November 2023 - Your Global Summary of IFRS News and Developments

LATEST MATTERS FROM THE INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) 

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

• July 26 – 27, 2023 
• August 23, 2023 
• September 30,2023 
• October 26, 2023 

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

PRIMARY FINANCIAL STATEMENTS 

The IASB met on 25 October 2023 to discuss sweep issues identified in drafting IFRS 18 Presentation and Disclosure in Financial Statements related to aggregation and disaggregation and other topics. The IASB tentatively decided: 

a. to require an entity to present a line item for cost of sales separately from any other expenses classified by function in the statement of profit or loss only if the entity classifies operating expenses by function that include cost of sales. 

b. to clarify that for the statement of financial position an entity uses: 
i. the characteristics of duration and timing of recovery and settlement to classify assets and liabilities as either current or non-current and the characteristic of liquidity to classify assets and liabilities by order of liquidity. 
ii. the characteristics of nature and function to aggregate assets and liabilities into separate line items. Other characteristics, like duration, liquidity, measurement basis, type and tax effects, assist an entity identifying the nature or function of the assets and liabilities. 

c. to provide no transitional relief from retrospective application of IFRS 18 for any earlier periods than the annual period immediately preceding the initial period of application. 

The IASB discussed and confirmed the drafting approaches for minor sweep issues, except in relation to the disclosure of specified expenses by nature by an entity that presents one or more function line items. The IASB tentatively decided to confirm that such an entity will be required to disclose in a single note the amounts for these expenses that are included in each line item in the operating category only. In addition, the entity will be required to include in the same note two disclosures for each specified expense: 

a. the total for the specified expenses by nature, already required in IFRS Accounting Standards; and 

b. an explanation of which line items outside the operating category include any difference between the total of the amounts included in the line items in the operating category and the total described in (a).

SECOND COMPREHENSIVE REVIEW OF THE IFRS FOR SMES ACCOUNTING STANDARD 

The IASB tentatively decided to: 

• Review Section 23 of the IFRS for SMEs Accounting Standard (Standard) to reflect the principles in IFRS 15 Revenue from Contracts with Customers. 
• Clarify how an entity applies the rebuttable presumption in related Simplification of the control model in Section 9 -Consolidated and Separate Financial Statements 
• That the problem it addressed in introducing the expected credit loss model in IFRS 9 does not meet its principle of relevance to SMEs because the population of entities eligible to apply the IFRS for SMEs Accounting Standard that have significant exposure to credit risk is expected to be small. 
• IASB members acknowledged that a small sub-group of SMEs, such as non-bank lenders, might have significant exposure to credit risk. The IASB asked the staff to research alternatives that would seek to recognize expected credit losses for this sub-group of entities. 

To expose for public comment a proposal to align the Standard with: 

a. Supplier Finance Arrangements, which amended IAS 7 Statement of Cash Flows and IFRS 7 Financial Instruments: Disclosures; and 

b. Lack of Exchangeability, which amended IAS 21 The Effects of Changes in Foreign Exchange Rates. 

RATE-REGULATED ACTIVITIES 

The IASB tentatively decided that the prospective Accounting Standard would: 

a. retain the proposed guidance in the Exposure Draft on rights to renew or cancel a regulatory agreement. The IASB would clarify in the prospective Accounting Standard that those rights might be explicit or implicit. 

b. retain the proposed guidance in the Exposure Draft on compensation for cancellation of a regulatory agreement. The IASB would clarify in the prospective Accounting Standard that the guidance also applies to other circumstances in which termination occurs. 

c. include the principles in paragraph 35(c) of IFRS 15 Revenue from Contracts with Customers that relate to an entity’s right to payment for performance completed to date. An entity would use those principles to help it assess whether there exists an enforceable present right to receive, or an enforceable present obligation to pay, compensation on termination of a regulatory agreement for an amount comprising unrecovered regulatory assets and unfulfilled regulatory liabilities. 

d. retain the proposed requirements in the Exposure Draft on reassessment of and changes to the boundary of a regulatory agreement. 

