April 15, 2015 On the Horizon for IFRS IFRIC meeting March 2015 Meeting highlights IASB issues March 2015 IFRIC meeting highlights The IFRS Interpretations Committee (IFRIC or the Committee) has issued the March 2015 IFRIC Update, which summarizes the deliberations during its meeting in London on March 24, 2015. This IFRS Update provides a brief description of the topics discussed at that meeting. For a more complete description of the issues discussed by the Committee, as well as the results of those discussions, please refer to the March 2015 IFRIC Update. All decisions reached at Committee meetings are tentative and may be changed or modified at future meetings. Committee decisions become final only after completion of a formal vote on an Interpretation or Draft Interpretation, which is confirmed by the IASB. Contents IASB issues March 2015 IFRIC meeting highlights... 1 Current agenda... 2 Scope and presentation in IFRS 5... 2 Date of transaction for purpose of identifying the applicable exchange rate for revenue recognition... 2 Recognition of deferred tax assets for unrealized losses... 3 Tentative agenda decision... 4 Continuation of a minimum funding requirement for contributions relating to future service... 4 Work in progress... 4 Control of a structured entity by an operating lessee or by a junior lender... 4 Agenda decisions... 5 Classification of joint arrangements: assessment of other facts and circumstances... 5 Classification of joint arrangements: application of other facts and circumstances... 6 Consideration of two joint arrangements with similar features that are classified differently... 7 Accounting by joint operator for recognition of revenue... 7 Accounting by joint operator when its share of output purchased differs from its share of ownership interest in joint operation... 8 Accounting by the joint operator in its separate financial statements... 9 Accounting by joint operation that is a separate vehicle in its financial statements... 9 Selection of applicable tax rate for measurement of deferred tax relating to investment in associate.. 9 Measurement of longevity swaps held under a defined benefit pension plan... 10
On the Horizon for IFRS 2 Current agenda Scope and presentation in IFRS 5 The Committee considered the following relating to the scope of IFRS 5, Non-current Assets Held for Sale and Discontinued Operations: Is loss of control key to the inclusion of an event within the scope of IFRS 5 or does there also need to be a disposal for the event to be classified as held for sale? A better understanding of the objective for the scope of IFRS 5 is necessary to decide whether the issue can be addressed through an interpretation or broader amendment to IFRS 5. The Committee asked the staff to undertake a broader analysis of the scope of IFRS 5. Is IFRS 5 applicable to a disposal group consisting mainly, or entirely, of financial instruments? The Committee noted that such a disposal group would meet the classification requirements for held for sale. However, the Committee noted that the question about the measurement of such a disposal group is another example of the IFRS 5 measurement challenges that it had previously considered. The Committee plans to consider this issue as part of the issues related to the recognition of an impairment loss for a disposal group previously considered at the September 2014 meeting. How to apply the notion of a major line of business in presenting discontinued operations? The issue is about how to interpret the definition of discontinued operation in terms of the concept of operating segment in IFRS 8, Operating Segments. The Committee noted that the definition of discontinued operations is an area that the IASB had attempted to revise in the former financial statement presentation project. The Committee plans to consider this issue along with the disclosure and presentation issues that it had considered at the September 2014 meeting. The staff plans to present a summary of the issues previously discussed but not resolved at a future meeting with a proposal on how to proceed with these outstanding items. Date of transaction for purpose of identifying the applicable exchange rate for revenue recognition The Committee continued to discuss the development of an interpretation of paragraphs 21 22 of IAS 21, The Effects of Changes in Foreign Exchange Rates that would address how to determine the date of the transaction. The date of the transaction determines the spot exchange rate used to translate a foreign currency transaction on initial recognition of the asset, expense, or income (or part of it) that follows the recognition of a non-monetary prepayment asset or a non-monetary deferred income liability. A nonmonetary prepayment asset or a non-monetary deferred income liability typically arises on the payment or receipt of consideration in advance of the recognition of the related asset, expense, or income and represent an entity s right to receive goods or services, or an entity s obligation to transfer goods or services, respectively. Scope of the proposed interpretation The Committee tentatively decided that the proposed draft interpretation would apply to both cash and non-cash consideration that is denominated or priced in a foreign currency. In addition, it would not apply in circumstances in which the foreign currency amount of the non-monetary prepayment asset or deferred income liability is subsequently required to be remeasured for the purposes of the initial recognition of the related asset, expense, or income (or part of it).
