Documents issued during the quarter ended 30 September 2024

During the quarter ended 30 September 2024, the IASB issued the final standards listed below:

During the quarter ended 30 September 2024, the IFRIC issued the final agenda decisions listed below:

During the quarter ended 30 September 2024, the IASB issued the Exposure Drafts listed below:

Meetings

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:

• 22-24 July 2024
• 28 August 2024
• 16-18 September 2024

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

Research and standard setting

Dynamic risk management

The IASB reached a number of tentative conclusions, primarily focused on disclosure requirements. The IASB tentatively decided that entities should be required to disclose information that enables users of financial statements to understand:
a)    The entity’s inherent interest rate risk management strategy and how it is used to manage repricing risk
b)    The effect of the entity’s interest rate risk management activities on the amount, timing and uncertainty of future cash flows, and
c)    The effect of the entity’s interest rate risk management activities on the statement of financial position and statement of profit or loss

The IASB tentatively decided that an entity would be required:
a)    to discontinue applying the DRM model if the entity’s risk management strategy changes—in other words, if the managed interest rate risk or how the entity manages that risk changes; and
b)    to recognise the DRM adjustment in profit or loss over the risk management time horizon if the underlying items included in its CNOP continue to exist or future transactions are still expected to occur.

The IASB also tentatively decided that unless an entity changes its risk management strategy, it would not permitted:
a)    to discontinue applying the DRM model;
b)    to remove underlying items included in determining its CNOP when those items continue to meet the qualifying criteria; or
c)    to de-designate a designated derivative.

Rate-regulated activities 

The IASB met on 23 July to discuss extending the application of the proposed requirements in the previously issued exposure draft, and to redeliberate the proposed transition requirements and effective date. The IASB also discussed the criteria related to re-exposure, as well as the due process requirements.
With respect to the potential extension of the application of the proposed requirements, the IASB tentatively decided not to extend the measurement requirements for items affecting regulated rates only when cash is paid or received on a cash basis to items affecting regulated rates on other bases.

The IASB also tentatively decided that entities would not be required to discount the estimates of future cash flows arising from a regulatory asset or liability if
a)    that asset or liability arises from an item of expense or income that relates to liabilities or assets measured on a present value basis and that affects regulated rates on a present value basis, and
b)    the entity is unable to estimate the timing and amount of those future cash flows without undue cost or effort. An entity that chooses this exemption would be required to disclose that fact, and also the carrying amounts as of the end of the reporting period of regulatory assets and regulatory liabilities to which the exemption has been applied.

When discussing whether the presentation proposals dealing with items affecting regulated rates on a cash basis, the IASB reached a tentative decision that those presentation requirements should be extended to items affecting regulated rates on other bases.

The IASB also discussed transition the proposals for retrospective application. A tentative decision was reached to allow entities to apply the standard retrospectively either in accordance with the provisions of IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, or by using a modified retrospective method. Regardless of which method is elected, entities would be required to restate comparative information for the period immediately preceding the period of initial application of the prospective rate-regulated activities standard. Entities would be permitted to restate comparative information or present unadjusted comparative information for any earlier periods presented. If the entity elects to present unadjusted comparative information, it would be required to clearly state that the comparative information was unadjusted and explain the basis on which that information was presented.

The IASB also tentatively decided to make certain amendments to IFRS 1, First-Time Adoption of International Financial Reporting Standards, to permit an entity to apply the rate-regulated activities standard on a modified retrospective basis.

Finally, the Board reached a number of tentative conclusions on transition reliefs, including:

Entities using the modified retrospective approach: 
a)    would be required to state that fact and disclose which transition reliefs they had applied
b)    would be permitted to limit the application of the requirements for regulatory returns on assets not yet available for use to assets not yet available for use at the beginning of the prior period (if the regulatory capital base has a direct relationship with its property, plant and equipment)
c)    would be permitted to use hindsight and use the regulatory interest rate at the beginning of the comparative period as the rate for the purpose of discounting estimates of future cash flows

A tentative decision was reached that, regardless of the transition approach elected, an entity would be required to disclose the quantitative information required by paragraph 28(f) of IAS 8 for the comparative period. Disclosure of similar quantitative information for earlier periods presented would be permitted, but not required.

Certain amendments would be made to IFRS 1.

