IASB Update December 2021

Research and standard-setting

Financial Instruments with Characteristics of Equity (Agenda Paper 5)

The IASB met on 15 December 2021 to discuss the accounting for:

• financial instruments with contingent settlement provisions; and
• the effects of applicable laws on contractual terms of financial instruments.

Financial instruments with contingent settlement provisions (Agenda Papers 5A–5B)

The IASB tentatively decided to propose amendments to IAS 32 Financial Instruments: Presentation:

• to clarify that financial instruments with contingent settlement provisions may be compound instruments;
• to clarify that the liability component of a compound financial instrument with contingent settlement provisions, which could require immediate settlement if a contingent event occurs, is measured at the full amount of the conditional obligation;
• to clarify that payments at the discretion of the issuer are recognised in equity, even if all the proceeds are initially allocated to the liability component of a compound financial instrument;
• to specify that the term ‘liquidation’ in paragraph 25(b) of IAS 32 refers to when an entity is in the process of permanently ceasing operations; and
• to specify that an assessment of whether a contract term is ‘not genuine’ under paragraph 25(a) of IAS 32 is not made by considering only the probability of the contingent event occurring.

All 12 IASB members agreed with these decisions.

The effects of applicable laws on contractual terms of financial instruments (Agenda Paper 5C)

The IASB tentatively decided to propose amendments to IAS 32 to require an entity to classify financial instruments as financial liabilities or equity by considering:

• terms explicitly stated in the contract that give rise to rights and obligations that are in addition to, or more specific than, those established by applicable law; and
• applicable laws that prevent the enforceability of a contractual right or a contractual obligation.

All 12 IASB members agreed with these decisions.

Next step

The IASB will continue its discussions on other topics included in the project plan, including the classification of financial instruments that are subject to shareholders’ discretion, at future meetings.

Rate-regulated Activities (Agenda Paper 9)

The IASB met on 14 December 2021 to discuss plans for redeliberating the proposals in its Exposure Draft Regulatory Assets and Regulatory Liabilities.

The IASB agreed on a plan.

Next step

The IASB will begin redeliberating the proposals at a future meeting.

Primary Financial Statements (Agenda Paper 21)

The IASB met on 15 and 16 December 2021 to redeliberate some of the proposals in the Exposure Draft General Presentation and Disclosures relating to:

• unusual income and expenses—Agenda Paper 21A; and
• income and expenses classified in the investing category—Agenda Paper 21B.

Unusual income and expenses (Agenda Paper 21A)

The IASB tentatively decided:

1. to explore how to proceed with a definition of ‘unusual income and expenses’. All 12 IASB members agreed with this decision.
2. to remove the reference to ‘limited predictive value’ from the definition of ‘unusual income and expenses’, and clarify in the Standard that it is a necessary characteristic of unusual income and expenses, not the sole characteristic. Eleven of 12 IASB members agreed with this decision.
3. to develop the application guidance accompanying the definition of ‘unusual income and expenses’:
   1. to clarify that the definition means that ‘unusual income and expenses’ can be dissimilar in type or amount from income and expenses expected in the future;
   2. to help an entity to assess whether similar income or expenses will arise in the future, based on guidance on the assessment of future transactions and other events in other IFRS Accounting Standards; and
   3. to explain that in considering whether income or expenses are similar to expected future income or expenses, an entity would consider characteristics of the income and expenses, including the underlying event or transaction that gives rise to income or expenses.

   Eleven of 12 IASB members agreed with these decisions.

Income and expenses classified in the investing category (Agenda Paper 21B)

The IASB tentatively decided:

1. to retain the proposal for entities to classify in the investing category income and expenses from assets that generate returns individually and largely independently of other resources held by an entity. Eleven of 12 IASB members agreed with this decision.
2. to retain the proposed application guidance in the Exposure Draft. Ten of the 11 IASB members present agreed with this decision. One IASB member was absent.
3. to add further application guidance stating that:
   1. income and expenses arising from individual assets and disposal groups classified as held for sale would not be classified in the investing category. Ten of the 11 IASB members present agreed with this decision. One IASB member was absent.
   2. income and expenses arising from business combinations would not be classified in the investing category because they do not arise from assets that generate returns individually or largely independently of other resources held by an entity. Eight of the 11 IASB members present agreed with this decision. One IASB member was absent.
   3. negative returns, such as those arising from unfavourable exchange rates or negative interest rates, are classified in the same category as positive returns arising from the asset. Similarly, negative interest expense on liabilities is classified in the same category as positive interest expense. All 11 IASB members present agreed with this decision. One IASB member was absent.
4. to classify income and expenses from associates and joint ventures in the investing category. Nine of 12 IASB members agreed with this decision
5. to remove the discussion of the objective from the requirements in the Standard and explain in the Basis for Conclusions the reasons for including specific items in the investing category, without referring to that explanation as being an ‘objective’. Ten of 12 IASB members agreed with this decision.
6. to retain the label ‘investing category’ for that category. Eight of 12 IASB members agreed with this decision.
7. not to proceed with the proposed use of the defined term ‘income and expenses from investments’. Ten of 12 IASB members agreed with this decision.