On the Horizon for IFRS 3 Interaction with IFRS 15 The Committee considered the interaction of the proposed draft interpretation with IFRS 15, Revenue from Contracts with Customers and noted that an entity first applies IFRS 15 to its revenue transactions to determine how the transaction is recognized and measured in the financial statements and subsequently applies IAS 21 to determine the exchange rate to apply when translating any foreign currency amounts into the entity s functional currency. The Committee noted that IFRS 15.105-106 states that if a customer pays consideration, or an entity has a right to an amount of consideration that is unconditional (i.e. a receivable), before the entity transfers a good or service to the customer, the entity records a contract liability when the payment is made or due, whichever is earlier. The Committee tentatively agreed that the date of the transaction for IAS 21 purposes would be the earlier of: The date of the initial recognition of the non-monetary prepayment asset or deferred income liability (which will generally be the date of the payment, or receipt, of the advance consideration); and The date that the related asset, expense, or income (or part of it) is recognized in the financial statements The Committee also tentatively agreed that: The proposed draft interpretation and accompanying examples would not explicitly include guidance on the accounting for contract assets or significant financing components for foreign currency revenue transactions in accordance with IFRS 15 Certain examples would refer to the fact that the entity determines that the variable consideration requirements in IFRS 15 do not apply on the basis that the amount of consideration in the foreign currency is fixed Transition The Committee tentatively agreed that, on initial application, an entity would either apply the draft interpretation retrospectively in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors; or prospectively to the initial recognition of an asset, expense or income, but without restating the previously reported balance sheet. Next steps The Committee agreed that the staff would prepare the draft interpretation for a written ballot, subject to no significant matters arising from discussions at a future IASB meeting. Deliberation of comments received on proposals for narrow-scope amendments Recognition of deferred tax assets for unrealized losses The Committee considered an analysis of the comment letters received on the Exposure Draft, Recognition of Deferred Tax Assets for Unrealised Losses (Proposed amendments to IAS 12) and decided to propose that the IASB proceed with the proposed amendments, subject to certain revisions. The Committee expressed concern about the ability of an entity to recover an asset for more than its carrying amount when it is measured at fair value and when recovery is not based on contractual cash flows. The Committee asked the staff to include a discussion of the concern in the Basis for Conclusions.
On the Horizon for IFRS 4 The staff will present the Committee's recommendations at a future IASB meeting. Tentative agenda decision Committee agenda decisions are not Interpretations. Interpretations are determined only after extensive deliberations and due process, including a formal vote. Interpretations become final only when approved by the IASB. Tentative agenda decisions, including the reasons for not adding the issues to the agenda, will be reconsidered at the July 2015 meeting. Continuation of a minimum funding requirement for contributions relating to future service The Committee was asked to clarify whether the future minimum funding requirement for contributions to cover future service would apply for only the minimum fixed period in certain specified circumstances. The issue could affect the amount of the net defined benefit asset to be recognized in the entity s statement of financial position. The Committee noted that an entity s minimum funding requirements at a given date can relate to the contributions that are required to cover: An existing shortfall for past service on the minimum funding basis Future service as explained in paragraph BC25 of IFRIC 14, IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding requirements and their interaction The Committee also noted that the level of the contributions will be subject to future negotiations, although the entity must continue to make contributions for future service under the existing funding principles, if the plan continues after the minimum period. When the entity estimates the future minimum funding requirement contributions in the circumstances described, the Committee noted that the entity would assume a continuation of the existing funding principles for future service, because: For any factors not specified by the minimum funding basis (for example, the period to continue the plan is not specified by the existing funding principles), the assumptions for determining future service costs and those used to estimate the future minimum funding requirement contributions for future service must be consistent The estimate would not include changes to the funding principles to determine contributions for future service, if such changes require future negotiations with the Trustees and tentatively decided not to add this issue to its agenda. Work in progress Control of a structured entity by an operating lessee or by a junior lender The Committee was asked for clarification about the interaction of IFRS 10, Consolidated Financial Statements and IAS 17, Leases. The Committee discussed the comment letters received on two tentative agenda decisions from its November 2014 meeting. The Committee noted that two of the comment letters received highlighted concerns about diversity in practice on this issue. Some members of the Committee suggested that it would be helpful to expand the wording of the tentative agenda decisions to include additional discussion about the assessment required when making conclusions about control.
