United States: On The Horizon For IFRS - IFRIC Meeting January 2013

Introduction

The IFRS Interpretations Committee (IFRIC or the Committee) has issued the January 2013 IFRIC Update, which summarizes the deliberations during its meeting in London on January 22-23, 2013. This On the Horizon for IFRS provides a high level summary of the issues discussed at that meeting. For further details of the Committee's meeting, please refer to the January 2013 IFRIC Update.

All decisions reached at Committee meetings are tentative and may be changed or modified at future meetings. Committee decisions become final only after completion of a formal vote on an Interpretation or Draft Interpretation, which is confirmed by the IASB.

Current agenda

At its January 2013 meeting, the Committee discussed the following items on its current agenda.

IAS 1, Presentation of Financial Statements ‒ disclosure requirements about the assessment of going concern

Background

Previously, the Committee was asked to clarify the guidance on disclosing material uncertainties related to an entity's ability to continue as a going concern under IAS 1, Presentation of Financial Statements. That guidance requires an entity to disclose material uncertainties about its ability to continue as a going concern when management becomes aware of those uncertainties. However, the submitter thinks the guidance about the objective, timing, and content of the required disclosures is unclear.

In November 2012, the Committee tentatively decided to address the issue of when and what should be disclosed about those uncertainties through a narrow-focused amendment to IAS 1 among other tentative decisions.

Current discussion

In January 2013, the staff presented the Committee with proposed amendments to IAS 1 that would retain, substantially unchanged, the guidance relating to going concern as a basis for preparing financial statements, but would also provide guidance on identifying material uncertainties and requirements on what to disclose.

After discussing the proposed amendments, the Committee tentatively agreed to expose the proposals with examples of conditions that indicate when material uncertainties arise and which material uncertainties to disclose. In addition, the Exposure Draft would ask constituents for feedback on whether the proposed level of detail is helpful and whether the time frame for assessing the going concern assumption in IAS 1 should be aligned with the time frame in many local auditing requirements.

The Committee recommended that these revised proposals be presented to the IASB for its consideration.

IAS 16, Property, Plant and Equipment, IAS 38, Intangible Assets, and IFRIC 12, Service Concession Arrangements ‒ variable payments for the separate acquisition of property, plant, and equipment, and intangible assets

Background

Previously, the Committee was asked to clarify the accounting for certain payments made by an operator in a service concession arrangement that is within the scope of IFRIC 12, Service Concession Arrangements. Specifically, the submitter asked the Committee to clarify whether such payments should either be included in the measurement of an asset and liability at the start of the concession arrangement, or treated as executory in nature and recognized as expenses as incurred over the term of the arrangement.

The Committee noted that the issue of variable concession fees is linked to a broader issue regarding contingent payments made by an entity for separate purchases of property, plant, and equipment and of intangible assets outside of a business combination, which the Committee discussed in 2011, but reached no conclusion.

In November 2012, the Committee discussed the initial and subsequent accounting for variable payments.

Current discussion

In January 2013, the Committee continued to discuss the subsequent accounting for variable payments, including a review of illustrative examples in which the cost of the asset would be adjusted, and tentatively decided to recommend that the IASB amend IAS 16, Property, Plant and Equipment; IAS 38, Intangible Assets; and IAS 39, Financial Instruments: Recognition and Measurement. Under the proposed amendments, the adjustment of the carrying amount of a financial liability resulting from the application of paragraph AG8 of IAS 39 would be recognized as a corresponding adjustment to the cost of the asset, to the extent required by either IAS 16 or IAS 38. Therefore, the paragraph AG8 adjustment would be recognized as a corresponding adjustment to the cost of the asset purchased:

• Entirely if the adjustment is a change in estimate of a liability initially recognized upon the acquisition of the asset, and
• To the extent that it relates to future economic benefits to be derived from the asset if the adjustment results from the initial recognition of a liability to make variable payments that was not previously recognized as a liability upon the acquisition of the asset.

