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 18 July 2022 IASB meeting.

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

Rate-regulated Activities 

The IASB continued discussions on the proposals in its Exposure Draft Regulatory Assets and Regulatory Liabilities regarding total allowed compensation. 

The IASB tentatively decided that the application guidance in the standard should focus on assisting entities in the identification of timing differences instead of specifying the components of total allowed compensation, and highlighted the common differences that arise from regulatory activities that would affect timing. Differences in timing could give rise to a regulatory asset and liability and is a common feature across a variety of regulatory schemes. Therefore, a focus on guidance related to timing differences would prevent the standard from being perceived as targeting a specific type of regulatory scheme or implying that all regulatory schemes contain all the components of total allowed compensation as outlined in paragraph B2 of the Exposure Draft. 

The IASB also tentatively decided that the Standard will provide guidance for an entity to assess whether it has an enforceable present right to regulatory returns on an asset not yet available for use. If that enforceable right exists, those returns would form part of the total allowed compensation for goods or services supplied during the construction period of that asset. 

Non-Current Liabilities with Covenants (Amendments to IAS 1) 

The IASB discussed the amendments to IAS 1, Presentation of Financial Statements as part of its project on Non-current Liabilities with Covenants (Amendments to IAS 1). The IASB tentatively decided to require entities to apply the amendments for annual reporting periods beginning on or after 1 January 2024. 

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. 

Entities with specified main business activities—Issues specific to the investing category 

The IASB tentatively decided: 

- to require an entity that invests as a main business activity to classify in the operating category income and expenses from assets that would otherwise be classified in the investing category.  
- to permit an entity to group assets with shared characteristics for the purpose of assessing whether those investments are made as a main business activity. The way an entity groups financial assets for this assessment should be consistent with the way it groups financial assets into classes for the purposes of disclosures about financial instruments, in accordance with IFRS 7, Financial Instruments: Disclosures.  
- to add application guidance clarifying that income and expenses from financial assets arising from providing financing to customers are classified in the operating category. 

The IASB also decided to explore a related disclosure requirement. 

Entities with specified main business activities—Issues specific to the financing category 

The IASB tentatively decided: 

- to confirm the proposed accounting policy choice for an entity for classifying income and expenses from liabilities that arise from transactions that involve only the raising of finance.  
- to confirm that the proposed accounting policy choice discussed above is not applied to specified income and expenses from other liabilities.  
- to confirm the proposed requirement for entities that invest in financial assets as a main business activity to classify income and expenses from cash and cash equivalents in the operating category.  
- to explore withdrawing the accounting policy choice for classifying income and expenses from cash and cash equivalents proposed for entities that provide financing to customers as a main business activity. 

Disclosures of operating expenses by nature in the notes 

The IASB tentatively decided: 

- to require an entity to disclose the amounts of depreciation, amortization and employee benefits included in each line item in the statement of profit or loss.  
- to explore an approach that would require an entity to disclose, for all operating expenses disclosed in the notes, the amounts included in each line item in the statement of profit or loss. 

Contractual Cash Flow Characteristics of Financial Assets 

The IASB met to discuss how to clarify the requirements in IFRS 9, Financial Instruments for assessing a financial asset’s contractual cash flow characteristics. The IASB discussed the concept of a basic lending arrangement, including contractual terms that could change the timing or amount of contractual cash flows, and the characteristics of financial assets with non-recourse features and contractually linked instruments (CLIs). Preliminary staff views and analysis was provided, however the IASB was not asked to make a decision at the time of the meeting. 

IFRS INTERPRETATIONS COMITTEE (IC) LATEST DECISIONS SUMMARY 

The following IFRIC decisions were finalized at the 18 July 2022 IASB meeting with no further amendments: 

- Negative Low Emission Vehicle Credits (IAS 37);  
- Special Purpose Acquisition Companies (SPAC): Classification of Public Shares as Financial Liabilities or Equity (IAS 32); and  
- Transfer of Insurance Coverage under a Group of Annuity Contracts (IFRS 17). 

The following is a summarized update of key matters arising from the discussions and decisions taken by the IFRIC at its meeting on 13 September 2022. 

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

Lack of Exchangeability (Amendments to IAS 21) 

The Committee discussed the IASB’s Lack of Exchangeability project, which proposes to amend IAS 21, The Effects of Changes in Foreign Exchange Rates. Committee members provided the following advice on the project’s direction after considering the feedback on the Exposure Draft: 

• The Committee proposes amending paragraph 19A of the Exposure Draft so that it no longer requires an entity to meet the conditions listed in that paragraph. Instead, paragraph 19A would state that an entity’s objective in estimating the spot exchange rate is to reflect at the measurement date the rate at which an orderly exchange transaction would take place between market participants under prevailing economic conditions; 
   
• The Committee proposes to continue to permit, but not require, the use of observable exchange rates as noted in paragraph 19B of the Exposure Draft, and to further explain the reasons in the Basis for Conclusions; 
   
• The Committee proposes clarifying that rates from exchange transactions that do not create enforceable rights and obligations can be used as a starting point for estimating the spot exchange rate when exchangeability is lacking; and 
   
• The Committee proposes to maintain the approach of not providing or describing detailed estimation requirements or particular estimation techniques. The Committee suggests revising Illustrative Example 4 in the Exposure Draft and adding examples to illustrate how an entity might apply the requirements in estimating the spot exchange rate when exchangeability is lacking. 

