IASB Update April 2020

Research and standard-setting

Financial Instruments with Characteristics of Equity (Agenda Paper 5)

The Board met on 21 April 2020 to continue its discussions on how to clarify the principles for classifying financial instruments settled in an entity’s own equity instruments.

Financial instruments settled in an entity’s own equity instruments: foundation principle (Agenda Paper 5A)

The Board tentatively decided that for a derivative on own equity to meet the fixed-for-fixed condition in IAS 32 Financial Instruments: Presentation, the number of functional currency units to be exchanged with each underlying equity instrument must be fixed or only vary with:

1. allowable preservation adjustments; or
2. allowable passage of time adjustments.

This proposal was presented as Alternative B in the Agenda Paper.

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

The Board also tentatively decided to classify as equity a contract that can be settled by exchanging a fixed number of non-derivative own equity instruments with a fixed number of another type of non-derivative own equity instruments.

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

Financial instruments settled in an entity’s own equity instruments: adjustment principle (Agenda Paper 5B)

The Board tentatively decided that an entity would be required to classify derivatives on own equity as equity instruments if preservation adjustments require the entity to preserve the relative economic interests of future shareholders to an equal or a lesser extent than those of the existing shareholders. This proposal was presented as Alternative B in the Agenda Paper.

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

The Board also tentatively decided that an entity would be required to classify derivatives on own equity as equity instruments if passage of time adjustments:

1. are pre-determined and vary only with the passage of time; and
2. fix the number of functional currency units per underlying equity instrument in terms of a present value.

This proposal was presented as Alternative B in the Agenda Paper.

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

Next step

At a future Board meeting, the Board will begin its discussions on other topics included in the project plan discussed at the October 2019 Board meeting.

Post-implementation Review of IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities (Agenda Paper 7)

The Board met on 22 April 2020 to discuss the findings from the first phase of the Post-implementation Review and the next step for the project.

Findings from the first phase and determining the next step (Agenda Paper 7A)

The Board decided to proceed with the Post-implementation Review and publish a Request for Information.

All 14 Board members agreed with these decisions.

The Board decided the Request for Information will focus on:

1. in relation to IFRS 10:
   1. power over an investee;
   2. the link between power and returns, with a focus on identifying agency relationships;
   3. accounting requirements, with a focus on changes in ownership interests; and
   4. the investment entity consolidation exception.
2. in relation to IFRS 11:
   1. collaboration arrangements outside the scope of IFRS 11;
   2. the classification of joint arrangements as joint operations based on other facts and circumstances; and
   3. accounting requirements, with a focus on joint operations.
3. in relation to IFRS 12, the quality of information an entity provides and whether and how well the disclosure objectives are met by an entity applying the requirements.

The Board also decided the Post-implementation Review would not cover the interaction of IFRS 10, IFRS 11 and IFRS 12 with other IFRS Standards.

All 14 Board members agreed with these decisions.

Next step

At a future meeting, the Board will discuss related due process steps.

Management Commentary (Agenda Paper 15)

The Board met on 21 April 2020 to discuss the disclosure objectives and supporting guidance to be included in the revised IFRS Practice Statement 1 Management Commentary. The Board considered the following content in management commentary:

• business model (Agenda Paper 15B);
• strategy (Agenda Paper 15C); and
• resources and relationships (Agenda Paper 15D).

Introduction to disclosure objectives (Agenda Paper 15A)

Agenda Paper 15A introduced an approach to develop and structure the disclosure objectives. The Board was not asked to make any decisions.

Business model, strategy, and resources and relationships (Agenda Papers 15B–15D)

The Board tentatively decided to specify in the disclosure objectives that management commentary should provide information and analysis to help investors and creditors understand:

1. how an entity’s business model creates value and generates cash flows;
2. management’s strategy for sustaining and developing the entity’s ability to create value and generate cash flows in the future; and
3. the resources and relationships on which the business model and strategy depend.

The Board tentatively decided to specify in the disclosure objectives that investors and creditors use information and analysis in management commentary to make the following assessments:

1. in relation to an entity’s business model:
   1. how effective the entity’s business model is in creating value and generating cash flows;
   2. how scalable it is; and
   3. how resilient, adaptable and durable it is;
2. in relation to management’s strategy:
   1. the potential effect of strategy on the entity’s ability to create value and generate cash flows; and
   2. the entity’s ability to execute the strategy; and
3. in relation to resources and relationships:
   1. how much the entity depends on resources or relationships; and
   2. whether those resources are likely to continue to be available to the entity and whether the entity’s relationships are likely to continue and strengthen.