The Committee also tentatively decided to proceed with the proposed amendments to IFRIC 12 that were discussed at its March and May 2012 meetings.

The staff was asked to prepare a paper with proposed amendments to IAS 16, IAS 38, IAS 39, and IFRIC 12 as part of a narrow-scope project, for discussion at a future meeting.

IAS 32, Financial Instruments: Presentation ‒ put options written on noncontrolling interests

Background

In May 2012, the Committee published a draft Interpretation on the accounting for put options written on noncontrolling interests in the parent's consolidated financial statements (NCI put). The comment period ended on October 1, 2012.

Current discussion

In January 2013, after reviewing the staff's summary and analysis of the comments received on the draft Interpretation, the Committee tentatively decided on the following proposals:

• The final Interpretation would apply to put options and forward contracts, in the parent's consolidated financial statements, that obligate an entity in the group to purchase shares of a subsidiary that are held by a noncontrolling-interest shareholder for cash or another financial asset. This tentative decision would widen the scope of the draft Interpretation to include NCI forward contracts.
• The final Interpretation would apply retrospectively.
• The financial liability recognized for an NCI put would be remeasured under IAS 39, Financial Instruments: Recognition and Measurement, and IFRS 9, Financial Instruments, with changes in measurement recognized in profit or loss. The Committee believes that if NCI puts were measured on a net basis at fair value, consistently with derivatives that are within the scope of IAS 39 and IFRS 9, better information would be provided.

Many respondents commented that the Committee or IASB should more comprehensively address the accounting for NCI puts—or all derivatives written on an entity's own equity. Some respondents believe that the requirement to measure particular derivatives written on an entity's own equity instruments on a gross basis at the present value of the redemption amount does not yield useful information. Consequently, the Committee decided to ask the IASB to reconsider the requirements for put options and forward contracts written on an entity's own equity in paragraph 23 of IAS 32, Financial Instruments: Presentation, before finalizing the draft Interpretation. The Committee noted that the IASB should consider whether NCI puts and NCI forwards should be accounted for differently from other derivatives written on an entity's own equity.

The staff was directed to report both the Committee's views and the feedback from the comment letters to the IASB and to ask the Board how to proceed.

IAS 37, Provisions, Contingent Liabilities and Contingent Assets ‒ Interpretation on levies

Background

In May 2012, the Committee published a draft Interpretation on the accounting for levies recognized in accordance with the definition of a "liability" in IAS 37, Provisions, Contingent Liabilities and Contingent Assets.

After receiving constituents' comments, the Committee began redeliberating the proposed accounting in the draft Interpretation in November 2012 and tentatively decided that the final Interpretation would

• Address the accounting for levies that are within the scope of IAS 37 as well as levies whose timing and amount is certain
• Exclude guidance on the accounting for liabilities arising from emissions trading schemes
• Confirm the guidance provided in the draft Interpretation about the accounting for the liability to pay a levy

Current discussion

In January 2013, the Committee continued redeliberating the proposed accounting in the draft Interpretation and tentatively decided to include the following guidance:

• Levies would be defined as transfers of resources imposed by governments on entities in accordance with laws and/or regulations, except for levies
• that are within the scope of other IFRS and fines or other penalties imposed for breaches of laws and/or regulations.
• The accounting for the liability to pay a levy would be addressed, but other IFRS would be used to decide the debit side of the transaction (that is, whether levy costs would be recognized as assets or expenses).
• The accounting for levies with minimum thresholds would be addressed consistent with the principles established in the draft Interpretation (that is, the obligating event is the activity that triggers the payment of the levy, as identified by legislation). Therefore, the obligating event for a levy that triggers a liability to pay a levy if a minimum activity threshold is achieved in the current period (such as a minimum amount of revenues, sales, or outputs produced) would be the achievement of that minimum activity threshold.
• The same recognition principles would be applied in the interim financial statements as are applied in the annual financial statements, as stated in IAS 34, Interim Financial Reporting.