On the Horizon for IFRS 5 The Committee asked the staff to bring a revised tentative agenda decision for discussion and public reexposure to a future meeting. Agenda decisions IFRIC agenda decisions are published for information only and do not change existing IFRS requirements. Committee agenda decisions are not Interpretations. Interpretations are determined only after extensive deliberations and due process, including a formal vote. Interpretations become final only when approved by the IASB. Classification of joint arrangements: assessment of other facts and circumstances The Committee noted that the assessment of other facts and circumstances would focus on whether those facts and circumstances create enforceable rights to the assets and obligations for the liabilities (IFRS 11.14 and B30). How and why particular facts and circumstances create rights and obligations The Committee discussed how and why particular facts and circumstances create rights and obligations that result in the joint arrangement being classified as a joint operation, when the joint arrangement is structured through a separate vehicle whose legal form causes the separate vehicle to be considered in its own right. The Committee noted that the assessment of other facts and circumstances is performed when there is no contractual arrangement to reverse or modify the rights and obligations conferred by the legal form of the separate vehicle through which the arrangement has been structured. The assessment of other facts and circumstances focuses on whether the other facts and circumstances establish, for each party to the joint arrangement, rights to the assets and obligations for the liabilities relating to the joint arrangement. The Committee observed that to classify the joint arrangement as a joint operation as a result of assessing other facts and circumstances, it is necessary to demonstrate that: Each party to the joint arrangement has rights and obligations relating to economic benefits of the assets of the arrangement; and Each party is obligated to provide cash to the arrangement through enforceable obligations, which is used to settle the liabilities of the joint arrangement on a continuous basis. Implication of economic substance The Committee observed that the concept of economic substance may not be consistently understood or applied in practice with respect to the assessment of other facts and circumstances. The Committee noted that the consideration of other facts and circumstances is not a test of whether each party to the joint arrangement is closely or fully involved with the operation of the separate vehicle, but a test of whether other facts and circumstances override the rights and obligations conferred upon the party by the legal form of the separate vehicle (IFRS 11.BC43). The Committee determined that the assessment of other facts and circumstances would be undertaken with a view towards whether enforceable rights to assets and obligations for liabilities are created in accordance with existing IFRS requirements. The Committee concluded that neither an interpretation nor an amendment to a Standard was necessary and decided not to add this issue to its agenda.
On the Horizon for IFRS 6 Classification of joint arrangements: application of other facts and circumstances The Committee discussed how other facts and circumstances would be applied to some specific fact patterns and considered how particular features of those fact patterns would affect the classification of the joint arrangement when assessing other facts and circumstances. Output sold at a market price The Committee discussed whether the fact that the output from the joint arrangement is sold to the parties of the joint arrangement at a market price prevents the joint arrangement from being classified as a joint operation. The Committee observed that such a circumstance is not a determinative factor for the classification of the joint arrangement. It noted that the parties would also need to consider whether the cash flows provided to the joint arrangement through the parties purchase of the output from the joint arrangement at market price, along with any other funding that the parties are obliged to provide, would be sufficient to enable the joint arrangement to settle its liabilities on a continuous basis. The Committee noted that judgment is needed to determine whether the arrangement is a joint operation based on other facts and circumstances. Financing from a third party The Committee discussed whether financing from a third party prevents a joint arrangement from being classified as a joint operation. The Committee noted that if the cash flows to the joint arrangement from the sale of output to the parties, along with any other funding that the parties are obligated to provide, satisfy the joint arrangement s liabilities, then third-party financing alone would not affect the classification of the joint arrangement, irrespective of whether the financing occurs at inception or during the course of the joint arrangement s operations. The Committee noted that in this situation, the joint arrangement will, or may, settle some of its liabilities using cash flows from third-party financing, but the resulting obligation to the third-party finance provider will be settled using cash flows that the parties are obligated to provide. Nature of output The Committee discussed whether the nature of the output (i.e. fungible or custom-made output) produced by the joint arrangement determines the classification of a joint arrangement when assessing other facts and circumstances. The Committee noted that the answer is not a determinative factor for the classification of the joint arrangement. It also noted that the focus of obligation for the liabilities in IFRS 11 is on the existence of cash flows between the parties to satisfy the joint arrangement s liabilities as a consequence of the parties rights to, and obligations for, the assets of the joint arrangement, regardless of the nature of the product. Determining the basis for substantially all of the output The Committee discussed whether volumes or monetary values of output would be the basis for determining whether the parties to the joint arrangement are taking substantially all of the output from the joint arrangement when assessing other facts and circumstances. The Committee noted that to meet the criteria for classifying the joint arrangement as a joint operation through the assessment of other facts and circumstances (IFRS 11.B31-B32):
