IASB Update June 2022

Research and standard-setting

Post-implementation Review of IFRS 9—Classification and Measurement (Agenda Paper 3)

The IASB met on 21 June 2022 to discuss feedback from its Post-implementation Review of IFRS 9 Financial Instruments. In particular, the IASB discussed:

1. an analysis of stakeholder views of equity instruments for which an entity has elected to present fair value changes in other comprehensive income; and
2. a literature review update.

The IASB was not asked to make any decisions.

Next step

The IASB will continue its discussions of the topic.

Financial Instruments with Characteristics of Equity (Agenda Paper 5)

The IASB met on 20 June 2022 to continue its discussions on the reclassification of financial instruments issued by an entity as financial liabilities or equity instruments when the substance of the contractual terms changes without a modification to the contract.

The IASB tentatively decided to add general requirements on reclassification to IAS 32 Financial Instruments: Presentation to prohibit reclassification other than for changes in the substance of the contractual terms arising from changes in circumstances outside the contract. This approach does not affect reclassifications already required in IAS 32.

All 10 IASB members agreed with this decision.

The IASB also tentatively decided to clarify that when the substance of the contractual terms changes because of changes in circumstances outside the contract:

1. a financial liability reclassified from equity would be measured at fair value at the date of reclassification. Any difference between the carrying amount of the equity instrument and the fair value of the financial liability would be recognised in equity. All 10 IASB members agreed with this decision
2. an equity instrument reclassified from a financial liability would be measured at the carrying value of the financial liability at the date of reclassification. No gain or loss would be recognised. All 10 IASB members agreed with this decision.
3. a reclassification would be accounted for in the reporting period in which the change in circumstances occurred. Eight of 10 IASB members agreed with this decision.

The IASB also acknowledged the importance of disclosures in helping users of financial statements better understand the change in classification and its effect on measurement, if any.

Next step

The IASB will discuss other topics set out in the project plan at its future meetings.

Equity Method (Agenda Paper 13)

The IASB met on 21 June 2022 to continue the discussion, started at its April 2022 meeting, on this application question: how does an investor apply the equity method of accounting when purchasing an additional interest (or disposing of an interest) in an associate while retaining significant influence?

The IASB considered an analysis of its preferred approach to applying the equity method of accounting, along with the implications of an alternative approach.

Purchase of an additional interest (and disposal of an interest) in an associate while retaining significant influence (Agenda Paper 13A)

The IASB tentatively decided that an investor applying the preferred approach to a bargain purchase of an additional interest, while retaining significant influence, would recognise a bargain purchase gain in profit or loss.

All 10 IASB members agreed with this decision.

The IASB tentatively decided that an investor applying the preferred approach to a partial disposal, while retaining significant influence, would measure the portion of the carrying amount of an investment in an associate to be derecognised using:

1. a specific identification method, if the investor can identify the specific portion of the investment being disposed of and its cost; and
2. the last-in, first-out method, if the specific portion of the investment being disposed of cannot be identified.

The IASB decided to explore practical methods of measuring the portion of the carrying amount of an investment in an associate to be derecognised when an investor applies the preferred approach to a partial disposal while retaining significant influence.

Six of 10 IASB members agreed with these decisions.

Other changes in an associate’s net assets (Agenda Paper 13B)

The IASB discussed how to apply its preferred approach to other changes in an associate’s net assets that change an investor’s ownership interest.

The IASB decided to continue discussing this application question at a future meeting.

Nine of 10 IASB members agreed with this decision.

Next step

The IASB will continue discussing the application questions within the scope of the project at a future meeting.

Primary Financial Statements (Agenda Paper 21)

The IASB met on 20 June 2022 to redeliberate the proposals in its Exposure Draft General Presentation and Disclosures relating to:

• general requirements for additional line items and subtotals; and
• the use of columns for presenting management performance measures.