Some Committee members asked the IASB to consider a comprehensive review of the principles in IAS 34 to see if the guidance in IAS 34 is consistent and to determine whether the "discrete" approach is preferable to the "integral" approach.

Interpretations Committee agenda decisions

IFRIC agenda decisions are published for information only and do not change existing IFRS requirements. Committee agenda decisions are not Interpretations. Interpretations are determined only after extensive deliberations and due process, including a formal vote. Interpretations become final only when approved by the IASB.

After reviewing the following issues during the January 2013 meeting, the Committee decided not to add them to its agenda. For the full text of the Committee's agenda decisions, please refer to the January 2013 IFRIC Update.

IFRS 3, Business Combinations ‒ continuing employment

Background

In January 2012, the Committee was asked to clarify the guidance in IFRS 3, Business Combinations, for contingent payments made to selling shareholders if those shareholders become employees. The specific issue is whether paragraph B55(a) of IFRS 3 is conclusive, on its own, in determining whether payments made to an employee that are forfeited upon termination of employment are considered remuneration for post-combination services and should be excluded from consideration paid for the acquisition. The question arose because the submitter asserted that the introduction to paragraph B55 of IFRS 3 states that the factors B55(a) through B55(h) are indicators. However, paragraph B55(a) uses conclusive language that states that payments in a contingent consideration arrangement that are automatically forfeited if employment terminates are remuneration for post-combination services.

In September 2012, the Committee tentatively decided not to add this issue to its agenda to give it the opportunity to work jointly with the FASB to avoid the risk of creating divergence with U.S. GAAP.

Agenda decision

In January 2013, the Committee noted that, based on the language in paragraph B55(a) of IFRS 3, payments made under a contingent consideration arrangement that are automatically forfeited if employment terminates would lead to a conclusion that the arrangement is compensation for post-combination services rather than additional consideration for an acquisition unless the service condition is not substantive.

Because IFRS 3 is the result of the joint convergence effort between the IASB and the FASB, the Committee decided not to add this issue to its agenda at this time and to consult with the FASB on this issue after the FASB completes its ongoing post-implementation review of FASB Statement 141R, Business Combinations.

IAS 27, Consolidated and Separate Financial Statements, and IFRS 10, Consolidated Financial Statements ‒ noncash acquisition of a noncontrolling interest by a controlling shareholder in the consolidated financial statements

Background

The Committee was asked to provide guidance on the accounting for the purchase of a noncontrolling interest (NCI) by the controlling shareholder when the consideration given includes noncash items (specifically, whether the difference between the fair value and the carrying amount of the consideration should be recognized in equity or in profit or loss). The submitter noted that the difference should be recognized in equity under paragraph 31 of IAS 27, Consolidated and Separate Financial Statements, but if IFRIC 17, Distributions of Non-cash Assets to Owners, is applied by analogy, the difference should be recognized in profit or loss.

In September 2012, the Committee tentatively decided not to add this issue to its agenda because existing IFRS requirements provide sufficient guidance.

Agenda decision

The Committee noted paragraph 31 of IAS 27 addresses the difference between the carrying amount of NCI and the fair value of the consideration given, and not the difference between the fair value of the consideration given and the carrying amount of such consideration. The difference between the carrying amount of NCI and the fair value of the consideration given is recognized in equity. However, the difference between the fair value of the assets transferred and their carrying amount arises from derecognition of those assets. In general, any gain or loss arising from derecognition of an asset is recognized in profit or loss under IFRS.

In January 2013, the Committee concluded that in light of the existing IFRS requirements an interpretation or an amendment to IFRS is not necessary. Therefore, the Committee decided not to add this issue to its agenda.

IAS 28, Investment in Associates ‒ impairment of investments in associates in separate financial statements

Background

In July 2012, the Committee asked the staff to update its analysis and to perform additional outreach on a particular issue that was referred to the IASB but remains unresolved: whether an entity should apply, in its separate financial statements, the provisions of either IAS 36, Impairment of Assets, or IAS 39, Financial Instruments: Recognition and Measurement, to test its investments in subsidiaries, joint ventures, and associates that are carried at cost for impairment.

