LATEST MATTERS FROM THE INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)

The following is a summarised update of key matters arising from the discussions and decisions taken by the IASB at its meetings on the following dates:

• 25 January 2022
• 25 February 2022
• 24 March 2022

The full update, as published by the IASB, can be found here.

Primary Financial Statements

The IASB continued discussions on proposals in the exposure draft General Presentation and Disclosures published in 2019. This exposure draft seeks to improve how information is communicated in the financial statements with a focus on financial performance.

Management performance measures

The IASB tentatively decided:

1. to confirm the proposed requirement for an entity to disclose why a management performance measure communicates management’s view of performance.
2. to confirm the proposed requirement for an entity to disclose a reconciliation between a management performance measure and the most directly comparable subtotal or total specified in IFRS.
3. to provide additional application guidance to support the proposed requirement described in (a).
4. to require an entity to disclose, for each reconciling item, the amount(s) related to each line item(s) in the statement(s) of financial performance.
5. to confirm the proposed requirement for an entity to disclose information about management performance measures in a single note to the financial statements.
6. not to add any requirements relating to an entity including disclosures about management performance measures in the financial statements by reference to another document.

Principles for presentation and required line items in primary financial statements

The IASB tentatively decided:

1. to revise the general principle for the presentation of line items in the primary financial statements set out in the Exposure Draft by removing the term ‘relevant’ and instead including a reference to an understandable overview of an entity’s income and expenses or assets, liabilities, and equity.
2. to require all presentation requirements to apply only when the resulting presentation does not detract from the primary financial statement providing an understandable overview.
3. to add guidance indicating that in the operating category it is unlikely that the presentation of items set out in paragraph 65 of the Exposure Draft would reduce how useful the statement is in providing an understandable overview of the entity’s income and expenses.
4. to remove the term ‘minimum’ from paragraph 42 of the Exposure Draft.
5. not to revisit the requirements for specified line items brought forward from IAS 1 Presentation of Financial Statements.
6. not to add a specific requirement to present impairments of non-financial assets.
7. to proceed with the proposed requirement to present goodwill separately from intangible assets.
8. to proceed with the proposed requirement for required line items to be presented in each affected category in the statement of profit or loss.
9. not to specify any required line items to be presented in the financing category in the statement of profit or loss.

Entities with specified main business activities—general issues

The IASB tentatively decided to provide additional guidance to that proposed in the Exposure Draft on ‘main business activities’ by clarifying that:

1. the role of main business activities in the requirements of the draft standard is limited to assessing whether an entity invests in the course of its main business activities or provides financing to customers as a main business activity.
2. An entity will need to use judgement in assessing whether it invests in the course of its main business activities or provides financing to customers as a main business activity. These are matters of fact and not assertions and the assessment should be based on observable evidence to the extent available.
3. Examples of observable evidence are operating performance measures used in public communications and information about segments if an entity applies IFRS 8 Operating Segments.
4. The specified subtotals similar to gross profit in paragraph 78B of the Exposure Draft are examples of important indicators of operating performance for an entity that invests in the course of its main business activities or provides financing to customers as a main business activity.

The IASB tentatively decided to clarify that, applying the proposals, an entity assesses at reporting-entity level whether it invests in the course of its main business activities or provides financing to customers as a main business activity.

The IASB also tentatively decided to clarify that, applying the proposals, an entity applies prospectively any change in outcome of its assessment of whether it invests in the course of its main business activities or provides financing to customers as a main business activity; thus, applying the proposals, the entity does not restate comparatives.

The IASB further tentatively decided to require an entity to disclose the following when there is a change in the outcome of its assessment of whether it invests in the course of its main business activities or provides financing to customers as a main business activity:

• the fact that there has been a change.
• information about the effect of the change that would allow users to perform trend analysis on operating profit.

Financial Instruments with Characteristics of Equity

The IASB continued its discussions on the application of IAS 32 Financial Instruments: Presentation to the classification of financial instruments as financial liabilities or equity instruments.

Shareholders’ discretion

The IASB discussed the classification of a financial instrument with a contractual obligation to deliver cash (or to settle it in such a way that it would be a financial liability) at the discretion of the issuer’s shareholders.

The IASB tentatively decided to explore a factors-based approach to help an entity apply its judgement when classifying these types of financial instruments as financial liabilities or as equity. Such an approach would provide examples of potential factors for an entity to consider when assessing whether a decision of shareholders is treated as a decision of the entity. This assessment is needed to determine whether an entity has an unconditional right to avoid delivering cash (or settling a financial instrument in such a way that it would be a financial liability).

Second Comprehensive Review of the IFRS for SMEs Standard

The IASB is currently working towards an exposure draft which will propose amendments to IFRS for SMEs accounting standard which is also seeking alignment with IFRS.

