United States: On The Horizon For IFRS - June 25, 2013

Introduction

The IFRS Interpretations Committee (IFRIC or the Committee) has issued the May 2013 IFRIC Update, which summarizes the deliberations during its meeting in London on May 14-15, 2013. This On the Horizon for IFRS provides a brief description of the topics discussed at that meeting. For a more complete description of the issues discussed by the Committee, as well as the results of those discussions, please refer to the May 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 May 2013 meeting, the Committee discussed the following item on its current agenda.

Recognition of deferred tax assets for unrealized losses

In December 2012, the IASB tentatively decided that the accounting for deferred tax assets for unrealized losses on debt instruments should be clarified through a narrow-scope amendment to IAS 12, Income Taxes. The clarification would address whether an unrealized loss on a debt instrument measured at fair value gives rise to a deductible temporary difference when the holder expects to recover the carrying amount of the asset by holding it to maturity and collecting all contractual cash flows.

In May 2013, the Committee discussed this issue and decided to recommend to the IASB that IAS 12 be amended to clarify that deferred tax assets for unrealized losses on debt instruments would be recognized, unless recovering the debt instrument by holding it until an unrealized loss reverses does not reduce future tax payments and instead only avoids higher tax losses. The Committee noted that this recommendation would not always be consistent with one recently discussed and proposed by the FASB.

The Committee decided to consult with the IASB on its proposed approach before drafting a proposed amendment to IAS 12.

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.

Reissuing previously issued financial statements

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.

In May 2013, the Committee reaffirmed its previous decision not to add this issue to its agenda based on its analysis of IAS 10 and because this issue arises in multiple jurisdictions that have particular securities laws and regulations that may prescribe the form for re-presentations of financial statements.

Associates and common control

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.

The Committee noted that accounting for the acquisition of an interest in an associate or joint venture under common control would be better considered within the context of broader projects on accounting for business combinations under common control and the equity method of accounting. The Committee also noted that the IASB has added to its agenda a priority research project on accounting for business combinations under common control and a research project on the equity method of accounting. Therefore, in May 2013 the Committee reaffirmed its previous decision not to add this issue to its agenda.

Identification of cash equivalents

The Committee was asked about the basis used to classify financial assets as cash equivalents under IAS 7, Statement of Cash Flows. The submitter believes that classifying investments as cash equivalents based on 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.

In light of existing guidance, the Committee does not expect significant diversity in practice to develop and believes that an interpretation or an amendment to IFRS is unnecessary. Therefore, in May 2013 the Committee reaffirmed its previous decision not to add this issue to its agenda.

Timing of the recognition of intercompany recharges

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 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.

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 and that any conclusions could have unintended consequences on the treatment of other types of intercompany transactions.

In the absence of existing guidance about intercompany transactions, the Committee believes that it would not be able to resolve this issue efficiently. Therefore, in May 2013 the Committee reaffirmed its previous decision not to add this issue to its agenda.

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. Tentative agenda decisions, including the reasons for not adding the issues to the agenda, will be reconsidered at the September 2013 meeting.

Classification of financial instruments that give the issuer the contractual right to choose the form of settlement

The Committee was asked to clarify how an issuer would classify three financial instruments under IAS 32, Financial Instruments: Presentation. None of the three financial instruments had a maturity date, but each financial instrument gave the holder the contractual right to redeem the instrument at any time. Although the redemption right was described differently for each instrument, on exercise the issuer had the contractual right to choose to settle the instrument in either cash or a fixed number of its own equity instruments.

The Committee noted that if the issuer has the contractual right to choose to settle a nonderivative financial instrument in either cash or a fixed number of its own equity instruments, that financial instrument would meet the definition of an equity instrument in IAS 32, provided the instrument does not establish an obligation to deliver cash (or another financial asset) indirectly through its terms and conditions. The Committee also noted that if the issuer has a contractual obligation to deliver cash, then the obligation meets the definition of a financial liability.

In light of the Committee's analysis of the existing IFRS requirements, the Committee does not believe an interpretation is necessary and tentatively decided not to add this issue to its agenda.

Effect of protective rights on an assessment of control

The Committee was asked whether the control assessment in IFRS 10, Consolidated Financial Statements, should be reassessed if protective rights become exercisable (for example, on breach of a loan covenant that gives rise to a default).

The Committee observed that paragraph 8 of IFRS 10 requires an investor to reassess whether it controls an investee if facts and circumstances change and that a breach which results in protective rights becoming exercisable does constitute such a change. The Committee concluded that it does not expect significant diversity in practice to develop in this area following the implementation of IFRS 10 and therefore tentatively decided not to add this issue to its agenda.

Classification of a disposal group as held for sale in a planned IPO

The Committee was asked to clarify the guidance in IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, on the classification of a disposal group as held for sale when the disposal plan will be achieved via an initial public offering (IPO) that has not yet been approved by the securities regulator.

The Committee noted that an entity should apply the guidance in paragraphs 6 through 9 of IFRS 5 to assess whether the sale of a disposal group by means of an IPO is highly probable. On the basis of the Committee's analysis of IFRS 5, it determined that sufficient guidance exists and that neither an Interpretation nor an amendment to a Standard is necessary. Therefore, the Committee tentatively decided not to add this issue to its agenda.

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.

Annual Improvements to IFRS 2011-2013 Cycle

At the May 2013 meeting, the Committee deliberated the comments received on the following proposed amendments that were included in the November 2012 Exposure Draft, Annual Improvements to IFRSs 2011-2013 Cycle.

