February 10, 2015 On the Horizon for IFRS IFRIC meeting January 2015 Meeting highlights IASB issues January 2015 IFRIC meeting highlights The IFRS Interpretations Committee (IFRIC or the Committee) has issued the January 2015 IFRIC Update, which summarizes the deliberations during its meeting in London on January 27, 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 January 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 January 2015 IFRIC meeting highlights... 1 Current agenda... 2 Impact of uncertainty when an entity recognizes and measures a current tax liability or asset... 2 Accounting for the net proceeds and costs of testing property, plant and equipment... 2 Date of transaction for purpose of identifying the applicable exchange rate for revenue recognition... 3 Classification of liability for prepaid cards issued by a bank in the bank s financial statements... 4 Item recommended to IASB for a narrow-scope amendment... 5 Should an investment property under construction be transferred from inventory to investment property when there is an evident change in use?... 5 Agenda decisions... 5 Disclosures for a subsidiary with a material non-controlling interest... 5 Disclosure of summarized financial information about material joint ventures or associates... 7 Fair value hierarchy when third-party consensus prices are used... 7 Income and expenses arising on financial instruments with a negative yield: presentation in the statement of comprehensive income... 8 Accounting for embedded foreign currency derivatives in host contracts... 8 Levies raised on production property, plant and equipment... 8 Tentative agenda decisions... 9 Definition of close members of family of a person... 9 Work in progress... 9
On the Horizon for IFRS 2 Assessment of significant influence: fund manager acting as agent and holding own investment in the fund... 9 Current agenda Impact of uncertainty when an entity recognizes and measures a current tax liability or asset The Committee continued its discussions on the development of an interpretation of IAS 12, Income Taxes regarding the accounting for current income tax assets and liabilities when there are tax uncertainties. The Committee reviewed the proposed draft Interpretation and reached the following tentative decisions: The scope would include guidance on the impact of tax uncertainties on the accounting for current and deferred tax The disclosure guidance would: Require an entity to disclose the method that is used to reflect tax uncertainties in the measurement of current and deferred tax Refer to the guidance in IAS 1, Presentation of Financial Statements on the disclosure of judgments and estimates, and its relevance to the required accounting The Interpretation would be applied prospectively, recognizing the cumulative effect of initially applying the Interpretation in retained earnings at the start of the reporting period in which an entity first applies the Interpretation. However, retrospective application would be permitted. Previously, the Committee had tentatively decided that an entity would assume that the tax authorities would examine the amounts reported to them and have full knowledge of all relevant information. At the January 2015 meeting, the Committee asked the staff to consider the implication of that assumption on the derecognition of current and deferred tax assets and liabilities. The staff will then determine whether a further analysis needs to be presented to the Committee. Accounting for the net proceeds and costs of testing property, plant and equipment The Committee was asked to clarify the accounting for the net proceeds from selling any items produced while testing an item of property, plant and equipment (PPE) under construction, i.e. as part of the activities necessary to bring the item of PPE to the location and condition necessary for it to be capable of operating in the manner intended by management. The question is whether the amount by which the net proceeds received exceed the costs of testing would be recognized in profit or loss or as a deduction from the cost of the PPE. The Committee discussed the results of the outreach performed on certain issues. The Committee observed that the analysis would focus on the meaning of testing the PPE, as this term is used in paragraph 17 (e) of IAS 16, Property, Plant and Equipment. The Committee observed that the reference to proceeds in IAS 16 is made only in relation to testing. On this basis, the appropriate question is whether the activity that led to those proceeds was testing. The Committee also observed that disclosure about this issue, including the judgments made, is important and would be considered. The staff will present additional analyses at a future meeting.