IFRS 9 Financial Instruments (Impairment of Financial Assets)

The IASB tentatively decided:

1. to retain unchanged the incurred loss model in Section 11 Basic Financial Instruments of the IFRS for SMEs Standard for trade receivables and contract assets within the scope of Section 23 Revenue of the IFRS for SMEs Standard;
2. to propose amendments to Section 11 to require an SME to use an expected credit loss model for all other financial assets measured at amortised cost; and
3. to retain unchanged the requirements in Section 11 for impairment of equity instruments measured at cost.

IFRS 15 Revenue from Contracts with Customers

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

1. contract modifications
2. series of distinct goods or services
3. performance obligation terminology
4. constraining estimates of variable consideration
5. significant financing components
6. allocating discounts and variable consideration
7. selecting a method for measuring progress towards complete satisfaction of a performance obligation
8. incremental costs of obtaining a contract

The IASB also tentatively decided to propose amendments to the IFRS for SMEs Standard to include the factors in paragraphs 29(a)-(c) of IFRS 15 to help an SME determine whether a promised good or service is separately identifiable.

IFRS 3 Business Combinations (Definition of a Business and Reacquired rights)

The IASB tentatively decided:

1. to propose aligning the definition of a business in the IFRS for SMEs Standard with the amended definition of a business issued in 2018, without introducing any rebuttable presumption; and
2. to retain unchanged Section 19 Business Combinations and Goodwill of the IFRS for SMEs Standard without reflecting the requirements in IFRS 3 Business Combinations that provided additional guidance on reacquired rights.

Other issues (due to the alignment with IFRS 3, IFRS 10 and IFRS 11)

The IASB tentatively decided:

1. to propose amendments to Section 9 Consolidated and Separate Financial Statements of the IFRS for SMEs Standard to align it with the requirements of IFRS 10 for step-disposals that result in loss of control and for changes in a parent’s ownership interests in a subsidiary without loss of control.
2. to propose amendments to Section 15 Investments in Joint Ventures of the IFRS for SMEs Standard to align it with the requirements of IFRS 11 Joint Arrangements, regarding the accounting for an interest held by a party which does not have joint control of a jointly controlled operation or a jointly controlled asset.

IFRS 9 Financial Instruments (Issued financial guarantee contracts)

The IASB tentatively decided to propose amendments to the IFRS for SMEs Accounting Standard to require the issuer of a financial guarantee contract to initially measure the contract at the premium received (plus the present value of any future premium payments receivable) and subsequently measure it at the higher of:

1. the expected credit losses; and 
2. the amount initially recognised, if any, amortised on a straight-line basis over the life of the guarantee.

Lease Liability in a Sale and Leaseback (Amendments to IFRS 16): Transition, effective date, and due process

The IASB discussed its amendments to IFRS 16 Leases to add subsequent measurement requirements for the lease liability arising from a sale and leaseback transaction.

The IASB tentatively decided to:

1. require entities to apply the amendments retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors; and
2. provide no specific transition exemption for first-time adopters.

The IASB tentatively decided to require entities to apply the amendments for annual reporting periods beginning on or after 1 January 2024, with earlier application permitted.

IFRS interpretations committee (IC) latest decisions summary

The following is a summarised update of key matters arising from the discussions and decisions taken by the IFRIC at its meetings on the following dates:

•  February 2022
• 16 March 2022

The full updates, as published by the IASB, can be found here.

Negative Low Emission Vehicle Credits (IAS 37 Provisions, Contingent Liabilities and Contingent Assets)

The Committee received a request asking whether particular measures to encourage reductions in vehicle carbon emissions give rise to obligations that meet the definition of a liability in IAS 37. In the fact pattern described in the request government measures applied to entities that produce or import passenger vehicles for sale in a specified market. Entities receive positive credits if in a calendar year they have produced or imported vehicles whose average fuel emissions are lower than a government target and negative credits if in that year they have produced or imported vehicles whose average fuel emissions are higher than the target.

An entity that receives negative credits for one year is required to eliminate those negative credits either by purchasing positive credits or by generating positive credits itself in the next year and using those positive credits to eliminate the negative balance. If the entity fails to eliminate its negative credits the government can impose sanctions on the entity.

The Committee concluded that an entity that produced or imported vehicles with average fuel emissions higher than the government target would normally have a legal obligation that meets the definition of a liability under IAS 37 as:

• The activity that may give rise to an obligation to eliminate negative credits is the production or import of vehicles. Where the entity has produced or imported vehicles with average fuel emissions higher than the government target by the end of the reporting period, that obligation arises from past events.
• The measures that create the obligation and give the government authority to impose sanctions derive from the operation of law. Hence, the obligation is a legal obligation settlement of which can be enforced by law.
• Settlement involves an outflow from the entity of resources embodying economic benefits either cash (if the entity purchases positive credits) or positive credits the entity will receive in the next year.
• The obligation arises from past events and exists independent of the entity’s future actions.