In September 2012, the Committee tentatively decided not to add this issue to its agenda because existing IFRS provide sufficient guidance.

Agenda decision

The Committee noted that paragraph 38 of IAS 27, Consolidated and Separate Financial Statements, requires an entity to account for investments in subsidiaries, joint ventures, and associates either at cost or in accordance with IAS 39 in its separate financial statements. In addition, under paragraphs 4 and 5 of IAS 36 and paragraph 2(a) of IAS 39, investments in subsidiaries, joint ventures, and associates that are not accounted for under IAS 39 are within the scope of IAS 36 for impairment purposes. Therefore, in its separate financial statements, an entity should apply the provisions of IAS 36 to test for impairment its investments in subsidiaries, joint ventures, and associates that are carried at cost in accordance with paragraph 38(a) of IAS 27 (2008) or paragraph 10(a) of IAS 27, Separate Financial Statements (Revised 2011).

In January 2013, the Committee concluded that in light of the existing IFRS requirements an interpretation or an amendment to IFRS is not necessary and therefore decided not to add this issue to its agenda.

Interpretations Committee tentative agenda decisions

Committee agenda decisions are not Interpretations. Interpretations are determined only after extensive deliberations and due process, including a formal vote. Interpretations become final only when approved by the IASB.

After reviewing the following issues during the January 2013 meeting, the Committee tentatively decided not to add them to its agenda. The Committee will reconsider these tentative decisions, including its reasons for not adding the issues to the agenda, at the May 2013 meeting. For the full text of the Committee's tentative agenda decisions, please refer to the January 2013 IFRIC Update .

IFRS 2, Share-based Payment ‒ timing of the recognition of intercompany charges

Background

• The Committee was asked to clarify the guidance in IFRS 2, Share-based Payment, regarding intragroup recharges made in respect of share-based payments. The following fact pattern was outlined in the submission:

• The parent company of an international group grants share-based awards to the employees of its subsidiaries.
• The parent is obligated to settle these awards.
• The awards are based on the employee's service to the subsidiary.
• The subsidiary and the parent both recognize the share-based transaction in accordance with IFRS 2, typically over the vesting period of the awards.
• The parent has entered into recharge agreements with its subsidiaries that require the subsidiaries to pay the parent the value of the share-based awards upon settlement of the awards by the parent.

The specific issue is whether the subsidiary's liability to its parent regarding these charges should be recognized from the date of grant of the award or at the date of exercise of the award.

Tentative agenda decision

Outreach performed by the staff indicates that there is diversity in practice in the recognition of these liabilities. One view is that the recharge is linked with the share-based payments and that both are recognized from the grant date over the vesting period. Others think that the recharge is a separate transaction recognized by analogy with liabilities, the distribution of equity, or as an executory contract.

The Committee believes this issue is broad and that resolving it would require the Committee to address the accounting for intragroup payment arrangements generally in the context of common control. Any conclusions it reaches could have unintended consequences on the treatment of other types of intercompany transactions.

In the absence of guidance about intercompany transactions within existing IFRS and the Conceptual Framework, the Committee believes that it would not be able to resolve this issue efficiently and tentatively decided not to add it to its agenda.

IAS 7, Statement of Cash Flows ‒ identification of cash equivalents

Background

The Committee was asked about the basis of classification of financial assets as cash equivalents under IAS 7, Statement of Cash Flows. The submitter believes that the classification of investments as cash equivalents on the basis of the remaining period to maturity as of the balance sheet date would lead to a more consistent classification rather than the current focus on the investment's maturity from its acquisition date.

Tentative agenda decision

The Committee noted that paragraph 7 of IAS 7 states that financial assets held as cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes and that an investment held for the short term will normally have a maturity of three months or less from the acquisition date. The Committee noted that this three-month criterion promotes consistency among entities in the classification of cash equivalents and it does not believe the requirements of paragraph 7 of IAS 7 are unclear.