On the Horizon for IFRS 3 Date of transaction for purpose of identifying the applicable exchange rate for revenue recognition The Committee continued its consideration of a question regarding how to determine which exchange rate to use when reporting revenue transactions denominated in a foreign currency in accordance with IAS 21, The Effects of Changes in Foreign Exchange Rates when a customer paid for the goods or services by making a non-refundable payment in advance. Previously, the Committee tentatively decided to develop guidance on identifying the date of the transaction for revenue transactions denominated in a foreign currency, as an interpretation of IAS 21. The Committee tentatively decided that revenue would be recognized using the exchange rate at the date the advance payment is made or the advance payment is due, whichever is earlier. At the January 2015 meeting, the Committee considered the scope of the proposed interpretation, how the guidance would apply to more complex scenarios, and the effective date and transition requirements. Scope of the proposed interpretation The Committee tentatively agreed that, as an interpretation of IAS 21, the proposed guidance would not be restricted to revenue transactions, but would also apply to other foreign currency transactions that are similarly affected by the issue. However, the Committee noted that the proposed interpretation would not be applicable when the asset, expense or income is measured at fair value on initial recognition, such as, for example, business combinations, financial instruments and share-based payments. In addition, the proposed interpretation would not apply to insurance contracts and income taxes. Applying the principle to more complex scenarios The Committee considered some more complex payment arrangements, including circumstances where there are multiple payments for multiple goods or services over time. The Committee tentatively agreed: To clarify that the date of the transaction for the purpose of applying the guidance currently in paragraphs 21-22 of IAS 21 is determined on the date the transaction is initially recognized. If the transaction is initially recognized in stages, the date of the transaction also occurs in stages. The date of the transaction is used to determine the exchange rate used to translate the prepayment asset or deferred income liability, together with the corresponding (portion of) the asset (on initial recognition), expense, or income. The prepayment asset or deferred income liability that is recognized in relation to the advance consideration is subsequently derecognized on recognition of the corresponding asset, expense, or income. The pattern of derecognition and recognition is determined by applicable IFRS, and is not affected by the denomination of the transaction in a foreign currency. The Committee also tentatively agreed that the proposed interpretation would only deal with circumstances in which the advance consideration is denominated or priced in a foreign currency and gives rise to a non-monetary prepayment asset or deferred income liability. Effective date and transition The Committee tentatively agreed that: The effective date would not be earlier than the effective date of IFRS 15, Revenue from Contracts with Customers (i.e. for accounting periods beginning on or after January 1, 2017), but earlier application would be permitted
On the Horizon for IFRS 4 On initial application entities may apply the proposed interpretation either: Retrospectively in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors; or Retrospectively with the cumulative effect of initially applying the interpretation recognized in opening retained earnings at the start of the reporting period in which an entity first applies the proposed Interpretation, or at the start of a prior reporting period presented, but only to transactions that are not completed transactions at that date No specific provisions or exemptions would be given for first-time adopters Next steps The Committee directed the staff to draft a proposed interpretation to be discussed at a future meeting. Classification of liability for prepaid cards issued by a bank in the bank s financial statements The Committee was asked to clarify the classification of the liability for prepaid cards issued by a bank in the bank s financial statements and accounting for the unspent balance of the prepaid cards with the following contractual features: No expiry date and cannot be refunded, redeemed, or exchanged for cash Redeemable for goods or services only at selected merchants which may, depending upon the card program, be a single merchant or all merchants that accept a specific card network No back-end fees, which means that the balance on the prepaid card does not reduce unless spent by the holder The Committee was asked to consider whether the liability for those prepaid cards is a non-financial liability because the issuing bank does not have an obligation to deliver cash to the cardholder. Previously, the Committee observed that the liability for prepaid cards with features as explained above meets the definition of a financial liability because the issuing bank has a contractual obligation to deliver cash to the merchant that is conditional upon the cardholder using the prepaid card to purchase goods or services. Thus an issuing bank would apply the guidance in IFRS 9, Financial Instruments (or IAS 39, Financial Instruments: Recognition and Measurement) to determine when to derecognize the liability for prepaid cards. However, the Committee was concerned about other similar arrangements, such as customer loyalty programs or prepaid cards issued by a non-banking entity that can be redeemed for goods or services of the issuing entity or of other entities, and requested the staff to analyze those other similar arrangements. The Committee requested the staff to specifically consider the basis for distinction between the prepaid cards with features as explained above and other similar arrangements. At the January 2015 meeting, the staff presented an analysis of those other similar arrangements. The Committee discussed these arrangements and asked the staff to consider and analyze other more complex arrangements. The staff will present a paper on this analysis at the next Committee meeting.