Use of columns to present management performance measures, and general requirements for additional line items and subtotals (Agenda Paper 21A)

The IASB tentatively decided:

1. to add a requirement, based on the discussion in paragraphs BC31 and BC165 of the Basis for Conclusions accompanying the Exposure Draft, for additional subtotals and line items presented in the statement(s) of financial performance to fit into the structure of the categories required in the Accounting Standard. All 10 IASB members agreed with this decision.
2. to withdraw the proposal to specifically prohibit the use of columns for presenting management performance measures in the statement(s) of financial performance. Nine of 10 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 21 June 2022 to discuss its project on Business Combinations under Common Control.

The IASB discussed whether conceptually the acquisition method and/or a book-value method should apply to business combinations under common control. In particular, the IASB discussed:

1. the similarities and differences between business combinations under common control and business combinations covered by IFRS 3 Business Combinations; and
2. the types of users of a receiving entity’s financial statements and their information needs compared to those of a business combination covered by IFRS 3.

The IASB was not asked to make any decisions.

Next step

The IASB will continue its discussions on selecting the measurement method, including practical considerations such as a cost constraint, at a future meeting.

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

The IASB met on 22 June 2022 to discuss whether and, if so, how to propose amendments to the IFRS for SMEs Accounting Standard as a part of the second comprehensive review.

Towards an exposure draft—Guidance on public accountability (Agenda Paper 30A)

The IASB tentatively decided:

1. not to include guidance on public accountability from Module 1 Small and Medium-sized Entities in the IFRS for SMEs Accounting Standard;
2. not to include guidance on public accountability from Module 1 in the proposed Accounting Standard Subsidiaries without Public Accountability: Disclosures when it is finalised; but
3. to make Module 1 separately available on the IFRS Foundation’s website as educational material to support the proposed Accounting Standard Subsidiaries without Public Accountability: Disclosures, when that Accounting Standard is finalised.

Eight of 10 IASB members agreed with this decision.

Towards an exposure draft—Additional simplifications to IFRS 15 Revenue from Contracts with Customers (Agenda Paper 30B)

The IASB tentatively decided to propose amendments to the IFRS for SMEs Accounting Standard to align Section 23 Revenue of the Standard with IFRS 15 Revenue from Contracts with Customers, with simplifications for:

1. Customer options for additional goods or services—an SME would be required to:
   1. account for an option that provides a material right to the customer (excluding contract renewal options) as a separate performance obligation when the effect of doing so is significant to the individual contract; and
   2. account for contract renewal options based on the expected contract term and the corresponding expected consideration.
2. Principal-versus-agent considerations—an SME would be determined to be acting as a principal if:
   1. it controls the distinct good or service (or a distinct bundle of goods or services) to be provided to a customer before the good or service (or the distinct bundle) is transferred to the customer; or
   2. it is primarily responsible for fulfilling the promise to provide that good or service.
3. Warranties—if a contract with a customer includes a warranty and the customer does not have the option to purchase a warranty separately an SME would be required, if the warranty is significant to the contract, to assess whether the warranty provides the customer with a service in addition to the assurance that the product complies with agreed-upon specifications.
4. Licensing—a licence would be determined to provide a customer with a right to access an SME’s intellectual property if the SME expects to undertake activities that either:
   1. would significantly affect the benefit the customer obtains from the intellectual property by changing the substance of the intellectual property; or
   2. could significantly affect the benefit the customer obtains from the intellectual property by directly exposing the customer to any positive or negative effects of those activities.
5.  Allocating discounts and variable consideration—an SME would be required to allocate discounts and variable consideration to the performance obligations in a contract on a relative stand-alone selling price basis, unless this basis did not depict the amount of consideration to which the SME expects to be entitled in exchange for satisfying each separate performance obligation. In such a case, the SME would instead be required to use a method that reflects the amount of consideration to which the SME expects to be entitled in exchange for satisfying each separate performance obligation.
6. Allocating variable consideration—when an SME transfers distinct goods or services promised in a series of distinct goods or services that forms part of a single performance obligation, the SME would be required to allocate variable consideration to all the distinct goods or services that form part of the single performance obligation, unless this does not depict the amount of consideration to which the SME expects to be entitled in exchange for transferring the promised goods or services to the customer. In such a case, the SME would instead be required to use a method that reflects the amount of consideration to which the SME expects to be entitled in exchange for transferring the promised goods or services to the customer.