Next step

The IASB will continue to redeliberate the project proposals at future meetings.

Business Combinations under Common Control (Agenda Paper 23)

The IASB met on 16 December 2021 to discuss feedback on its Discussion Paper Business Combinations under Common Control. (The Discussion Paper explores possible reporting requirements for a receiving entity that would, in the reporting of business combinations under common control, reduce diversity in practice and improve transparency.)

The IASB discussed feedback on the scope of the project and on selecting the measurement method. The IASB was not asked to make any decisions. 

Next step

The IASB will continue discussing feedback on other aspects of the Discussion Paper at a future meeting.

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

The IASB met on 14 December 2021 to discuss whether and, if so, how to propose amendments to the IFRS for SMEs Standard.

Towards an exposure draft—IFRS 3 Business Combinations (Agenda Paper 30A)

The IASB tentatively decided to propose amendments to Section 19 Business Combinations and Goodwill of the IFRS for SMEs Standard.

The proposals would align the definition of a business in the IFRS for SMEs Standard with the amended definition of a business issued in the amendments to IFRS 3 Business Combinations in October 2018 by reproducing, in a new appendix to Section 19, application guidance that includes:

1. the optional concentration test set out in paragraphs B7A–B7B of IFRS 3;
2. a decision tree to assess whether an acquired process is substantive; and
3. the application guidance for the assessment set out in paragraphs B8⁠–⁠B12D of IFRS 3, alongside some illustrative examples.

Eleven of 12 IASB members agreed with this decision.

The proposals would also partially align Section 19 with the requirements for acquisition-related costs and contingent consideration, as set out in IFRS 3, requiring an entity:

1. to recognise acquisition-related costs as an expense at the time of the acquisition. Ten of 12 IASB members agreed with this decision.
2. to recognise contingent consideration at fair value and subsequently measure it at fair value at each reporting date, with changes in fair value recognised in profit or loss (except for the subsequent measurement of any contingent consideration that meets the definition of an equity instrument). If measuring contingent consideration at fair value would involve undue cost or effort, an entity would be required to measure the contingent consideration using a ‘best estimate’ (the most likely outcome)—with changes in the subsequent measurement being recognised in profit or loss—and provide the related disclosures. Eight of 12 IASB members agreed with this decision.

The proposals would also add the requirements set out in IFRS 3 on accounting for an acquisition achieved in stages (step acquisitions). The IASB also tentatively decided to ask for further views on these requirements in the invitation to comment. All 12 IASB members agreed with these decisions.

The proposals would as well introduce guidance (in the new appendix to Section 19) for a new entity formed in a business combination, as set out in paragraph B18 of IFRS 3 and the application guidance set out in paragraphs B13–B17 of IFRS 3. All 12 IASB members agreed with this decision.

Finally, the IASB tentatively decided to retain unchanged the requirement in Section 19 that an entity measure any non-controlling interest in the acquiree at the non-controlling interest’s proportionate share of the recognised amounts of the acquiree’s identifiable net assets. Seven of 12 IASB members agreed with this decision.

Towards an exposure draft—IFRS 10 Consolidated Financial Statements (Agenda Paper 30B)

The IASB tentatively decided to propose amendments to Section 9 Consolidated and Separate Financial Statements of the IFRS for SMEs Standard to align partially with IFRS 10 Consolidated Financial Statements, by:

1. aligning the definition of control in Section 9 with that in IFRS 10;
2. retaining and updating the rebuttable presumption in paragraph 9.5 of the IFRS for SMEs Standard relating to the assessment of control; and
3. not introducing in the IFRS for SMEs Standard the requirement that an investment entity measures its investments in subsidiaries at fair value through profit and loss.

All 12 IASB members agreed with these decisions.

Towards an exposure draft—IFRS 11 Joint Arrangements (Agenda Paper 30C)

The IASB tentatively decided to propose amendments to Section 15 Investments in Joint Ventures of the IFRS for SMEs Standard to align partially with IFRS 11 Joint Arrangements, by:

1. aligning the definition of joint control in Section 15 with that in IFRS 11. All 12 IASB members agreed with this decision.
2. retaining the classifications of joint arrangements: ‘jointly controlled operations’, ‘jointly controlled assets’ and ‘jointly controlled entities’. Eleven of 12 IASB members agreed with this decision.
3. retaining the accounting requirements of Section 15, including the accounting policy election for jointly controlled entities. All 12 IASB members agreed with this decision.

Towards an exposure draft—IFRS 9 Financial Instruments (Agenda Papers 30D–30E)

The IASB tentatively decided to propose amendments to Section 11 Basic Financial Instruments of the IFRS for SMEs Standard by adding the definition of a ‘financial guarantee contract’ from IFRS 9. All 12 IASB members agreed with this decision.

At the meeting, the IASB also provided direction to the staff for developing an expected credit loss model in Section 11. This model will be considered at a future meeting, together with the measurement requirements for issued financial guarantee contracts.