On the Horizon for IFRS 5 Item recommended to IASB for a narrow-scope amendment Should an investment property under construction be transferred from inventory to investment property when there is an evident change in use? The Committee was asked to clarify the application of paragraph 57 of IAS 40, Investment Property, which provides guidance on transfers to, or from, investment properties. The 2008 Annual Improvement project extended the application of IAS 40 to investment properties under construction. However, no corresponding changes were made to the guidance on transfers into, or out of, investment properties in paragraph 57 of IAS 40. The question is whether the lack of an amendment to paragraph 57 was an oversight or whether the intention was to prohibit transfers of a property under construction or development, previously classified as inventory, to investment property when there is an evident change in use. The Committee observed that the principle in IAS 40 for classification as investment property is based on how an asset is used. The Committee determined that a change in use would involve an assessment of whether a property qualifies as an investment property; supported by evidence that a change in use has occurred. The Committee determined that an entity would reclassify investment property under construction or development into, or out of, investment property if, and only if, there is evidence that a change in the use of such property has occurred. The Committee also noted that the words when and only when in paragraph 57 are important to ensure that a reclassification is limited appropriately to reflect changes in use that have taken place. The Committee observed that the list of circumstances in paragraphs 57(a) (d) represent evidence that a change in use has occurred, but is not an exhaustive list. The Committee tentatively decided to recommend to the IASB that it should amend paragraph 57 of IAS 40 to reinforce the principle for reclassification into, or out of investment property, by adding guidance in line with the approach described above. 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. Disclosures for a subsidiary with a material non-controlling interest The Committee was asked to clarify the requirements in paragraphs 12(e) (g) of IFRS 12, Disclosure of Interests in Other Entities to disclose information about a subsidiary that has non-controlling interests that are material to the reporting entity. The question is whether the information required by these paragraphs should be provided at: The subsidiary level (i.e. the legal entity) and be based on the separate financial statements of the individual subsidiary; or A subgroup level for the subgroup of the subsidiary together with its investees and be based either on (i) the amounts of the subgroup included in the consolidated financial statements of the reporting entity; or (ii) the amounts included in consolidated financial statements of the subgroup; noting that
On the Horizon for IFRS 6 transactions and balances between the subgroup and other entities outside the subgroup would not be eliminated. The Committee noted that, within the context of the disclosure objective in paragraph 10 of IFRS 12, materiality would be assessed by the reporting entity on the basis of the consolidated financial statements of the reporting entity. In this assessment, a reporting entity would consider both quantitative considerations (i.e. the size of the subsidiary) and qualitative considerations (i.e. the nature of the subsidiary). The Committee noted that the decision on which approach is used to present the disclosures required by paragraphs 12(e) (g) reflects the one that best meets the disclosure objective of paragraph 10 of IFRS 12 in the circumstances. According to this objective, An entity shall disclose information that enables users of its consolidated financial statements to understand (i) the composition of the group; and (ii) the interest that non-controlling interests have in the group s activities and cash flows. The Committee observed that this judgment would be made separately for each subsidiary or subgroup that has a material non-controlling interest. Disclosures required by paragraphs 12(e) and (f) of IFRS 12 The Committee observed that a reporting entity would meet the requirements in paragraphs 12(e) and (f) by disclosing disaggregated information from the amounts included in the consolidated financial statements of the reporting entity related to subsidiaries that have non-controlling interests that are material to the reporting entity. The Committee further observed that a reporting entity would apply judgment in determining the level of disaggregation of this information. Disclosures required by paragraph 12(g) of IFRS 12 The Committee observed that: Paragraph 12(g) requires summarized financial information about the subsidiaries that have noncontrolling interests that are material to the reporting entity Paragraph B10(b) requires an entity to disclose summarized financial information about the assets, liabilities, profit or loss and cash flows of the subsidiary that enables users to understand the interest that non-controlling interests have in the group s activities and cash flows. That information might include but is not limited to, for example, current assets, non-current assets, current liabilities, noncurrent liabilities, revenue, profit or loss and total comprehensive income. This information would be prepared on a basis that is consistent with the information included in the consolidated financial statements of the reporting entity, which would be from the perspective of the reporting entity. Paragraph B11 states that the summarized financial information required by paragraph B10(b) is the amounts before inter-company eliminations The Committee noted that the information provided with respect to paragraph 12(g) would include transactions between the subgroup/subsidiary and other members of the reporting entity s group without elimination in order to meet the requirements in paragraph B11 of IFRS 12. The transactions within the subgroup would be eliminated. The Committee determined that, in light of the existing IFRS requirements, sufficient guidance exists and that neither an Interpretation nor an amendment to a Standard was necessary and thus decided not to add this issue to its agenda.