In light of existing guidance, the Committee does not believe that an interpretation or an amendment to IFRS is necessary and it does not expect significant diversity in practice to develop. Therefore, the Committee tentatively decided not to add this issue to its agenda.

IAS 10, Events after the Reporting Period ‒ reissuing previously issued financial statements

Background

The Committee was asked to clarify the accounting implications of applying IAS 10, Events after the Reporting Period, when previously issued financial statements are reissued in connection with an offering document. The specific issue is whether IAS 10 permits only one date of authorization for issue, thereby precluding dual dating, when previously issued financial statements are reissued in connection with an offering document.

This issue arises in jurisdictions where securities laws and regulatory practices require an entity to reissue its previously issued annual financial statements in connection with an offering document if the most recently filed interim financial statements reflect matters that are accounted for retrospectively under applicable accounting standards. However, the securities law and regulatory practices in these jurisdictions do not require an entity to recognize, in its reissued financial statements, events or transactions occurring between the time the financial statements were first issued and the time the financial statements were reissued. Instead, security and regulatory practices require the entity to recognize in its reissued financial statements only those adjustments that would ordinarily be made to the comparatives in the following year's financial statements (for example, adjustments for changes in accounting policy that are applied retrospectively, but not changes in accounting estimates).

Tentative agenda decision

The Committee noted that the objective of IAS 10 is to prescribe when an entity should adjust its financial statements for events that occur after the reporting period and the disclosures that an entity should give about the date when the financial statements were authorized for issue and about events after the reporting period.

The Committee observed that financial statements prepared in accordance with IFRS should reflect all adjusting and nonadjusting events up to the date that the financial statements were authorized for issue. Therefore, financial statements would not be in compliance with IFRS if transactions and events that occur after the balance sheet date are reflected in the financial statements, but IFRS do not permit them to be reflected, or transactions or events after the balance sheet date are not reflected in the financial statements, but IFRS require that they be reflected.

Based on the above analysis and because the issue arises in multiple jurisdictions that have specific securities laws and regulations, the Committee tentatively decided not to add this issue to its agenda.

IAS 28, Investments in Associates and Joint Ventures (Revised 2011), and IFRS 3, Business Combinations ‒ associates and common control

Background

In October 2012, the Committee was asked to clarify the accounting for an acquisition of an interest in an associate or joint venture from an entity under common control. The specific question is whether it is appropriate to apply by analogy the scope exemption for business combinations under common control in IFRS 3, Business Combinations, to the acquisition of an interest in an associate or joint venture under common control.

Tentative agenda decision

The Committee observed that paragraph 32 of IAS 28, Investments in Associates and Joint Ventures (Revised 2011), provides guidance on the acquisition of an interest in an associate or joint venture that does not distinguish between acquisition of an investment under common control and one that is not. The Committee also observed that paragraph 10 of IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, requires management to use its judgment in developing and applying an accounting policy only in the absence of an IFRS that specifically applies to a transaction.

Notwithstanding the aforementioned observations, the Committee noted that accounting for the acquisition of an interest in an associate or joint venture under common control would be better considered as part of a broader project on accounting for business combinations under common control, which the IASB identified as a priority research project in May 2012.

Although the Committee is particularly concerned that diversity in practice exists in this area, it tentatively decided not to add this issue to its agenda because of its concerns about the broader issues that relate to accounting for business combinations under common control.

Issues considered for Annual Improvements

The Committee assists the IASB in Annual Improvements by reviewing proposed improvements to IFRS and making recommendations to the IASB. Specifically, the Committee's involvement includes reviewing and deliberating issues for their inclusion in future exposure drafts of proposed Annual Improvements to IFRS and deliberating the comments received on the exposure drafts. When the Committee has reached consensus on an issue included in Annual Improvements, the recommendation (including finalization of the proposed amendment or removal from Annual Improvements) will be presented to the IASB for discussion, in a public meeting, before being finalized. Approved Annual Improvements to IFRS (including exposure drafts and final standards) are issued by the IASB.