On the Horizon for IFRS 7 The parties to the joint arrangement would have rights to substantially all the economic benefits of the assets of the joint arrangement The joint arrangement would be able to settle its liabilities from the cash flows received as a consequence of the parties rights to and obligations for the assets of the joint arrangement, along with any other funding that the parties are obligated to provide The Committee noted that the economic benefits of the assets of the joint arrangement would relate to the cash flows arising from the parties rights to, and obligations for, the assets. Accordingly, it noted that the assessment is based on the monetary value of the output, instead of physical quantities. and decided not to add these issues to its agenda. Consideration of two joint arrangements with similar features that are classified differently The Committee discussed a circumstance in which two joint arrangements would be classified differently when they have similar features, but one is structured through a separate vehicle and the other is not (in circumstances in which the legal form confers separation between the parties and the separate vehicle). Two such joint arrangements could be classified differently because: The legal form of a joint arrangement structured through a separate vehicle would be overridden by other contractual arrangements or specific other facts and circumstances for the joint arrangement to be classified as a joint operation; but A joint arrangement that is not structured through a separate vehicle is classified as a joint operation The Committee thought that such different accounting would not conflict with the concept of economic substance. This is because, according to IFRS 11, the concept of economic substance means that the classification of the joint arrangement would reflect the rights and obligations of the parties to the joint arrangement and the presence of a separate vehicle plays a significant role in determining the nature of those rights and obligations. The Committee noted that the requirements of IFRS 11 provide the principles necessary for determining the classification of joint arrangements, including assessing the impact of a separate vehicle. The assessment of the classification would depend on specific contractual terms and conditions and requires a full analysis of features involving the joint arrangement. and decided not to add this issue to its agenda. Accounting by joint operator for recognition of revenue The Committee discussed whether a joint operator would recognize revenue in relation to the output purchased from the joint operation by the parties. This issue relates to the application of IFRS 11.20(d), which requires a joint operator to recognize its share of the revenue from the sale of the output by the joint operation. The Committee noted that if the joint arrangement is structured through a separate vehicle and the assessment of other facts and circumstances results in the joint arrangement being classified as a joint operation, because the parties take all the output of the joint arrangement in proportion to their rights to the output, the application of IFRS 11.20(d) would not result in the recognition of revenue by the parties. This is because, if the joint operators purchase all the output from the joint operation in proportion to their rights to the output, they would recognize their revenue only when they sell the output to third parties.
On the Horizon for IFRS 8 A joint operator that has an obligation to purchase the output from the joint operation has rights to the assets of the joint operation. The sale of the output by the joint operation to the joint operator results in it selling output to itself and, therefore, the joint operator would not recognize a share of the revenue from the sale of that output by the joint operation. Accordingly, IFRS 11.20(d) would result in the recognition of revenue by a joint operator only when the joint operation sells its output to third parties. For this purpose, third parties do not include other parties who have rights to the assets and obligations for the liabilities relating to the joint operation. and decided not to add this issue to its agenda. Accounting by joint operator when its share of output purchased differs from its share of ownership interest in joint operation The Committee discussed the accounting when the joint operator s share of the output purchased differs from its share of ownership interest in the joint operation. The Committee considered a fact pattern in which the joint arrangement is structured through a separate vehicle and for which the parties to the joint arrangement have committed themselves to purchase substantially all of the output produced at a price designed to achieve a break-even result. The parties to the joint arrangement are considered to have rights to the assets and obligations for the liabilities. Such a joint arrangement is classified as a joint operation (Example 5, IFRS 11). Sometimes the parties percentage ownership interest in the separate vehicle differs from the percentage share of the output produced that each party is obligated to purchase. This may occur, when for example, the share of output purchased by each party varies over the life of the joint arrangement. A key issue that arises in this situation is over what time horizon should the share of output be considered. The Committee noted that the joint operators of such a joint operation would account for their assets, liabilities, revenues, and expenses in accordance with the shares specified in the contractual arrangement (IFRS 11.20). However, when an assessment of other facts and circumstances has concluded that the joint arrangement is a joint operation, and the joint arrangement agreement does not specify the allocation of assets, liabilities, revenues, or expenses, the question arises about what share to recognize. Specifically, should the share of assets, liabilities, revenue, and expenses recognized reflect the percentage of ownership of the legal entity, or the percentage of output purchased by each joint operator? The Committee also noted that if the joint operators made a substantial investment in the joint operation that differed from their ownership interest, there may be other elements of the arrangements that could explain why there is a difference between the percentage of ownership interest and the percentage share of the output produced that each party is obligated to purchase. It noted that the identification of the other elements may provide relevant information to determine how to account for the difference between the two. The Committee noted that it is important to understand why the share of the output purchased differs from the ownership interests in the joint operation and thus judgment is needed. The Committee noted that notwithstanding these observations, there remained concerns about the sufficiency of the guidance in IFRS 11 on the accounting by a joint operator in the circumstances described. The Committee noted that to develop additional guidance for this issue would require a broader analysis than could be achieved by the Committee and decided not to add this issue to its agenda.