With respect to past business combinations, the IASB tentatively decided:
a)    entities would be required to apply the transition requirements of this prospective rate-regulated activities standard to regulatory assets acquired or regulatory liabilities assumed in past business combinations (a change from the proposals included in the Exposure Draft)
b)    entities applying the transition requirements would take the net adjustment to retained earnings (or another category of equity, if appropriate)

The IASB concluded that re-exposure was not required, and expects to issue the final standard in the second half of 2025. The standard will be effective for annual periods beginning on or after 1 January 2029, with earlier application permitted.

Second Comprehensive Review of the IFRS for SMEs Accounting Standard (Agenda Paper 30)

On impairment of financial assets, the IASB tentatively decided to withdraw its proposal to introduce an expected credit loss model for impairment of some financial assets, and to add a requirement for an SME to disclose an analysis of financial assets by due date.

On issued financial guarantee contracts, the IASB tentatively decided:

a)    to include intragroup financial guarantee contracts issued at nil consideration in the scope of Section 21 Provisions and Contingencies;
b)    to keep other issued financial guarantee contracts in the scope of Part II of Section 11 Financial Instruments of the third edition of the Standard and to require an SME to measure such contracts at fair value through profit or loss; and
c)    to add to Section 21 requirements for an SME to disclose:
i.    the nature and business purpose of an issued intragroup financial guarantee contract;
ii.    the maximum amount the SME would have to pay if that contract is called on; and
iii.    an indication of the uncertainties relating to the amount or timing of any outflow of resources under the contract.

The IASB tentatively decided to set an effective date of 1 January 2027 for this third edition of this Standard.
Post-implementation review of IFRS 15 Revenue from Contracts with Customers

The IASB met on 22 July 2024 to finalize decisions on its post-implementation review (PIR) of IFRS 15.

The Board concluded that, overall, the requirements of IFRS 15 are working as intended and that certain explanations in the basis for conclusions of IFRS 15 did not need to be included in the Standard itself.

The IASB decided to confirm its tentative decisions on certain application matters, and then concluded that, subject to approval from the Due Process Oversight Committee to publish a project summary and feedback statement on the PIR of IFRS 15.

Management Commentary

The IASB met on 18 September 2024 to discuss targeted refinements to proposals for a revised IFRS Practice Statement 1 Management Commentary.

The IASB reached the following tentative decisions:

The Practice Statement would:
a)    be clarified to reflect that the term ‘management’ can include a governing board of an entity; and
c)    be clarified to note that the revised Practice Statement does not specify who is required to authorise management commentary for issue.
d)    Acknowledge, in the objective of management commentary, the concept of management’s perspective and information about sustainability-related factors

The IASB tentatively decided:

a)    to acknowledge that management commentary complements other information in general purpose financial reports, including information in sustainability-related financial disclosures, if that information is provided outside of management commentary.
b)    to extend the requirements for identifying the financial statements related to management commentary to identifying sustainability-related financial disclosures, if these disclosures are not part of the larger report that includes management commentary.
c)    to require an entity to disclose the basis on which sustainability-related financial disclosures are prepared, if an entity prepares such disclosures.
d)    to give greater prominence to the requirements that apply to situations in which an entity is required by local law or regulation to include specific information in management commentary.
e)    to make the definition of ‘general purpose financial statements’ consistent with the definition set out in IFRS 18 Presentation and Disclosure in Financial Statements and in the Conceptual Framework for Financial Reporting; and
f)    to include in the defined terms the definition of ‘sustainability-related financial disclosures’ set out in IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information.

The IASB will continue its discussions of targeted refinements to the proposals in the Exposure Draft.

Addendum to the Exposure Draft Third edition of the IFRS for SMEs Accounting Standard

The IASB met on 17 September to consider feedback on the Exposure Draft Addendum to the Exposure Draft Third edition of the IFRS for SMEs Accounting Standard (Addendum Exposure Draft) and to decide how to proceed with the project given that feedback.

The IASB tentatively decided:

a)    to finalise the proposed amendments to Section 7 Statement of Cash Flows of the IFRS for SMEs Accounting Standard (Standard) as set out in the Addendum Exposure Draft, but with some minor revisions to clarify that an SME would be required to make certain disclosures in aggregate for its supplier finance arrangements
b)    to finalise the proposed amendments to Section 30 Foreign Currency Translation of the Standard as set out in the Addendum Exposure Draft with no changes.
c)    to confirm that the amendments described in (a) and (b) to Section 7 and Section 30 of the Standard will have the same effective date as the third edition of the Standard (1 January 2027).
d)    to include the same transition reliefs for the amendments described in (a) to Section 7 of the Standard as for amendments to IAS 7 Statement of Cash Flows.