In January 2013, the Committee deliberated the comments received on five proposed amendments included in the 2012 Exposure Draft, Annual Improvements to IFRSs 2010–2012 Cycle, as well as an issue that is being considered for inclusion in the Annual Improvements Cycle 2012–2014.

Annual improvements 2010–2012 cycle ‒ recommended for finalization

The Committee decided to recommend including the following proposed amendments in the Annual Improvements to IFRSs 2010-2012 Cycle, subject to IASB approval at a future IASB meeting. The amendments are expected to be issued in the second quarter of 2013.

IFRS 2, Share-based Payment ‒ definition of "vesting conditions"

The Committee recommended that the IASB should finalize the proposed amendment to clarify the definition of "vesting conditions" in Appendix A of IFRS 2, Share-based Payment, (by separately defining a "performance condition" and a "service condition") subject to some editorial remarks and consideration of other recommendations noted by the Committee, including modifying the transition provisions to require an entity to apply this amendment on a prospective basis in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors.

IAS 16, Property, Plant and Equipment, and IAS 38, Intangible Assets ‒ revaluation method ‒ proportionate restatement of accumulated depreciation

The Committee agreed in principle that the IASB should finalize the proposed amendments to IAS 16, Property, Plant and Equipment, and IAS 38, Intangible Assets, to clarify how a revaluation of an item of property, plant, and equipment or an intangible asset should be presented subject to revisions to some of the wording of the proposed amendments, clarification of the basis for conclusions, and modifications to the transition requirements.

IAS 24, Related Party Disclosures ‒ key management personnel

The Committee recommended that the IASB should finalize the proposed amendment to IAS 24, Related Party Disclosures, to clarify the related party disclosures required when key management personnel services are provided to the reporting entity subject to the Board's consideration of certain modifications noted by the Committee.

Annual Improvements 2010–2012 cycle ‒ further consideration required

IFRS 3, Business Combinations ‒ accounting for contingent consideration in a business combination

The Committee discussed the comments received on the proposed amendments to IFRS 3, Business Combinations, to clarify the subsequent accounting for contingent consideration that arises in a business combination, and generally agreed with the staff's recommendations to amend certain proposals.

However, the Committee noted that the proposed requirements for the subsequent measurement of nonfinancial liability contingent consideration would not require the same presentation of the own credit risk element of the change in fair value measurement as would be required for financial liability contingent consideration. Therefore, the Committee asked the staff to consider how to align the accounting for the subsequent changes in fair value for both financial and nonfinancial liability contingent consideration.

Annual Improvements 2010–2012 cycle ‒ not recommended for finalization

IAS 1, Presentation of Financial Statements ‒ current/noncurrent classification of liabilities

The Committee discussed the comments received on the proposed amendment to IAS 1, Presentation of Financial Statements, to clarify that a liability would be classified as noncurrent if an entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve months after the reporting period under an existing loan facility with the same lender, on the same or similar terms.

The Committee noted that the proposed amendment ties the classification requirements of financial liabilities in IAS 1 to the derecognition requirements of financial liabilities in IAS 39, Financial Instruments: Recognition and Measurement, and IFRS 9, Financial Instruments. In that case, the assessment of whether the terms are the same or similar would include a quantitative analysis based on the so-called "10 per cent test," which the Committee thinks is not appropriate for classification purposes and would raise practical issues.

After considering the comments received, the Committee decided to recommend to the IASB that it not confirm the proposed amendment to IAS 1 in its current form and instead asked the IASB to address this issue through a narrow-scope project to amend IAS 1.