On the Horizon for IFRS 9 Accounting by the joint operator in its separate financial statements The Committee discussed the accounting by a joint operator in its separate financial statements for its share of assets and liabilities of a joint operation when that joint operation is structured through a separate vehicle. The Committee noted that IFRS 11 requires the joint operator to account for its rights and obligations in relation to the joint operation. It also noted that those rights and obligations are the same whether separate or consolidated financial statements are prepared (IFRS 11.26) and thus the same accounting is applied. The Committee also noted that IFRS 11 requires the joint operator to account for its rights and obligations, which are its share of the assets held by the entity and its share of the liabilities incurred by it. The Committee observed that the joint operator would not additionally account in its separate or consolidated financial statements for its shareholding in the separate vehicle. and decided not to add this issue to its agenda. Accounting by joint operation that is a separate vehicle in its financial statements The Committee discussed the accounting by a joint operation that is a separate vehicle in its financial statements. The recognition by joint operators in both consolidated and separate financial statements of their share of assets and liabilities held by the joint operation leads to the question of whether those same assets and liabilities would also be recognized in the financial statements of the joint operation. The Committee noted that IFRS 11 applies only to the accounting by the joint operators and not to the accounting by the separate vehicle that is a joint operation. The financial statements of the separate vehicle would therefore be prepared in accordance with applicable Standards. Company law often requires a legal entity or separate vehicle to prepare financial statements. Accordingly, the reporting entity for the financial statements would include the assets, liabilities, revenues, and expenses of that legal entity or separate vehicle. However, when identifying the assets and liabilities of the separate vehicle, it is necessary to understand the joint operators rights and obligations relating to those assets and liabilities and how those rights and obligations affect those assets and liabilities. and decided not to add this issue to its agenda. Selection of applicable tax rate for measurement of deferred tax relating to investment in associate The Committee was asked to clarify the selection of the applicable tax rate for the measurement of deferred tax relating to an investment in an associate in a multi-tax rate jurisdiction. The question is how the tax rate would be selected when local tax legislation prescribes different tax rates for different manners of recovery (for example, dividends, sale, or liquidation). The Committee noted that IAS 12.51A states that an entity measures deferred tax liabilities and assets using the tax rate and the tax base that are consistent with the expected manner of recovery or settlement. Accordingly, the tax rate would reflect the expected manner of recovery or settlement. If one part of the temporary difference is expected to be received as dividends, and another part is expected to be recovered upon sale or liquidation (for example, an investor has a plan to sell the investment later and expects to receive dividends until the sale of the investment), different tax rates would be applied to the parts of the temporary difference to be consistent with the expected manner of recovery.
On the Horizon for IFRS 10 The Committee concluded that it did not expect diversity in the application of IAS 12 and decided not to add this issue to its agenda. Measurement of longevity swaps held under a defined benefit pension plan The Committee was asked to clarify the measurement of longevity swaps held under an entity s defined benefit pension plan. A longevity swap transfers the risk of pension scheme members living longer (or shorter) than expected. The swap transfers this risk from the pension scheme to an external party (usually an insurance company or a bank). If a defined benefit plan enters into a longevity swap, it pays fixed amounts and receives variable amounts. These amounts are settled on a net basis. The amounts under the variable leg are calculated at the amounts actually paid to beneficiaries. The outreach did not provide evidence that the use of longevity swaps is widespread. The Committee understands that when such transactions take place, the predominant practice is to account for a longevity swap as a single instrument, and measure it at fair value as part of plan assets, by applying paragraphs 8 and 113 of IAS 19, Employee Benefits and IFRS 13, Fair Value Measurement. The Committee concluded that it did not expect diversity in the application of IAS 19 and decided not to add this issue to its agenda. 2015 Grant Thornton LLP. All rights reserved. This Grant Thornton LLP On the Horizon provides information and comments on current accounting issues and developments. It is not a comprehensive analysis of the subject matter covered and is not intended to provide accounting or other conclusions with respect to the matters addressed in this issue. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at accounting that complies with matters addressed in this publication. For additional information on topics covered in this publication, contact a Grant Thornton client-service partner.