17 (Agenda Paper 2)

The Board received a summary of the feedback from outreach on the Exposure Draft Amendments to IFRS 17. No decisions were requested from the Board.

Next steps

At the November 2019 meeting, the staff plan to provide the Board with:

1. a summary of feedback from comment letters on the Exposure Draft; and
2. a plan for redeliberating topics.

The Board’s objective remains to issue any amendments to IFRS 17 in mid-2020.

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

The Board met on 23 October 2019 to discuss potential accounting issues related to the classification and measurement of financial instruments that could arise as a result of interest rate benchmark reform (IBOR reform). Specifically, the Board discussed:

1. the assessment of whether a change in the contractual cash flows or terms of a financial instrument is a substantial modification, and the accounting requirements for modifications that are not substantial (that is, modifications that do not result in the derecognition of a financial instrument when IFRS 9 Financial Instruments is applied); and
2. modifications that result in the derecognition of existing financial instruments and the accounting implications of recognising modified financial instruments as ‘new’ financial instruments.

Classification and measurement—modification of financial instruments (Agenda Paper 14A)

The Board tentatively decided to amend IFRS 9 to:

1. clarify that, even in the absence of an amendment to the contractual terms of a financial instrument, a change in the basis on which the contractual cash flows are determined that alters what was originally anticipated constitutes a modification of a financial instrument in accordance with IFRS 9. Twelve of 14 Board members agreed and one disagreed with this decision. One Board member abstained.
2. provide a practical expedient allowing an entity to apply paragraph B5.4.5 of IFRS 9 to account for modifications related to IBOR reform and to provide examples in IFRS 9 of modifications that are related to IBOR reform, and examples of those that are not. Thirteen of 14 Board members agreed with this decision. One Board member abstained.
3. clarify that an entity should first apply paragraph B5.4.5 of IFRS 9 to account for modifications related to IBOR reform to which the practical expedient applies. Thereafter, an entity should apply the current IFRS 9 requirements to determine if any other modifications are substantial; if those modifications are not substantial, the entity should apply paragraph 5.4.3 of IFRS 9. Thirteen of 14 Board members agreed with this decision. One Board member abstained.

Accounting implications from derecognition of a modified financial instrument (Agenda Paper 14B)

The Board tentatively decided that, in the context of IBOR reform, current requirements in IFRS 9 provide sufficient guidance to determine the appropriate accounting treatment in the following situations:

1. derecognising a financial asset or a financial liability from the statement of financial position and the recognition of the resulting gain or loss in profit or loss following a substantial modification.
2. determining an entity’s business model for managing financial assets.
3. determining whether the interest component of the contractual cash flows of a new financial asset referenced to alternative benchmark rates meets the criteria for solely payments of principal and interest on the principal amount outstanding (SPPI), as required by IFRS 9. The Board also tentatively decided to add an example to IFRS 9 to illustrate the application of the SPPI assessment in the context of IBOR reform.
4. recognising the expected credit losses for a new financial asset.
5. accounting for embedded derivatives for financial liabilities.

All 14 Board members agreed with these decisions.

Financial Instruments with Characteristics of Equity (Agenda Paper 5)

The Board met on 23 October 2019 to discuss the project plan for the Financial Instruments with Characteristics of Equity project. In particular, the Board discussed the practice issues that it could address in the scope of the project and an indicative project timeline outlining the expected commencement of Board deliberations on each issue.

The Board was not asked to make any decisions.

Next steps

At future Board meetings, the Board will discuss practice issues in the scope of the project and the viability of potential solutions, beginning with the classification of financial instruments that will or may be settled in the issuer’s own equity instruments.

Dynamic Risk Management (Agenda Paper 4)

The Board met on 23 October 2019 to discuss its plan to consult stakeholders on the core elements of the DRM accounting model. After that consultation, the Board will decide how best to pursue the next phase of the project, which is to develop the DRM accounting model further.

The Board was not asked to make any decisions.

Next step

The Board will consider at a future meeting the feedback from its consultation on the core elements of the DRM accounting model.