The IASB confirmed that applicable due process requirements had been complied with and agreed that the proposals would not be re-exposed. 

The amendments resulting from the Addendum Exposure Draft will be included in the forthcoming third edition of the Standard.

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

Maintenance and consistent application

Power purchase arrangements
The IASB met on 17 September to discuss feedback on the Exposure Draft Contracts for Renewable Electricity, which proposed amendments to IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures. The IASB discussed the proposed:
a)    scope of the amendments (Agenda Paper 3A); and
b)    requirements on applying paragraph 2.4 of IFRS 9 to a contract to buy nature-dependent electricity (own-use amendments) (Agenda Paper 3B). 

Scope of the proposed amendments

The IASB tentatively decided to finalise the proposed scope of the amendments, subject to clarifying that contracts within the scope of the proposed amendments:
a)    reference nature-dependent electricity generated from sources that depend on natural conditions that cannot be controlled;
b)    can be settled net or gross; and
c)    expose an entity to cash-flow variability that depends on the contracted amount of nature-dependent electricity.

Own-use amendments

The IASB tentatively decided to finalise the proposed requirements on applying paragraph 2.4 of IFRS 9 to a contract to buy nature-dependent electricity. This finalisation is subject to clarifying the relationship between the proposed requirements and requirements in paragraphs 2.4–2.7 of IFRS 9 and that an entity:
a)    applies the additional considerations for these electricity contracts only if:
i.    the contractual features expose the entity to the risk of oversupply of electricity in any delivery interval; and
ii.    the entity does not have the practical ability to avoid selling any oversupply of electricity at the market-determined time, based on the design and operation of the market in which electricity is bought.
b)    assesses whether it will be a net purchaser over a reasonable amount of time when applying the own-use requirements to such a contract. An entity is a net purchaser if it buys enough electricity in the market in which it buys electricity to offset sales of any oversupply in that same market.
c)    making the assessment described in (b), considers:
i.    the seasonality of the nature-dependent source of electricity generation and the entity’s business cycle to decide what constitutes ‘a reasonable amount of time’. The IASB tentatively decided that a ‘reasonable amount of time’ cannot exceed 12 months.
ii.    all reasonable and supportable information, including forward-looking information, at the date of the assessment.
iii.    whether it has been a net purchaser over a reasonable amount time (but not exceeding 12 months)

IFRS Interpretations Committee (IC) Latest decisions summary

The following is a summary of key matters arising from the discussions and decisions taken by the IFRIC at its meeting on 10 September:

Guarantees Issued on Obligations of Other Entities

The Committee received a request about how an entity accounts for guarantees that it issues.
The request described three fact patterns in the context of an entity’s separate financial statements. In the fact patterns, an entity issues several types of contractual guarantees on obligations of a joint venture. These fact patterns include situations in which the entity guarantees to make payments to a bank, a customer, or another third party in the event the joint venture fails to meet its contractual obligations under its service contracts or partnership agreements and fails to make payments when due.
The request asks whether the guarantees issued are financial guarantee contracts to be accounted for in accordance with IFRS 9 Financial Instruments and, if not, which other IFRS Accounting Standards apply to these guarantees.
Evidence gathered by the Committee [to date] indicated that, in practice, entities issue guarantees on obligations of their joint ventures and other entities (such as associates, subsidiaries or third parties), and those guarantees have a variety of terms and conditions. The Committee observed that questions relating to the accounting for issued guarantees arise both in the context of an entity’s separate financial statements and consolidated financial statements.
The Committee observed that an entity accounts for a guarantee that it issues based on the requirements, including the scoping requirements, in IFRS Accounting Standards and not based on the nature of the entity’s business activities. An entity applies judgement in determining which IFRS Accounting Standard applies to a guarantee that it issues and in considering the specific facts and circumstances and the terms and conditions of the guarantee contract.
The Committee noted that the International Accounting Standards Board (IASB), at its April 2024 meeting, discussed diversity in practice in the interpretation of the term ‘debt instrument’ in the definition of a financial guarantee contract. The IASB decided to consider during its next agenda consultation the broader application questions related to financial guarantee contracts, including about the meaning of the term ‘debt instrument’ in the definition of a financial guarantee contract. The Committee therefore concluded that an entity applies judgement in interpreting the meaning of the term ‘debt instrument’ when determining whether a guarantee is accounted for a financial guarantee contract.
With regard to the scoping requirements in the IFRS Accounting Standards, the Committee concluded that the principles and requirements in IFRS Accounting Standards provide an adequate basis for an entity to determine how to account for a guarantee that it issues.
Consequently, the Committee reached a tentative agenda decision not to add a standard-setting project to the work plan. This tentative agenda decision is open for comment until 18 November 2024.

