Documents issued during the quarter ended 31 December 2024 

During the quarter ended 31 December 2024, the IASB issued the final standards listed below:

During the quarter ended 31 December 2024, the IASB issued the Exposure Drafts listed below: 

Meetings

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:

• 28 October 2024
• 20 November 2024
• 11 December 2024

Research and standard setting

Second Comprehensive Review of the IFRS for SME’s Accounting Standard

The IASB discussed sweep issues at its meetings on 21 October 2024 and 20 November 2024 relating to the proposals and transition requirements in the Exposure Draft Third edition of the IFRS for SMEs Accounting Standard.

The IASB tentatively decided to amend paragraph 19.13 of the Exposure Draft to specify that an SME would be required to assess only at the date of acquisition whether measuring the fair value of the contingent consideration involves undue cost or effort. Therefore, no reassessment would be permitted.

The IASB tentatively decided to withdraw the proposal in the Exposure Draft to add a sentence to paragraph 5.11 of the IFRS for SMEs Standard about providing further information about expenses by nature or function. 

The IASB tentatively decided:

a)   to provide relief from the disclosure requirement in paragraph 10.13(b) of the Standard, but only for the current period, on initial application of the third edition of the Standard.

b)   to withdraw the proposed disclosure requirement in paragraph A28(b) of the Exposure Draft Third edition of the IFRS for SMEs Accounting Standard.

The IASB expects to issue the third edition of the Standard in the first half of 2025.

Management Commentary

The IASB met on 20 November 2024 and 9 December 2024 to discuss targeted refinements to its proposals for a revised IFRS Practice Statement 1 Management Commentary.

Design of Disclosure Objectives

The IASB tentatively decided to simplify the disclosure objectives proposed in the Exposure Draft Management Commentary by changing the assessment objectives from requirements to explanations.

Material Information

The IASB tentatively decided to align the proposed definition of ‘material’ more closely with the definitions in the Conceptual Framework for Financial Reporting and IFRS Standards by:

a)   referring to decisions made on the basis of the entity’s general purpose financial reports, which include the management commentary and the related financial statements;

b)   stating in the definition that these reports provide information about a specific reporting entity; and

c)   replacing the defined term ‘material’ with the term ‘material information’.

Areas of Content and Related Topics

The IASB tentatively decided to acknowledge, in the main body of the revised Practice Statement, that an entity’s management commentary provides material information about governance-related matters as necessary to meet:

a)   the overall objective of management commentary; and

b)   the disclosure objectives for the areas of content in management commentary.

Terminology and Supporting Explanations

The IASB tentatively decided:

a)   to align the terminology used for the attributes of useful information with the terminology used in the Conceptual Framework for Financial Reporting;

b)   to retain the plain language used in the supporting explanations of these attributes;

c)   to replace the term ‘investors and creditors’ with the term ‘primary users of general purpose financial reports’;

d)   to clarify the relationship between an entity’s ability to create value for itself—and therefore to generate cash flows—and the value the entity’s activities might create, preserve or erode for other parties, the economy and the natural environment across all time horizons, including in the long term; and 

e)   to remove the observation that some people refer to the value an entity creates for itself as ‘enterprise value’.

Coherence

The IASB tentatively decided:

a)   to clarify that the notion of coherence includes effectively representing the connections between various matters;

b)   to specify that the notion of coherence extends to coherence between information in an entity’s management commentary and in its other general purpose financial reports, which include its financial statements and its sustainability-related financial disclosures, if those disclosures are provided outside the management commentary; and

c)   to include the requirements and guidance on the notion of coherence in a separate chapter in the revised Practice Statement.

Dynamic Risk Management

The IASB met on 22 October 2024 to discuss the transition requirements and consequential amendments to IFRS Accounting Standards to be proposed in the Dynamic Risk Management (DRM) exposure draft. 