The Board tentatively decided to specify in the disclosure objectives that the information and analysis included in management commentary focus:

1. on the key features of an entity’s business model and address:
   1. the range, nature and scale of the entity’s operations;
   2. the entity’s cycle for creating value and generating cash flows; and
   3. indirect wider consequences or impacts of the entity’s operations if they could affect the entity’s ability to generate cash flows;
2. on the key aspects of management’s strategy and address:
   1. what drives the strategy;
   2. what management aims to achieve in the long term;
   3. how management plans to achieve those aims; and
   4. how management will monitor and measure success; and
3. on the entity’s key resources and relationships and address:
   1. the nature of those resources and relationships;
   2. how those resources and relationships are accessed;
   3. how they are used;
   4. what could affect the availability of the entity’s resources and the strength of its relationships; and
   5. how those resources and relationships are managed.

The Board also tentatively decided to specify that:

1. the key features of an entity’s business model are those that underpin the entity’s ability to create value and generate cash flows;
2. the key aspects of management’s strategy are those that will significantly affect an entity’s ability to create value and generate cash flows in the future; and
3. an entity’s key resources and relationships are those on which the entity’s ability to create value and generate cash flows depend.

All Board members present agreed with all these decisions. All 14 Board members were present for the discussion of business model. 13 Board members were present and one Board member was absent for the discussions of strategy and of resources and relationships.

The Board also discussed possible supporting guidance on business model, strategy and resources and relationships. The Board was not asked to make any decisions.

Next step

The Board’s next discussion is expected to cover risks and external environment.

Disclosure Initiative—Subsidiaries that are SMEs (Agenda Paper 31)

The Board met on 23 April 2020 to discuss:

• the project plan for the remainder of 2020—Agenda Paper 31A; and
• whether the IFRS Standard being developed for subsidiaries that are SMEs should require subsidiaries to apply the presentation requirements of IFRS Standards or the presentation requirements of the IFRS for SMEs Standard—Agenda Paper 31B.

Project plan for the remainder of 2020 (Agenda Paper 31A)

The objective of the project is to develop a reduced disclosure IFRS Standard that would apply on a voluntary basis to subsidiaries that are SMEs. The Board tentatively agreed with the proposed plan for the project.

Presentation requirements (Agenda Paper 31B)

The Board tentatively agreed that the presentation requirements of IFRS Standards be applied by subsidiaries that are SMEs that elect to apply the IFRS Standard being developed in this project. Thirteen of 14 Board members present agreed with this decision.

Next step

The Board will continue discussions in Q3 2020.

Maintenance and consistent application

Amendments to IFRS 17 Insurance Contracts oral update

The Board received an update on the status of its activities to support implementation of IFRS 17 Insurance Contracts. It was not asked to make any decisions.

Lease Liability in a Sale and Leaseback (Agenda Paper 12A)

The Board discussed a recommendation from the IFRS Interpretations Committee to amend IFRS 16 to specify how a seller-lessee would apply the subsequent measurement requirements in IFRS 16 to the lease liability that arises in a sale and leaseback transaction.

The Board tentatively decided to propose a narrow-scope amendment to IFRS 16 to specify that:

1. in applying paragraphs 36–38 of IFRS 16 to a sale and leaseback transaction with variable lease payments, a seller-lessee be required:
   1. to determine the lease payments made (as described in paragraph 36(b)) as the payments included in the measurement of the lease liability. The payments included in that measurement are those that, when discounted using the discount rate described in paragraph 37, result in an amount equal to the carrying amount of the lease liability.
   2. not to remeasure the lease liability to reflect any reassessment of future variable lease payments.
   3. to apply paragraph 38 in accounting for any difference between the payments made for the lease and those included in the measurement of the lease liability.
2. in applying paragraphs 40 and 45 of IFRS 16 to lease modifications and changes in the lease term related to a sale and leaseback transaction, a seller-lessee be required to determine the revised lease payments as the revised expected payments for the lease.

The Board also tentatively decided to develop an additional example that would illustrate how a seller-lessee would account for a sale and leaseback transaction with variable payments, both at the date of the transaction and subsequently throughout the lease term.

All 14 Board members agreed with these decisions.

Next step

The Board will discuss the proposed amendment’s effective date and transition, as well as the Board’s compliance with applicable due process steps at a future meeting.

Lack of Exchangeability (Amendments to IAS 21) (Agenda Papers 12B–12E)

The Board continued to discuss its proposed narrow-scope amendment to IAS 21 to address how an entity should determine the spot exchange to use when exchangeability between two currencies is lacking.