Lessor forgiveness of lease payments (IFRS 9 financial instruments and IAS 16 leases)

The Committee received a request about a lessor’s application of IFRS 9 and IFRS 16 in accounting for a rent concession where the only change in the lease is the lessor’s forgiveness of lease payments due from the lessee under that contract. In the fact pattern described in the request the lessor grants the lessee a rent concession on a lease contract classified as an operating lease under IFRS 16. The lessor releases the lessee from its obligation to make specifically identified lease payments some of which are amounts contractually due but not paid (which the lessor has recognized as an operating lease receivable) and some of which are amounts not yet contractually due. The request asked how the lessor applies the expected credit loss model in IFRS 9 to the operating lease receivable when it expects to forgive payments due from the lessee before the rent concession is granted and whether the lessor applies the derecognition requirements in IFRS 9 or the lease modification requirements in IFRS 16 in accounting for the rent concession.

The lessor is required to apply the impairment requirements in IFRS 9 to the operating lease receivable (IFRS 9 paragraph 2.1(b)(i)). In the period before the rent concession is granted, the lessor will consider its expectations of forgiving lease payments that are recognized as part of operating lease receivable in measuring expected credit losses on the operating lease receivable.

The lessor is also required to apply the derecognition requirements in IFRS 9 to the operating lease receivable (IFRS 9 paragraph 2.1(b)(i)). The lessor legally releases the lessee from its obligation to make specifically identified lease payments some of which the lessor had recognized in the operating lease receivable. Accordingly, the lessor concludes that the derecognition requirements in IFRS 9 have been met as its contractual rights to the specified cash flows from the operating lease receivable expire as it has legally released the lessee from its obligation. On the date the rent concession is granted the lessor will derecognize the operating lease receivable together with the associated expected credit loss allowance and recognize any difference in profit or loss.

The lessor will apply the lease modification requirements in IFRS 16 to future lease payments under the lease. The rent concession meets the definition of a lease modification as it is a change in consideration for the lease that was not part of the original terms and conditions of the lease. The lessor has forgiven some lease payments which were not yet contractually due and which it had not included in the operating lease receivable. The lessor accounts for the modification to the operating lease as a new lease in accordance with paragraph 87 of IFRS 16. The lessor will apply paragraph 81 of IFRS 16 and recognize the revised future lease payments as income on a straight-line basis or other systematic basis.

IFRS queries

With every release, we will share one or more IFRS queries from matters raised with RSM member firms around the world. The advice contained in the response is general in nature and should not be relied on for an entity’s specific circumstances.

Query #1

My client has a bank loan, which is repayable on 30 June 2024.  The loan contract has covenants that they must comply with.  One of these is that they must generate a certain level of cash flow from operations each quarter.  If they do not meet this covenant, the bank has the right to request immediate repayment of the loan.

They met this covenant in all quarters during the year ended 30 June 2021.  However, they breached it as at 30 September 2021.  We are currently auditing the 30 June 2021 accounts and expect to sign off in December 2021.  Should the loan balance be treated as current or non-current in the 30 June 2021 accounts?

Answer:

Classification of loans as current liabilities is set out in IAS 1 paragraphs 69 and following.  In order for a debt to be classified as non-current, the borrower must have an unconditional contractual right to defer settlement for at least 12 months from the balance sheet date.  The key is that this assessment occurs on the balance sheet date.

Therefore, if the entity met all its covenants as at 30 June 2021, it would classify the debt as non-current, notwithstanding that a later breach occurred.  The breach is a non-adjusting subsequent event, meaning that it does not affect the balance sheet classification.

However, as auditors we would also need to think about the other issues raised by the breach of the covenant after year-end:

• There may be a going concern risk, and we will need to consider whether the breach causes a material uncertainty.
• The breach will need to be disclosed as a non-adjusting subsequent event

We may also need to reconsider the financial instrument disclosures, particularly those around liquidity risk, to ensure that they reflect the increased level of risk as a result of the breach.

Query #2

My client operates wind farms for the purposes of electricity generation.  They have signed contracts with farmers which give them the right to install wind turbines on the farmers’ land for a specified period in return for a fixed annual payment.  Is this a lease under IFRS 16 Leases?

Answer:

At first this might appear obvious, but it’s actually a pretty tricky question!  Under IFRS 16, a lease only exists where the lessee has the rights under a contract to obtain substantially all of the economic benefit from use of an identified asset.  In this instance, the lessee is leasing land from farmers, however it is not clear whether it obtains substantially all the economic benefit.  If the contract gives the right to erect wind turbines in an entire field or fields, but the farmer also has the right to graze animals in that same field, then it would seem our client does not have substantially all the economic benefit from a use of a specified asset, as the farmer retains some benefit.  If this is the case, then the arrangement is not a lease.

However, on reading the contract further, we might find that there are more detailed specified arrangements.  For example, the contract might state that 4 turbines are to be erected, and that for safety reasons, animals cannot graze within 10 meters of the base of the turbine.  This means that there are now specific areas of land (identified assets) which can only be used for the purposes of power generation (substantially all the economic benefit).  As such, the contract would be a lease.

As always, careful reading of the whole contract, and a good understanding of the nature of the arrangement, is necessary to reach the correct accounting conclusion!