The IASB also tentatively decided not to add more guidance on how an entity assesses its practical ability to renew, and other parties’ practical ability to cancel, a regulatory agreement. 

The IASB will continue to redeliberate the project proposals, including whether to add more guidance on how an entity identifies and measures cash flows within the boundary of a regulatory agreement. 

EQUITY METHOD 

The IASB tentatively decided to propose amendments to IFRS 12 Disclosure of Interests in Other Entities. 

The IASB tentatively decided to propose that an investor disclose the gain or loss from recognizing its share of other changes in its associate’s net assets that change its ownership interest, while it retains significant influence. 

The IASB tentatively decided to propose that an investor that has entered into a contingent consideration arrangement disclose: 

a. on obtaining significant influence in an associate: 
i. the amount recognised as part of the cost of the investment. 
ii. a description of the arrangement and the basis for determining the amount of the payment. 
iii. an estimate of the range of outcomes (undiscounted) or, if a range cannot be estimated, that fact and the reasons why a range cannot be estimated. If the maximum amount of the payment is unlimited, the investor shall disclose that fact. 

b. for each subsequent reporting period until the investor collects or settles the contingent consideration or it is cancelled or expires: 
i. any changes in the recognised amounts, including any differences arising upon settlement. 
ii. any changes in the range of outcomes (undiscounted) and the reasons for those changes. 
iii. the valuation techniques and key model inputs used to measure the contingent consideration. 

The IASB tentatively decided to propose that an investor disclose its gains or losses on transactions to its associates. 

The IASB tentatively decided to propose a disclosure objective requiring an investor to disclose information that enables users of its financial statements to evaluate the changes in the amounts in the financial statements arising from investments in associates. 

The IASB tentatively decided to propose that an investor disclose a reconciliation between the opening and closing carrying amount of its investments in associates, to meet the new disclosure objective. 

The IASB tentatively decided not to propose amendments to IFRS 12 to require an investor to disclose the gains or losses on transactions from its associates. 

CLIMATE-RELATED RISKS IN THE FINANCIAL STATEMENTS 

The IASB met on 20 September 2023 to discuss its project on Climate-related Risks in the Financial Statements. The IASB discussed: 

• whether to generalize the project objective to cover the reporting of financial information about the effects of other uncertainties in addition to those related to climate in the financial statements 
• the results of research on the nature and causes of stakeholders’ concerns about reporting the effects of climate-related risks in the financial statements. 
• the potential actions the IASB could take to respond to these concerns. 

The IASB decided that the objective of this project is to explore whether and, if so, how targeted actions could improve the reporting of financial information about climate-related and other uncertainties in the financial statements. 

The IASB discussed potential actions it could take to respond to stakeholders’ concerns about reporting the effects of climate-related risks in the financial statements. The IASB decided: 

a. to explore whether to create examples to illustrate how to apply requirements in IFRS Accounting Standards to reporting the effects of climate-related and other uncertainties. 

b. to explore clarifying or enhancing requirements in IFRS Accounting Standards in relation to disclosure of information about estimates. 

c. to refer to the IFRS Interpretations Committee a question about the circumstances in which an entity recognises a liability when applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets to climate-related commitments. 

d. to consult with the IFRS Interpretations Committee on questions related to the application of IAS 36 Impairment of Assets to measure value in use when an asset is subject to highly variable future cash flows over an extended period. 

However, the IASB will continue to monitor developments in climate-related and other uncertainties to determine whether to take further action. 

IFRS INTERPRETATIONS COMMITTEE (IFRIC) LATEST DECISIONS SUMMARY 

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

• September 12, 2023 

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

PREMIUMS RECEIVABLE FROM AN INTERMEDIARY (IFRS 17 INSURANCE CONTRACTS AND IFRS 9 FINANCIAL INSTRUMENTS) 

The Committee considered feedback on the tentative agenda decision published in the March 2023 IFRIC Update about how an entity that issues insurance contracts (insurer) applies the requirements in IFRS 17 and IFRS 9 to premiums receivable from an intermediary. 