All 10 IASB members agreed with these decisions.

The IASB also decided to revisit the tentative decision it made in February 2022 and tentatively decided to propose amendments to Section 23 of the IFRS for SMEs Accounting Standard to require, rather than permit, an SME to account for a promise to transfer a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer as a separate performance obligation, in line with the requirement in IFRS 15 (that is, without any simplification).

All 10 IASB members agreed with this decision.

The IASB also tentatively decided to propose amendments to Section 23 of the IFRS for SMEs Accounting Standard to require an SME to disclose:

1. revenue recognised from contracts with customers disaggregated into categories, showing separately, at a minimum, revenue arising from:
   1. the sale of goods;
   2. the rendering of services;
   3. royalties;
   4. commissions; and
   5. any other significant types of revenue; and
2. when the SME typically satisfies its performance obligations (based on paragraph 119(a) of IFRS 15).

All 10 IASB members agreed with this decision.

The IASB also tentatively decided not to introduce into Section 23 of the IFRS for SMEs Accounting Standard disclosure requirements based on paragraphs 89, 90, 93 and 97 of the Exposure Draft Subsidiaries without Public Accountability: Disclosures.

All 10 IASB members agreed with this decision.

Towards an exposure draft—Transition to the third edition of the IFRS for SMEs Accounting Standard (Agenda Paper 30C)

The IASB tentatively decided to propose transition requirements for:

1. the amendments to the IFRS for SMEs Accounting Standard that would align the Standard with IFRIC Interpretations and amendments to full IFRS Accounting Standards; and
2. guidance for first-time adopters of the IFRS for SMEs Accounting Standard.

The transition requirements to be proposed in the IFRS for SMEs Accounting Standard are based on the transition requirements for the related IFRIC Interpretations and amendments to full IFRS Accounting Standards, with the exception of:

1. an option to apply retrospectively the amendments to Section 16 Investment Property and Section 26 Share-based Payment of the Standard that the IASB plans to propose. The IASB tentatively decided to propose not to include such an option; therefore, an entity would be required to apply the amendments to Section 16 and Section 26 prospectively.
2. a relief from providing comparative disclosures of the changes in liabilities arising from financing activities. The IASB tentatively decided not to propose such a relief. An entity applying the amendments to Section 7 Statement of Cash Flows of the Standard that the IASB plans to propose would, therefore, be required to provide comparative disclosures of changes arising from financial activities, including changes arising from cash flows and non-cash flows.

All 10 IASB members agreed with these decisions.

Due process and permission to begin the balloting process (Agenda Paper 30D)

The IASB tentatively decided to set a comment period of 180 days for the exposure draft being developed for the project.

Nine of 10 IASB members agreed with this decision.

The IASB discussed the due process steps—including permission to begin the balloting process—for the exposure draft.

All 10 IASB members confirmed they were satisfied that the IASB has complied with the applicable due process requirements and has undertaken sufficient consultation and analysis to begin the process for balloting the exposure draft.

No IASB member indicated an intention to dissent from the proposals in the exposure draft.

Next step

The staff will prepare the exposure draft for balloting.

Disclosure Initiative—Subsidiaries without Public Accountability: Disclosures (Agenda Paper 31)

The IASB met on 22 June 2022 to decide on the direction of its Disclosure Initiative—Subsidiaries without Public Accountability: Disclosures project.