The IASB tentatively decided to propose that:

a)   an entity be required to apply the DRM model prospectively and be permitted to apply it early together with the required disclosure.

b)   an entity making the transition from hedging relationships in accordance with IFRS 9 Financial Instruments be permitted to discontinue its existing hedging relationships on the date of initial application, which is the beginning of the annual reporting period in which the entity first applies the proposed requirements. The entity would then be required to designate the underlying financial assets and financial liabilities in a DRM model at that date.

c)   an entity making the transition from hedging relationships in accordance with IAS 39 Financial Instruments: Recognition and Measurement be required to apply paragraphs 6.5.10 and 6.5.12 of IFRS 9 to the hedge adjustments related to those relationships.

d)   an entity making the transition to the DRM model be permitted to prospectively revoke, at the date of initial application, the designation of financial assets or financial liabilities under the fair value option in IFRS 9. The entity would then be required to designate those financial assets and financial liabilities in a DRM relationship at that date.

e)   an entity making the transition to the DRM model not be required to provide the disclosures described in paragraph 28(f) of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

f)   an entity making the transition to the DRM model be required to provide specific transition disclosures in the financial statements about the effects of:

i.   making the transition to the DRM model; and

ii.   revoking financial assets or financial liabilities previously designated under the fair value option in IFRS 9.

The IASB also tentatively decided to propose:

a)   adding the DRM requirements to a new chapter in IFRS 9;

b)   requiring first-time adopters that opt to apply the DRM model to apply it prospectively; and

c)   not including reduced disclosure requirements for the DRM model in IFRS 19 Subsidiaries without Public Accountability at this stage.

The IASB decided to set a comment period of 240 days for the DRM exposure draft.

Maintenance and consistent application

Power Purchase Agreements

The IASB met on 22 October 2024 to discuss the proposals set out in Exposure Draft Contracts for Renewable Electricity. 
Hedge Accounting Amendments

The IASB tentatively decided to finalise the proposed hedge accounting requirements set out in the Exposure Draft, subject to minor changes:

a.   to clarify to which particular requirements in Section 6.3 of IFRS 9 Financial Instruments the proposed amendments relate;

b.   to clarify that an entity would be permitted to align the amount of forecasted transactions designated as the hedged item with the variable amount of nature-dependent electricity expected to be delivered by the facility referenced in the hedging instrument;

c.   to clarify that, if the cash flows of the hedging instrument are conditional on the occurrence of the hedged forecast transaction, the ‘highly probable’ assessment would not be relevant; and

d.   to add qualitative examples to illustrate the application of the proposed amendments.

The IASB also tentatively decided not to add any additional guidance for the purpose of the ‘highly probable’ assessment.

Disclosures

The IASB tentatively decided to finalise the proposed disclosure requirements as they were set out in the Exposure Draft (including the proposals applicable to an entity applying IFRS 19 Subsidiaries without Public Accountability: Disclosures) but with minor changes.

Transition Proposals and Effective Date

The IASB tentatively decided to set an effective date of 1 January 2026, with early application permitted from the date of initial application.
For the proposed own-use amendments, the IASB tentatively decided:

a.   to continue to require retrospective application without requiring an entity to restate comparative information (as proposed in the Exposure Draft);

b.   to require an entity’s assessment under the proposed own-use amendments to be made based on its facts and circumstances at the date of initial application; and

c.   to permit the entity to designate, at the date of initial application, contracts at fair value through profit or loss in accordance with paragraph 2.5 of IFRS 9.

For the hedge accounting amendments, the IASB tentatively decided:

a.   to continue to require an entity to apply hedge accounting requirements prospectively; and

b.   to permit an entity to discontinue an existing hedging relationship on the date of initial application of the amendments, and to designate a new hedging relationship applying the amendments.

IFRS Interpretations Committee (IFRIC) Latest decisions summary

The following is a summary of key matters arising from the discussions and decisions taken by the IFRIC at is meeting on 26 November 2024.

Committee’s Tentative Agenda Decisions

Assessing Indicators of Hyperinflationary Economies (IAS 29 Financial Reporting in Hyperinflationary Economies)

The Committee received a request about applying IAS 29 when an economy becomes hyperinflationary. 

The request asked:

a.   Whether all indicators in paragraph 3 in IAS 29 should be considered in assessing when an economy becomes hyperinflationary, including whether to continue to consider all indicators even when one indicator in paragraph 3 has been met;

b.   Whether IAS 29 requires the consideration of indicators other than those in paragraph 3 when relevant; and

c.   Whether IAS 29 requires both a subsidiary (in its financial statements) and a parent (in its consolidated financial statements) to conclude consistently when an economy becomes hyperinflationary.

Evidence gathered by the Committee indicates little, if any, diversity in practice and that stakeholders:

a.   Do not conclude that an economy becomes hyperinflationary based solely on one of the indicators in paragraph 3 of IAS 29;

b.   Consider indicators other than those listed in paragraph 3 of IAS 29 when relevant; and

c.   Do not reach different conclusions at different levels within the Group when applying IFRS Accounting Standards. 