Annual Improvements 2012–2014 cycle ‒ further work required

IFRS 7, Financial Instruments: Disclosures ‒ disclosures for transfers of financial assets

The Committee was asked to clarify whether servicing rights and obligations are deemed to be "continuing involvement" for the purpose of the transfer disclosures in IFRS 7, Financial Instruments: Disclosures. The Committee noted that the wording in paragraph 42C of IFRS 7 is not clear on this issue, and recommended that the IASB consider clarifying the requirements in paragraph 42C.

Issues recommended for narrow scope amendment

IAS 19, Employee Benefits (Revised 2011) ‒ measurement of the net defined benefit obligation for post employment benefit plans with employee contributions

Background

Previously, the Committee was asked to clarify the guidance on accounting for employee contributions to defined benefit plans in paragraph 93 of IAS 19, Employee Benefits (Revised 2011), which is effective from annual periods beginning on or after January 1, 2013. Specifically, the submitter asked how to account for employee contributions in respect of service.

In previous discussions, the Committee had noted that employee contributions, including expected future contributions that result from employee service in the current and prior periods, should be considered in calculating the defined benefit obligation. However, the Committee was concerned about the complexity of the required calculations and the potential confusion that may result in practice.

Current discussion

In January 2013, the Committee discussed whether certain types of employee contributions to a defined benefit plan would reduce short-term employee benefits cost rather than post-employment benefits cost. The Committee noted that paragraph 93 of IAS 19 implies that all employee contributions in respect of service should be attributed to periods of service as a negative benefit, even though employee contributions linked solely to the employee's service rendered in the same period might meet the definition of short-term employee benefits.

However, the Committee noted that the existing wording in paragraph 93 of IAS 19 is not sufficiently clear to ensure that all entities will reach the same interpretation. In light of the effective date of IAS 19 (Revised 2011), the Committee believes that the issue should be addressed urgently and decided to ask the IASB to consider a narrow scope amendment to reflect the Committee's observations.

IAS 39, Financial Instruments: Recognition and Measurement ‒ novation of derivatives under EMIR legislation

Background

In November 2012, the Committee was asked to clarify whether an entity is required to discontinue hedge accounting if a hedging instrument is novated from one counterparty to another following the introduction of new regulations. Specifically, the issue relates to hedging relationships in which an over-the-counter (OTC) derivative has been designated as a hedging instrument under IAS 39, Financial Instruments: Recognition and Measurement, when the OTC derivative is novated to a central counterparty (CCP) following the introduction of the Regulation on OTC derivatives, central counterparties (CCPs), and trade repositories (the European Market Infrastructure Regulation (EMIR)).

The concern raised is that discontinuation of hedge accounting due to the novation would require an entity to newly designate the novated derivative if hedge accounting is subsequently used. In particular, the submitter was concerned that a new designation of the novated derivative would result in

more hedge ineffectiveness compared to a continuing hedging relationship because the novated derivative would have a non-zero fair value at the date of novation (and subsequent designation).

Current discussion

The Committee noted that IAS 39 requires an entity to discontinue hedge accounting when an OTC derivative designated as a hedging instrument is novated to a CCP under EMIR, because the existing novated derivative is derecognized and the new derivative contracts, with a counterparty being the CCP, are recognized at the time of the novation.

However, the Committee decided to recommend that the IASB make a narrow-scope amendment to IAS 39 to permit the continuation of hedge accounting in the very narrow circumstances where the parties to the original hedging instrument are required as a result of law or regulation to novate in the same way, with no other changes to the term of the hedging instrument.

Note: On February 28, 2013, the IASB issued an Exposure Draft, Novation of Derivatives and Continuation of Hedge Accounting (proposed amendments to IAS 39 and IFRS 9)with a 30 day comment period.

IFRS Interpretations Committee work in progress

IAS 19, Employee Benefits (Revised 2011) ‒ actuarial assumptions: discount rate

Background

In October 2012, the Committee was asked to provide guidance on determining the rate used to discount post-employment benefit obligations under the guidance in IAS 19, Employee Benefits (Revised 2011). The specific issue before the Committee is whether corporate bonds with a rating lower than "AA" can be considered high quality corporate bonds (HQCB).