Multi-currency Groups of Insurance Contracts (IFRS 17 and IAS 21) 

The Committee discussed the feedback received on the tentative agenda decision published in June 2022 in response to a submission about how to account for insurance contracts that generate cash flows in more than one currency. 

After considering the stakeholder feedback provided, the Committee proposed the following changes to the wording of the tentative agenda decision: 

• the accounting policy of the currency or currencies in which a group of contracts is denominated determines what amounts are the effect of changes in financial risk accounted for applying IFRS 17, Insurance contracts and what amounts are exchange differences accounted for applying IAS 21, The Effects of Changes in Foreign Exchange Rates; and 
   
• the contractual service margin (CSM) represents the unearned profit and not the unearned losses of a group of contracts. Accordingly, an entity is required to limit the carrying amount of the CSM to zero. 

Special Purpose Acquisition Companies (SPAC): Accounting for Warrants at Acquisition 

The Committee discussed the feedback received on the tentative agenda decision published in March 2022 in response to a submission about how an entity accounts for warrants on acquiring a special purpose acquisition company (SPAC). The following changes to the tentative agenda decision were proposed: 

• The Committee received a request to provide separate analysis in situations where an entity assumes the SPAC warrants and when an entity does not assume the SPAC warrants. In response to that feedback, the Committee recommends adding the parts of the analysis applicable to only one of the scenarios in separate boxes (described as ‘additional considerations’) within the agenda decision. 
   
• The Committee recommends removing the section ‘who is the acquirer’ from the agenda decision because the fact pattern already establishes the acquirer. 
   
• The Committee recommends changes to the agenda decision to identify whether the analysis is referring to the ‘SPAC warrants’ or the ‘new warrants’ the entity issued when acquiring the SPAC. 

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 

After a lengthy period of low interest rates, interest rates have risen in 2022 to rein in global inflation. For instance, the US Federal Reserve has increased its interest rate from 0.08% at the beginning of 2022 to 2.25%-2.50%. With such significant change to interest rates in a short period of time, what is the financial reporting impact when considering the impairment of non-financial assets including intangible assets, items of property, plant and equipment, and right-of use assets in accordance with IAS 36, Impairment of assets? 

A significant increase in market interest rates, or the risk-free rate, is considered an indicator of impairment consistent with IAS 36 paragraph 12(c). Therefore, an entity should consider whether the change in the risk-free rate would have a significant impact on the discount rate used in calculating the asset’s or cash generating unit’s (CGU’s) fair value or value in use.

Although this example was specific to the impairment of non-financial assets, there are other financial reporting implications that an entity should also consider. These implications include, but are not limited to, valuation methodologies including valuation of defined benefit obligations or assets in a pension plan, the calculation of expected credit losses for financial assets. For leases accounted for in accordance with IFRS 16, Leases, the discount rate is generally not revisited during the lease term, however certain events may require the lessee to revise the discount rate. For example, certain modifications of leases require an entity to remeasure the lease liability using a revised discount rate at the effective date of the modification. As a result, increases in interest rates may result in a higher discount rate, a corresponding lower lease liability and lower right of use asset. This change may also result in a shift to recognize higher interest expense from lease payments. 

Query #2 

What considerations should a crypto trading platform or exchange (“exchange”) evaluate to determine whether it controls a client’s crypto-currency (“crypto”) assets?

There are several factors that an exchange can consider to determine whether it retains the risk and rewards that are associated with control of an asset. The agreement between the exchange and the client should be thoroughly examined, in addition to (but not limited to): 

- Local laws and regulations regarding the legal ownership of assets that are held by a party on behalf of another; 
- Contractual limitations of each party’s rights and obligations associated with use and transfer of the crypto assets, and whether those rights are contractually enforceable; 
- The location of the crypto assets, and whether a client’s assets are kept in a separate wallet from other client’s or the exchange’s assets; 
- Internal controls, record keeping and the traceability of the dedicated blockchain address of the crypto assets; 
- Which party has legal title to the crypto asset; 
- Which party has the security risk associated with a lost or stolen crypto asset; and 
- Whether the contract provides guidance on the ownership and status of the crypto asset in the event of a liquidation event or change in control of the exchange. 

An exchange platform should review each client agreement carefully to understand each party’s risks and obligations, and the enforceability of those contractual rights. Internal controls over the safeguarding of crypto assets and storage should also be examined in detail.