The Committee concluded its discussions on that agenda decision. In accordance with paragraph 8.7 of the IFRS Foundation’s Due Process Handbook, the International Accounting Standards Board (IASB) will consider this agenda decision at its October 2023 meeting. If the IASB does not object to the agenda decision, it will be published in October 2023 in an addendum to this IFRIC Update. 

HOMES AND HOME LOANS PROVIDED TO EMPLOYEES 

The Committee considered feedback on the tentative agenda decision published in the March 2023 IFRIC Update about how an entity accounts for employee home ownership plans and employee home loans. 

The Committee concluded its discussions on that agenda decision. In accordance with paragraph 8.7 of the IFRS Foundation’s Due Process Handbook, the IASB will consider this agenda decision at its October 2023 meeting. If the IASB does not object to the agenda decision, it will be published in October 2023 in an addendum to this IFRIC Update.

GUARANTEE OVER A DERIVATIVE CONTRACT (IFRS 9 FINANCIAL INSTRUMENTS)—AGENDA PAPER 5 

The Committee considered feedback on the tentative agenda decision published in the March 2023 IFRIC Update about whether, in applying IFRS 9, an entity accounts for a guarantee written over a derivative contract as a financial guarantee contract or as a derivative. 

The Committee concluded its discussions on that agenda decision. In accordance with paragraph 8.7 of the IFRS Foundation’s Due Process Handbook, the IASB will consider this agenda decision at its October 2023 meeting. If the IASB does not object to the agenda decision, it will be published in October 2023 in an addendum to this IFRIC Update. 

UPDATES FROM RSM MEMBER FIRMS 

RSM UK has published guidance on the changes to classification of liabilities with covenants under IAS 1 

https://www.rsmuk.com/insights/bridging-the-gaap/amendments-to-ias-1 

RSM Australia has published an article explaining the recent amendments to IAS 21 in respect of when there is a lack of exchangeability for a currency. 

https://www.rsm.global/australia/insights/ifrs-news/lack-exchangeability-amendments-ias-21 

QUERY OF THE MONTH – WHAT IS A “SIGNIFICANT OR PROLONGED” DECLINE WHEN ASSESSING FOR INDICATORS OF IMPAIRMENT UNDER IAS 28? 

Background: 

Company A holds an investment in a listed entity named Company B representing 25% of total shares on issue in the investee. Company A have two directors on the board of Company B and are considered to have significant influence over the entity, meaning that they equity account for the investment under IAS 28. 

Question: 

During the financial year Company B share price dropped ~40% over a 6-month period, resulting in its value dropping 30% below the cost recorded in Company A books. In considering impairment indicators, paragraph 41C of IAS 28 Investments in Associates and Joint Ventures states that a “significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is also objective evidence of impairment.” 

Considering the wording of the standard should the ~40% drop in share price (FV) over 6 months signal evidence of impairment under IAS 28? 

Approach: 

IAS 28 Investments in Associates and Joint Ventures requires preparers to consider different impairment indicators to those typically considered under other Standards. The “significant or prolonged” wording was initially used in IAS 39 when assessing whether “available for sale” assets were impaired, until it was replaced by IFRS 9 Financial Instruments, and the available-for-sale classification no longer existed. We interpret the meaning of “significant or prolonged” as being the same in both standards. 

This is important, because the meaning of “significant or prolonged” was debated extensively after the 2008-9 Global Financial Crisis. In particular, a 2009 IFRIC agenda decision concluded that it was definitely an “OR” test, not an “AND” test. They noted that “The standard cannot be read to require the decline in value to be both significant and prolonged. Thus, either a significant or a prolonged decline is sufficient to require the recognition of an impairment loss.” 

IFRS does not explicitly quantify significant or prolonged. However, the general consensus around 2009 was that “significant” was generally greater than 20 to 30%, and prolonged was generally greater than 12 months. The IFRIC agenda decision was clear that any anticipated future increase in share price cannot be factored into an assessment of “significant or prolonged.” 

Therefore if the share price has dropped to 30% or more below cost in the period, we would interpret this as a significant decline, although not yet a prolonged one. It is therefore an indicator of impairment. This means a full impairment test must be performed, which may result in a write-down of the value of the investment in the associate.