The Committee discussed this issue in November 2012. Although the Committee made several observations about the application of paragraph 83, it did not reach any tentative decisions.

Current discussion

The Committee discussed the underlying principles for determining the discount rate, including whether the HQCB basket should be determined at the Eurozone or country level for liabilities denominated in Euros. The Committee supported its June 2005 agenda decision that stated an entity shall include HQCB issued by entities operating in other countries to determine the discount rate provided that these bonds are issued in the currency in which the benefits are to be paid. The Committee also asked the staff to consult with the IASB on the underlying principle in paragraph 84 of IAS 19 (Revised 2011) for determining the discount rate and other matters for discussion at a future meeting.

IAS 39, Financial Instruments: Recognition and Measurement ‒ income and expenses arising on financial instruments with a negative yield ‒ presentation in the statement of comprehensive income

Background

In the current economic environment, the demand for safe harbor investments has increased to the point where the yield on some assets, such as high quality government bonds, has turned negative. The issue before the Committee is how income and expense that result from negative effective interest rates on financial instruments should be presented in the statement of comprehensive income.

In September 2012, the Committee considered that in light of existing requirements an Interpretation was not necessary and therefore tentatively decided not to add this issue to its agenda.

Current discussion

Although the Committee had previously tentatively decided not to add this issue to its agenda, it decided to postpone finalizing that decision until the IASB has completed its redeliberations on the Exposure Draft, Classification and Measurement: Limited Amendments to IFRS 9, to avoid any unintended consequences on the classification of financial assets in accordance with IFRS 9, Financial Instruments.

IAS 40, Investment Property ‒ accounting for a structure that appears to lack the physical characteristics of a building

Background

The Committee was asked to clarify whether telecommunication towers in a jurisdiction should be accounted for as property, plant, and equipment under IAS 16, Property, Plant and Equipment, or as investment property under IAS 40, Investment Property. According to the submission, the owner of the telecommunication tower receives rent revenue and provides basic services (such as maintenance) in exchange for leasing spaces in the towers to telecommunication operators who attach their own devices to the towers.

The submitter is specifically seeking clarification on (1) whether a telecommunication tower should be viewed as a "building" and therefore as "property" as described in paragraph 5 of IAS 40, and (2) how the service element in the leasing agreement and the entity's business model affect the analysis of this issue.

Although the Committee noted in September 2012 that the tower described in the submission has some characteristics of investment property (for instance, rental income) it questioned whether the tower qualifies as a "building" since it lacks the features of a building, such as walls, floors, and a roof. Consequently, the Committee asked the staff to analyze this issue further and to consider amending the scope of IAS 40 to address it.

Current discussion

The Committee observed that it would be beneficial to explore approaches to amending IAS 40 to assist the IASB in deciding whether to expand the scope of IAS 40 to accommodate emerging business models. In this regard, the Committee discussed whether the scope of IAS 40 should focus on the nature of the business activity or on the nature of the asset.

The Committee also noted that the meaning of the term "property" should be consistent with the new proposed lease accounting model, which prescribes different accounting for leases of property and for leases of assets other than property.

Consequently, the Committee asked the staff to inform the IASB of its views and to ask the Board whether the definition of "property" in IAS 40 should be aligned with that in the new standard on leases.

Outstanding issues update

The Committee was updated on three new issues and three ongoing issues for consideration at a future meeting. Another issue on hold will also be considered at a future meeting. All other requests received and considered by the staff were discussed at this meeting, except for the following three matters:

• IAS 7, Statement of Cash Flows ‒ definitions of operating, investing, and financing activities
• IAS 7, Statement of Cash Flows ‒ interest paid that is capitalized
• IAS 29, Financial Reporting in Hyperinflationary Economies ‒ applicability of IAS 29 to financial statements prepared under the concept of financial capital maintenance in units of constant purchasing power

The next Committee meeting will be held on March 12-13, 2013.

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