The IASB decided to proceed with its proposal for a new IFRS Accounting Standard as set out in the Exposure Draft Subsidiaries without Public Accountability: Disclosures and agreed on a project plan for developing the new Accounting Standard.

All 10 IASB members agreed with these decisions.

The IASB also tentatively decided:

1. to include in the new IFRS Accounting Standard disclosure requirements of IFRS Accounting Standards issued as at 28 February 2021; and
2. to consider amendments to the disclosure requirements in IFRS Accounting Standards issued after 28 February 2021 after the new Standard is issued.

All 10 IASB members agreed with these decisions.

Next step

The IASB will continue discussing the feedback on the Exposure Draft.

Maintenance and consistent application

Maintenance and consistent application (Agenda Paper 12)

The IASB met on 20 June 2022 to discuss feedback on its Exposure Draft Non-current Liabilities with Covenants (Exposure Draft), which proposed amendments to IAS 1 Presentation of Financial Statements. The comment period for the Exposure Draft ended on 21 March 2022. The IASB also discussed how to proceed with the project.

Classification as current or non-current (Agenda Paper 12B)

The IASB tentatively decided:

1. to finalise the proposed amendments to paragraph 72A of IAS 1 and the addition of paragraph 72B. That is, the IASB tentatively decided to confirm that only covenants with which an entity must comply on or before the reporting date would affect a liability’s classification as current or non-current.
2. to provide no further clarification or application guidance on:
   1. determining whether a right to defer settlement has substance; or
   2. applying paragraphs 74–75 of IAS 1.
3. not to finalise the proposed clarification in paragraph 72C about situations in which an entity would have no right to defer settlement but, instead, to specify that the proposed requirements in paragraph 72B apply only to liabilities arising from loan arrangements.

All 10 IASB members agreed with these decisions.

Separate presentation and disclosure (Agenda Paper 12C)

The IASB tentatively decided:

1. not to finalise the proposal to require an entity to present separately non-current liabilities with covenants but, instead, to require an entity to disclose the carrying amount of such liabilities in the notes.
2. to finalise the proposal to require an entity to disclose information about non-current liabilities with covenants, with some modifications. Specifically, the IASB tentatively decided to require that, when an entity classifies liabilities arising from loan arrangements as non-current and those liabilities are subject to covenants, the entity is required to disclose information that enables investors to assess the risk that the liabilities could become repayable within 12 months, including:
   1. information about the covenants with which the entity is required to comply (such as the nature of the covenants and the date on which the entity must comply with them).
   2. facts and circumstances that indicate the entity may have difficulty complying with covenants when it is required to do so—for example, the entity having acted during or after the reporting period to avoid or mitigate a potential breach. Such facts and circumstances could also include the fact that the entity would not have complied with the covenants based on its circumstances at the reporting date.

All 10 IASB members agreed with these decisions.

Transition and effective date deferral (Agenda Paper 12D)

The IASB tentatively decided:

1. to require an entity to apply the proposed amendments retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
2. to allow an entity to adopt early the proposed amendments or the amendments in Classification of Liabilities as Current or Non-current (2020 amendments), but only if the entity adopts the proposed amendments and the 2020 amendments at the same time.
3. to defer the effective date of the 2020 amendments to align it with the effective date of the proposed amendments. The effective date will be decided at a future meeting, but it will be no earlier than annual reporting periods beginning on or after 1 January 2024.

All 10 IASB members agreed with these decisions.

Next step

The IASB will discuss the effective date of the proposed amendments, as well as its compliance with applicable due process steps, at a future meeting.

Contractual Cash Flow Characteristics of Financial Assets (Amendments to IFRS 9) (Agenda Paper 16)

The IASB met on 21 June 2022 to discuss the proposed scope and objective of its project to clarify the requirements in IFRS 9 Financial Instruments for assessing a financial asset’s contractual cash flow characteristics.

The IASB was not asked to make any decisions.

Next step

The IASB will discuss potential clarifications to the requirements at a future meeting.