Towards an exposure draft—Amendments to IFRS Standards and IFRIC Interpretations (Agenda Paper 30F–30J)

The IASB tentatively decided:

1. to propose amendments to the IFRS for SMEs Standard to align it with:
   1. Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41), with an exemption so that if, at initial recognition, separation of the bearer plants from the produce growing on bearer plants would involve undue cost or effort, an entity would not be required to separate bearer plants from the produce growing on bearer plants. Ten of 12 IASB members agreed with this decision.
   2. a package of amendments to IAS 1:
      1. Definition of Material (Amendments to IAS 1 and IAS 8);
      2. Disclosure Initiative (Amendments to IAS 1); and
      3. Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2). All 12 IASB members agreed with this decision.
   3. the amendments discussed in Agenda Paper 30I and listed as items 2–7, 9–12 in the table in Appendix A to Agenda Paper 30F. All 12 IASB members agreed with this decision.
2. to retain the IFRS for SMEs Standard unchanged for the amendments discussed in Agenda Paper 30J and listed as items 15–30 in the table in Appendix A to Agenda Paper 30F. All 12 IASB members agreed with this decision.
   

Towards an exposure draft—Other topics with amendments recommended (Agenda Paper 30K)

The IASB tentatively decided:

1. to retain paragraph 22.7(a) of the IFRS for SMEs Standard unchanged. Seven of 12 IASB members agreed with this decision.
2. to propose amendments to Section 26 Share-based Payment of the IFRS for SMEs Standard to include scope exclusions similar to those in paragraph 5 of IFRS 2 Share-based Payment. All 12 IASB members agreed with this decision.
3. to retain the requirements in Section 26 on share-based payments with settlement options unchanged. All 12 IASB members agreed with this decision.

Next step

The IASB will continue to develop the project proposals at a future meeting.

Maintenance and consistent application

Maintenance and consistent application (Agenda Paper 12)

The IASB met on 16 December 2021 to discuss the Lease Liability in a Sale and Leaseback project and to consider an agenda decision finalised at the November 2021 meeting of the IFRS Interpretations Committee.

Lease Liability in a Sale and Leaseback (IFRS 16): Project direction (Agenda Paper 12A)

In November 2020 the IASB published the Exposure Draft Lease Liability in a Sale and Leaseback, which proposed to amend IFRS 16 Leases. The comment period ended on 29 March 2021. At its May 2021 meeting, the IASB discussed a summary of feedback on the Exposure Draft.

At this meeting the IASB discussed how the project should proceed. In particular, the IASB tentatively decided to confirm its proposals in the Exposure Draft:

1. to clarify that the liability arising from a leaseback is a liability to which the sale and leaseback requirements in IFRS 16 apply;
2. not to change the initial measurement requirements in paragraph 100(a) of IFRS 16 for the right-of-use asset and the gain or loss arising from a sale and leaseback transaction;
3. to clarify that a seller-lessee subsequently measures the right-of-use asset arising from a leaseback by applying paragraphs 29–35 of IFRS 16; and
4. to include an illustrative example of a sale and leaseback transaction with variable payments.

Ten of the 11 IASB members present agreed with these decisions. One member was absent.

The IASB also tentatively decided to change the amendments from those proposed in the Exposure Draft by:

1. not prescribing how, at the commencement date, a seller-lessee determines the proportion of the previous carrying amount of the asset that relates to the right of use the seller-lessee retains;
2. requiring a seller-lessee to subsequently measure the liability arising from the leaseback by applying paragraphs 36–46 of IFRS 16; and
3. for the purposes of applying paragraphs 36–46 of IFRS 16, requiring the seller-lessee to apply the term ‘lease payments’ or ‘revised lease payments’ in such a manner that it does not recognise any amount of the gain or loss that relates to the right of use retained.

Ten of the 11 IASB members present agreed with these decisions. One member was absent.

Next step

At a future meeting the IASB will discuss the transition requirements for the proposed amendments, as well as the IASB’s compliance with applicable due process steps.

Economic Benefits from Use of a Windfarm (IFRS 16): Finalisation of agenda decision (Agenda Paper 12B)

The IASB discussed whether any IASB member objected to the Agenda Decision Economic Benefits from Use of a Windfarm (IFRS 16 Leases).

None of the IASB members present objected. One member was absent.

Next step

The Agenda Decision will be published in December 2021 in an addendum to IFRIC Update November 2021.

Strategy and governance

Third Agenda Consultation (Agenda Paper 24)

The IASB met on 15 December 2021:

• to complete its discussion of the feedback on its Request for Information Third Agenda Consultation (Agenda Paper 24A); and
• to finalise the criteria that the IASB will use when assessing the priority of financial reporting issues that could be added to its work plan (Agenda Paper 24B).

The IASB tentatively decided not to make any changes to the list of criteria but to proceed with the list as proposed in the Request for Information.

Eleven of 12 IASB members agreed with this decision.

Next step

After further discussion, the IASB will make decisions about the strategic direction and balance of its activities; and about the new financial reporting issues to be added to its work plan.