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

The Board met on 23 October 2019 to discuss the 2019 Comprehensive Review of the IFRS for SMEs Standard (2019 Review).

Previous Board decisions—IFRS 11 Joint Arrangements (Agenda Paper 30A)

At its September 2019 meeting, the Board asked the staff to present a paper addressing the potential implications of:

1. aligning the definition of ‘control’ in Section 9 Consolidated and Separate Financial Statements of the IFRS for SMEs Standard with the definition in IFRS 10 Consolidated Financial Statements, but not aligning the definition of ‘joint control’ in Section 15 Investments in Joint Ventures of the IFRS for SMEs Standard with the definition in IFRS 11 Joint Arrangements; and
2. aligning the definition of ‘joint control’ in Section 15 with the definition in IFRS 11 but retaining the accounting requirements of Section 15.

The Board decided to seek views in the request for information to be published as part of the 2019 Review on whether and how to align Section 15 with IFRS 11. In particular, the Board will seek views on:

1. applying the same definition of ‘control’ in full IFRS Standards and the IFRS for SMEs Standard. All 14 Board members agreed with this decision.
2. aligning the definition of ‘joint control’ in Section 15 with the definition in IFRS 11. Twelve of 14 Board members agreed and two disagreed with this decision.
3. retaining the accounting requirements of Section 15. Twelve of 14 Board members agreed and two disagreed with this decision.

Subsidiaries that are SMEs (Agenda Paper 31)

The Board met on 23 October 2019 to discuss the results of the second of the two parts of the research. The Board considered whether it could, with only minimal tailoring, adapt the disclosure requirements of the IFRS for SMEs Standard for use by subsidiaries that are SMEs that apply the recognition and measurement requirements of IFRS Standards. The Board considered the staff’s example disclosure requirements for five IFRS Standards.

The staff presented two alternative approaches to the example disclosure requirements. The Board tentatively decided to follow Approach 2. Eight of 14 Board members agreed and six disagreed with this decision.

Next step

The Board will discuss the scope of the project at a future meeting.

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

The Board met on 23 October 2019 to discuss the feedback on its Exposure Draft Accounting Policies and Accounting Estimates (Proposed amendments to IAS 8) and the project direction.

Definition of accounting estimates (Agenda Paper 26B)

The Board tentatively decided to revise the definition of accounting estimates to specify that:

1. accounting estimates are monetary amounts in financial statements that are subject to measurement uncertainty;
2. such monetary amounts are outputs of measurement techniques used in applying accounting policies; and
3. an entity uses judgements and/or assumptions in developing an accounting estimate.

The Board also tentatively decided to:

1. clarify that:
   1. the effects of a change in an input and/or in a measurement technique used to develop an accounting estimate are changes in accounting estimates if they do not result from the correction of prior period errors; and
   2. a change in accounting estimate that results from new information or new developments is not the correction of an error; and
2. specify that estimation techniques and valuation techniques are examples of measurement techniques an entity uses to develop accounting estimates.

All 14 Board members agreed with these decisions.

Other aspects (Agenda Paper 26C)

The Board tentatively decided:

1. not to amend the definition of accounting policies (ie to retain the existing definition of accounting policies in IAS 8);
2. to clarify that if a change is a change in accounting estimate, it cannot also be a change in accounting policy;
3. not to add discussion, that was included in paragraph 32B of the Exposure Draft, on whether selecting an inventory cost formula constitutes selecting an accounting policy;
4. to confirm the deletion of Example 3 from the Guidance on implementing IAS 8; and
5. add to the Guidance on implementing IAS 8 examples that illustrate how an entity would apply the definition of accounting estimates—this material would accompany, but not be part of, IAS 8.

Thirteen of 14 Board members agreed with these decisions and one Board member disagreed.

Project direction (Agenda Paper 26D)

The Board tentatively decided to finalise the amendments with the modifications set out above; and not to re-expose them.

All 14 Board members agreed with these decisions.

Next steps

The Board will discuss the transition requirements and effective date of the amendments at a future meeting. It will also review the project’s due process steps.