Recognition of Revenue from Tuition Fees (IFRS 15 Revenue from Contracts with Customers)

The Committee received a request about the period over which an educational institution recognises revenue from tuition fees.
The fact pattern described an arrangement in which:
a)    students attend the educational institution for approximately 10 months of the year (academic year) and have a summer break of approximately two months;
b)    during the summer break the educational institution’s academic staff takes a four-week holiday and uses the rest of the time:
i.    to wrap up the previous academic year (for example, by marking tests and issuing certificates); and
ii.    to prepare for the next academic year (for example, administering re-sit exams for students who failed in the previous academic year and developing schedules and teaching materials); and
c)    during the four-week period in which the academic staff is on holiday:
i.    the academic staff continues to be employed by, and receive salary from, the educational institution but provides no teaching services and does not carry out other activities related to providing educational services;
ii.    non-academic staff of the educational institution provides some administrative support (for example, responding to email enquiries and requests for past records); and
iii.    the educational institution continues to receive and pay for services such as IT services and cleaning.

Applying IFRS 15, the educational institution recognises revenue from tuition fees over time. The request asks whether the educational institution is required to recognise that revenue evenly over the academic year (10 months), evenly over the calendar year (12 months) or over a different period.

Evidence gathered by the Committee to date indicates no diversity in accounting for revenue from tuition fees. Feedback suggests any differences in the period over which these educational institutions recognise revenue from tuition fees result from differing facts and circumstances and do not reflect diversity in accounting for revenue from tuition fees.

Based on its findings, the Committee concluded that the matter described in the request does not have widespread effect. Consequently, the Committee reached a tentative agenda decision not to add a standard-setting project to the work plan. This tentative agenda decision is open for comment until 18 November 2024.
 

Query of the month

Question

An entity has signed an equity financing agreement. The agreement term is 3 years, and it allows the company to raise up to $20M from the subscriber through the issue of shares, at a discount to the prevailing market price at the time the shares are issued. The agreement includes an unavoidable up-front transaction cost of $2M that is due regardless of whether any funds are raised by the company. 

How the $2M transaction cost should be accounted for?

Answer

There are two elements to this:

1. Should the $2m be deducted from equity, or treated as an expense?
2. Should any expense be recognised immediately, or should it be recognised on a straight-line basis throughout the 3-year term. 

Equity or Expense?

In order to be deducted from equity, a transaction cost must be “incremental costs directly attributable to the equity transaction that otherwise would have been avoided. The costs of an equity transaction that is abandoned are recognised as an expense. [IAS 32.37].”

IFRS 9 defines an incremental cost as “one that would not have been incurred if the entity had not acquired, issued or disposed of the financial instrument” [IFRS 9 Appendix A]. Examples of such costs include fees and commission paid to agents, advisors, brokers and dealers, levies by regulatory agencies and security exchanges, and transfer taxes and duties

The $2M unavoidable transaction fee for the equity facility agreement is payable irrespective of whether the facility is used to raise capital or not. Therefore it is not an incremental costs directly attributable to the equity transaction that otherwise would have been avoided and would be viewed as sunk cost.  As such it cannot be recognised against equity.

How should the expense be recognised?

In our view, there is an accounting policy choice here. Either of the following approaches would be acceptable:  

• View 1: the arrangement does not constitute an asset, as the right to issue shares is at a discount to the market price. It should be expensed immediately.
• View 2: the $2M transaction fees is consideration to have access to a facility over the 3-year period. Hence the $2M should be initially recorded as prepayments and expensed over the 3-year period being the facility term.