On the Horizon for IFRS 7 Disclosure of summarized financial information about material joint ventures or associates The Committee was asked to clarify the requirement to disclose summarized financial information on material joint ventures or associates in paragraph 21(b)(ii) of IFRS 12 and its interaction with the aggregation principle in paragraphs 4 and B2 B6 of IFRS 12. The Committee expects the requirement in paragraph 21(b)(ii) of IFRS 12 to lead to the disclosure of summarized financial information on an individual basis for each joint venture or associate that is material to the reporting entity (i.e. this information would not be presented in aggregate for all material joint ventures or associates). The Committee observed that this reflects the IASB's intentions as described in paragraph BC50 of IFRS 12. The Committee also noted that there is no provision in IFRS 12 that permits the non-disclosure of the information required in paragraph 21(b)(ii) of IFRS 12. The Committee observed that a reporting entity would present the summarized financial information required by paragraph 21(b)(ii) about a joint venture or an associate that is material to the reporting entity based on the consolidated financial statements for the joint venture or associate, if it has subsidiaries. If it does not have subsidiaries, the presentation would be based on the financial statements of the joint venture or associate in which its own joint ventures or associates are equity-accounted. The Committee noted that these views are consistent with paragraph B14(a), which states that the amounts included in the IFRS financial statements of the joint venture or associate shall be adjusted to reflect adjustments made by the entity using the equity method, such as fair value adjustments made at the time of acquisition and adjustments for differences in accounting policies. The Committee analyzed the results of the outreach performed by the staff, which indicated that no significant diversity has been observed in the application of IFRS 12 related to these issues. The Committee determined that in light of the existing IFRS requirements, and on the basis of the outreach results received, that neither an interpretation nor an amendment to a Standard was necessary and thus decided not to add this issue to its agenda. Fair value hierarchy when third-party consensus prices are used The Committee was asked to clarify under what circumstances prices that are provided by third parties would qualify as Level 1 in the fair value hierarchy in accordance with IFRS 13, Fair Value Measurement. There are divergent views on the level within the hierarchy in which fair value measurements based on prices received from third parties would be classified. The Committee noted that when assets or liabilities are measured on the basis of prices provided by third parties, the classification of those measurements within the fair value hierarchy will depend on the evaluation of the inputs used by the third party to derive those prices, instead of on the pricing methodology used. The Committee noted that a fair value measurement that is based on prices provided by third parties may only be categorized within Level 1 of the fair value hierarchy if the measurement relies solely on unadjusted quoted prices in an active market for an identical instrument that the entity can access at the measurement date. The Committee also observed that the guidance in IFRS 13 relating to the classification of measurements within the fair value hierarchy is sufficient to draw an appropriate conclusion on the issue submitted. Therefore, the Committee determined that neither an interpretation nor an amendment to a Standard was necessary and thus decided not to add this issue to its agenda.
On the Horizon for IFRS 8 Income and expenses arising on financial instruments with a negative yield: presentation in the statement of comprehensive income The Committee discussed the economic phenomenon of negative effective interest rates for the presentation of income and expenses in the statement of comprehensive income. The Committee noted that interest resulting from a negative effective interest rate on a financial asset does not meet the definition of interest revenue in IAS 18, Revenue, because it reflects a gross outflow, instead of a gross inflow, of economic benefits. Therefore, the expense arising on a financial asset because of a negative effective interest rate would not be presented as interest revenue, but in an appropriate expense classification. The Committee noted that in accordance with paragraphs 85 and 112(c) of IAS 1, the entity is required to present additional information about such an amount if that is relevant to an understanding of the entity s financial performance or to an understanding of this item. The Committee determined that in light of the existing IFRS requirements an interpretation was not necessary and thus decided not to add the issue to its agenda. Accounting for embedded foreign currency derivatives in host contracts The Committee was asked to clarify the closely related criterion in paragraph 11 of IAS 39 to determine whether an embedded derivative would be separated from a host contract and accounted for as a derivative in accordance with IAS 39. The Committee was asked to consider whether an embedded foreign currency derivative in a licence agreement is closely related to the economic characteristics of the host contract, on the basis that the currency in which the licence agreement is denominated is the currency in which commercial transactions in that type of licence agreement are routinely denominated around the world (i.e. the routinelydenominated criterion in paragraph AG33(d)(ii) of IAS 39). The Committee noted that the issue related to a contract for a specific type of item and observed that an assessment of the routinely-denominated