Exchangeability and lack of exchangeability (Agenda Paper 12C)

The Board tentatively decided that, when an entity assesses exchangeability, the entity be required to:

1. consider whether it could obtain the foreign currency within a time frame that includes a normal administrative delay.
2. consider its ability to obtain foreign currency, and not its intention (or decision) to do so.
3. consider only markets or exchange mechanisms that create enforceable rights and obligations.
4. assume that the purpose of obtaining foreign currency is to:
   1. settle individual foreign currency transactions, or assets or liabilities related to those transactions, when it reports foreign currency transactions in the functional currency; or
   2. realise the entity’s net assets when it uses a presentation currency other than the functional currency (or to realise its net investment in a foreign operation when it translates the results and financial position of that foreign operation).
5. conclude that a currency lacks exchangeability in circumstances in which it is able to obtain only some amounts of foreign currency, when, for a particular purpose, it is able to obtain no more than an insignificant amount of foreign currency. Additionally, when an entity (i) reports foreign currency transactions in its functional currency, and (ii) can obtain less than the amount of foreign currency it needs to settle all balances and transactions in that currency, the entity would be required to assess exchangeability on an aggregated basis for all the related foreign currency balances and transactions.

All 14 Board members agreed with these decisions.

The exchange rate when a currency lacks exchangeability (Agenda Paper 12D)

The Board tentatively decided that:

1. an entity be required to estimate the spot rate when a currency lacks exchangeability.
2. the narrow-scope amendments set out an objective for the estimation process. The objective would require an entity to estimate a spot rate that:
   1. the entity would have been able to access at the reporting date had the currency been exchangeable;
   2. would have arisen in an orderly transaction between market participants; and
   3. would faithfully reflect the economic conditions prevailing at that date.
3. an entity be permitted to use an observable rate (that does not meet the definition of a spot rate) if that rate approximates the spot rate in the following circumstances:
   1. when the observable rate meets the definition of a spot rate for particular transactions or balances but not those for which the entity assesses exchangeability; or
   2. when the observable rate is the first subsequent rate at which exchanges could be made if exchangeability is restored before financial statements are authorised for issue.
4. an entity be required to apply an estimated exchange rate to:
   1. the entire transaction or balance of an asset or liability (when the entity reports foreign currency transactions in the functional currency); or
   2. the financial statements as a whole (when the entity uses a presentation currency other than the functional currency).

All 14 Board members agreed with these decisions.

Disclosure requirements when a currency lacks exchangeability (Agenda Paper 12E)

The Board tentatively decided that an entity be required to disclose:

• details of the currency that lacks exchangeability and a description of the restrictions that result in that lack of exchangeability;
• a description of the transactions affected by the lack of exchangeability;
• the carrying amount of assets and liabilities denominated in the currency that lacks exchangeability;
• the spot rate(s) used and whether that rate is:
  1. an observable rate that approximates the spot rate, or
  2. one that has been estimated;
• a description of the estimation technique applied, and qualitative and quantitative information about the inputs used in that estimation technique; and
• qualitative information about each type of risk to which the entity is exposed because of a currency’s lack of exchangeability, and the nature and carrying amount of assets and liabilities exposed to each type of risk.

Additionally, the Board tentatively decided that, when a foreign operation’s functional currency lacks exchangeability, an entity be required to disclose:

• the name of the foreign operation, its nature (whether it is a subsidiary, joint operation, joint venture, associate or branch) and its principal place of business;
• summarised financial information about the foreign operation; and
• the nature and terms of any contractual arrangements that could require the entity to provide financial support to that foreign operation, including events or circumstances that could expose the reporting entity to a loss. The entity would also be required to disclose the balance of assets to which such arrangements give rise.

All 14 Board members agreed with these decisions.

Next step

The Board will discuss the proposed amendment’s effective date and transition, as well as the Board’s compliance with applicable due process steps at a future meeting.

Commodity Loans (Agenda Paper 12F)

The Board discussed a possible narrow-scope project on commodity loans and related transactions.

The Board decided not to add such a project to its work plan at this time. All 14 Board members agreed with this decision.

The Board tentatively decided that the Request for Information on the 2020 Agenda Consultation include in its list of potential projects a project on commodity transactions. All 14 Board members agreed with this decision.

Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction (Amendments to IAS 12) (Agenda Papers 12G–12I)

The Board discussed a summary of feedback on its Exposure Draft Deferred Tax related to Assets and Liabilities arising from a Single Transaction.

The Board was not asked to make any decisions.

Next step

The Board will consider the project’s direction at a future meeting.

IFRIC Update (Agenda Paper 12J)

The Board received an update on the March 2020 meeting of the IFRS Interpretations Committee. Details of this meeting were published in IFRIC Update March 2020.

The Board was not asked to make any decisions.

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

The Board met on 23 April 2020 and received an update that, as part of outreach on the Request for Information on the Comprehensive Review of the IFRS for SMEs Standard, a survey would be published to provide an alternative way to comment for stakeholders without the capacity or resources to submit a comment letter.

The Board was not asked to make any decisions.