Based on its findings, the Committee concluded that the matter described in the submission does not have widespread effect. Consequently, the Committee decided not to add a standard-setting project to its work plan. This tentative agenda decision is open for comment until 3 February 2025.

Recognition of Intangible Assets Resulting from Climate Related Expenditure (IAS 38 Intangible Assets)

The Committee received a request about whether an entity’s expenditures for carbon credits and research activities and development activities meet the requirements in IAS 38 to be recognized as intangible assets.

A summary of the fact pattern described in the submission is as follows:

a.   an entity made a commitment in 2020 and 2021 to other parties to reduce a percentage of its carbon emissions by 2030 (referred to as a ‘2030 commitment’).

b.   the entity has taken ‘affirmative actions’ and, in its view, has created an established pattern of practice to achieve its 2030 commitment. These affirmative actions include: (i) creating a transition plan; (ii) engaging with ‘net zero focused investors’; (iii) publishing its commitment and plans on its website; (iv) joining coalitions with a mission to collaborate to achieve emissions reductions; (v) stating its emission reduction targets in its financial statements and in presentations to investors and others; and (vi) allocating capital to buying carbon credits and investing in ‘innovation programs’ purposed to find solutions to reduce emissions to meet its 2030 commitment.

c.   the entity’s innovation programs will typically involve creating teams of people with know-how, expertise and other intellectual property to create and develop solutions for emissions reductions specific to the entity or its sector and will result in the creation of intellectual capital.

d.   the entity’s investors, insurers and bankers have made their own transition commitments relying on the entity’s actions.

e.   the entity has concluded that its 2030 commitment and subsequent affirmative actions have created a constructive or legal obligation applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

As described in the April 2024 Agenda Decision Climate-related Commitments (IAS 37), if an entity has a constructive or legal obligation, the entity considers the criteria in paragraph 14 of IAS 37 in determining whether it recognises a provision for the costs of fulfilling that obligation.

The request asks whether during its 2024 annual reporting period the entity’s investments in carbon credits and expenditures for research activities and development activities, resulting in intellectual capital from innovation programs as described in the fact pattern, meet the requirements in IAS 38 to be recognised as intangible assets.

In response to its Third Agenda Consultation, the IASB added to its reserve list a project on pollutant pricing mechanisms (PPMs), some of which include the use of carbon credits. The IASB has been performing research, including engaging with stakeholders, to assess the prevalence and significance of PPMs. The IASB expects to consider at a future meeting the results of its research and to decide whether to start a project on the accounting for PPMs before the next agenda consultation.

Accordingly, the Committee did not consider the submission’s question about the accounting for carbon credits separately from the IASB’s research on PPMs. The Committee instead considered only the submission’s question about the accounting for expenditure on research activities and development activities

Evidence gathered by the Committee indicates no material diversity in the accounting for expenditure on research activities and development activities. Based on its findings, the Committee concluded that the matter described in the request does not have widespread effect. Consequently, the Committee decided not to add a standard-setting project to the work plan. This tentative agenda decision is open for comment until 3 February 2025.

Query of the month

Limited Recourse Loans

Question

Ariel Ltd, a listed company, provides a loan of $1m to a key employee, which the employee must use to buy 200,000 shares at $5 each.  The shares are to be held in trust for three years, after which the employee must either repay the loan, or forfeit the shares in which case no further loan repayments will be required.  The shares are automatically forfeited if the employee ceases employment before the end of the three years.

Answer

The IFRIC considered the treatment of these arrangements all the way back in 2005.  This arrangement is a limited recourse loan and would be treated as a share-based payment in accordance with IFRS 2.  In substance, it is effectively the issue of 200,000 options with a vesting period of three years, and an exercise price of $5.  In accordance with IFRS 2, the options would be fair valued on the grant date, and the fair value would be recognised as an expense over the three-year vesting period.

A common error is to treat such an arrangement as a loan and recognise a loan receivable on issue of the shares.  However, the substance of such an arrangement is that the employee has an option to acquire the shares.  If the share price has increased, they are likely to repay the loan, and therefore gain from the increase in the entity’s share price.  However, they have no obligation to pay the loan, as they can simply choose to return the shares instead.  It would therefore be inappropriate to recognise a loan receivable, as the issuing entity has no contractual right to receive any cash.

The correct accounting treatment is to treat the arrangement as a grant of share options, where the option is deemed to be exercised on the date that the loan is repaid.