criterion is based on evidence of whether or not such commercial transactions are denominated in that currency all around the world and not merely in one local area. The Committee further observed that the assessment of the routinely-denominated criterion is based on the specific facts and circumstances. The Committee determined that, in light of the existing IFRS requirements, sufficient guidance exists and that neither an interpretation nor an amendment to a Standard was necessary and thus decided not to add this issue to its agenda. Levies raised on production property, plant and equipment The Committee was asked to provide guidance relating to levies raised on production property, plant and equipment (PPE). IFRIC 21, Levies does not provide guidance on accounting for the costs arising from recognizing a levy. The Interpretation notes that entities apply other Standards to decide whether the recognition of an obligation for a levy gives rise to an asset or an expense. The question is whether the cost of a levy on productive assets is: An administrative cost to be recognized as an expense as it is incurred; or A fixed production overhead to be recognized as part of the cost of the entity s inventory in accordance with IAS 2, Inventories The Committee noted that when IFRIC 21 was being developed it had discussed the accounting for costs that arise from recognizing the liability for a levy. At that time it had considered whether such costs would be recognized as an expense, a prepaid expense, or as an asset recognized in accordance with IAS 2,
On the Horizon for IFRS 9 IAS 16 or IAS 38, Intangible Assets. The Committee had decided not to provide guidance on this matter; entities would apply other Standards to decide whether the recognition of a liability to pay a levy gives rise to an asset or to an expense. The Committee also noted that IFRIC 21 is an interpretation of IAS 37, Provisions, Contingent Liabilities and Contingent Assets and that paragraph 8 of IAS 37 states that IAS 37 does not deal with the recognition of either the asset or expense associated with a liability. It also noted that it would not be efficient to give case-by-case guidance on individual fact patterns. Accordingly, the Committee decided not to add this issue to its agenda. Tentative agenda decisions 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 March 2015 meeting. Definition of close members of family of a person The Committee was asked to clarify the definition of close members of the family of a person in paragraph 9 of IAS 24, Related Party Disclosures. The Committee observed that the definition of close members of the family of a person is expressed in a principle-based manner and involves assessing whether a family member is expected to influence or be influenced by a person. This assessment involves the use of judgment to determine whether members of the family of a person (including that person s parents) are related parties or not. The Committee also noted that the list in paragraphs 9(a) (c) of IAS 24 specifies members that would be considered close members of the family of a person. Moreover the Committee noted that this list is non-exhaustive and does not preclude other family members from being considered close members of the family. Accordingly, the Committee thought that other family members, including parents or grandparents, could qualify as close members of the family depending on the assessment of specific facts and circumstances. The Committee determined that, in light of the existing IFRS requirements, neither an interpretation nor an amendment to a Standard was necessary and thus tentatively decided not to add this issue to its agenda. Work in progress Assessment of significant influence: fund manager acting as agent and holding own investment in the fund The Committee was asked to clarify what factors may indicate that a fund manager has significant influence over a fund that it manages and in which it has a direct holding. The specific fact pattern relates to a situation in which an assessment of control under IFRS 10, Consolidated Financial Statements resulted in the conclusion that the fund manager does not control the fund that it manages and in which it has a direct holding, because it is acting as an agent in accordance with paragraphs B58 B72 of IFRS 10. The following questions were raised: Whether the fund manager should assess if it has a significant influence over the fund If yes, how should it make such an assessment
On the Horizon for IFRS 10 The Committee noted that a fund manager that concludes it is an agent in accordance with IFRS 10 would assess whether it has significant influence. The Committee further noted that a fund manager would need to make that assessment in accordance with the guidance in IAS 28, Investments in Associates and Joint Ventures. In particular it would consider its holding in the fund and whether its power to participate in financial and operating policy decisions, combined with its holding in the fund, constitutes significant influence. The Committee noted that IFRS 10 did not make any consequential amendments to IAS 28 with respect to the assessment of significant influence. However, the Committee did not reach agreement on whether and how a power to participate in financial and operating policy decisions that is held in the capacity of an agent would affect the assessment of significant influence. The Committee noted that the IASB currently has a research project on the subject of equity accounting, but that it is not clear at this stage whether the assessment of significant influence will form part of that project. Therefore, the Committee tentatively decided to monitor how that research project progresses, and to revisit this issue if the research project does not address it. 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.