Meaning of "effective" in IFRS 1

The Exposure Draft proposed amending IFRS 1, First-time Adoption of International Financial Reporting Standards, to clarify the meaning of "each IFRS effective at the end of an entity's first IFRS reporting period" in paragraph 7.

In May 2013, the Committee recommended that the IASB should finalize the proposed amendment subject to some wording revisions.

Scope exceptions for joint ventures in IFRS 3

The Exposure Draft proposed amending paragraph 2(a) of IFRS 3, Business Combinations, to clarify the scope exception for joint ventures.

In May 2013, the Committee recommended that the IASB should finalize the proposed amendment, but that it should be applied prospectively rather than retrospectively as proposed in the Exposure Draft.

Scope of paragraph 52 (portfolio exception) in IFRS 13

The Exposure Draft proposed amending paragraph 52 of IFRS 13, Fair Value Measurement, to clarify that the portfolio exception applies to all contracts within the scope of either IAS 39, Financial Instruments: Recognition and Measurement, or IFRS 9, Financial Instruments, regardless of whether they meet the definition of financial assets or financial liabilities in IAS 32, Financial Instruments: Presentation.

In May 2013, the Committee recommended that the IASB should finalize the proposed amendment, but that it should be applied prospectively from the beginning of the earliest period presented for which IFRS 13 is applied rather than retrospectively as proposed in the Exposure Draft.

Clarifying the interrelationship of IFRS 3 and IAS 40 when classifying property as investment property or owner-occupied property

The Exposure Draft proposed amending IAS 40, Investment Property, to clarify the interrelationship of IFRS 3, Business Combinations, with IAS 40 when classifying property as either investment property or owner-occupied property.

In May 2013, the Committee recommended that the IASB should finalize the proposed amendment and that retrospective application of this amendment should be permitted only if the information needed to apply the amendment retrospectively is available to the entity.

Issues considered for inclusion in the Annual Improvements Cycle 2012-2014

Change of disposal method under IFRS 5

The Committee was asked to clarify the guidance in IFRS 5, Non-current Assets held for Sale and Discontinued Operations, when a disposal plan is changed from a plan that qualified as held-for-sale to a plan to spin-off of a division and issue a dividend in kind to the shareholders. The specific issue is whether such a change in a disposal method would qualify as a change to a plan of sale and therefore the held-for-sale accounting would be discontinued under paragraphs 26-29 of IFRS 5.

The Committee noted that IFRS 5 lacks guidance for when an entity reclassifies an asset (or disposal group) from held for sale to held for distribution (or vice versa) and an entity no longer meets the criteria for held for distribution. To address the lack of guidance in IFRS 5, the Committee recommends and proposes to the IASB that IFRS 5 be amended through an Annual Improvement to add the following guidance:

• A change from held for sale to held for distribution (or vice versa) would not be accounted for in accordance with the guidance in paragraphs 27-29 of IFRS 5.
• When an entity no longer meets the criteria in paragraph 12A of IFRS 5, it would cease held-for-distribution accounting and would apply the guidance in paragraphs 27-29, unless the disposal group immediately meets the criterion to be classified as held for sale.

The Committee also recommended that the proposed amendments to IFRS 5 would be applied prospectively.

Disclosures for transfers of financial assets

Previously, the Committee was asked to clarify whether servicing agreements are deemed to be "continuing involvement" for the purpose of the transfer disclosures in IFRS 7, Financial Instruments: Disclosures.

In January 2013, the Committee noted that the wording in paragraph 42C of IFRS 7 is not clear on this issue, and asked the IASB to consider clarifying this guidance. The IASB in February 2013 indicated that servicing agreements would meet the definition of continuing involvement for the purposes of the IFRS 7 disclosures and that paragraph 42C includes servicing agreements in the transfer disclosure requirements.

In light of the IASB's feedback, the Committee recommended that the Board propose an amendment to paragraph 42C(c) of IFRS 7 through an Annual Improvement to clarify that servicing agreements are not excluded from the transfer disclosures.

Issue recommended for a narrow-scope amendment to IFRS

During the May 2013 meeting, the Committee recommended the following issue for a narrow-scope amendment to IFRS.

Elimination of gains from a transaction between a joint venturer and its joint venture

The Committee was asked to clarify the accounting for a transaction between a joint venturer (an entity) and its joint venture in which the amount of gain to eliminate in a downstream transaction under paragraph 28 of IAS 28, Investments in Associates and Joint Ventures, exceeds the amount of the entity's interest in the joint venture. Specifically, the question is whether the gain from the transaction should be eliminated entirely or only to the extent that it does not exceed the carrying amount of the entity's interest in the joint venture. If the entire gain is eliminated, the issue would be how to present the corresponding entry for the amount of the gain in excess of the carrying amount of the joint venturer's interest in the joint venture.

In March 2013, the Committee observed that under paragraph 28 of IAS 28, the entity should eliminate the gain from a downstream transaction to the extent of related investors' interest in the joint venture, even if the gain to be eliminated exceeds the carrying amount of the entity's interest in the joint venture.

In May 2013, the Committee noted that it would be appropriate to present the eliminated gain in excess of the carrying amount of the entity's interest in the joint venture as a deferred gain. However, IAS 28 does not provide sufficient guidance on this issue. Therefore, the Committee recommended to the IASB to amend IAS 28 through a narrow-scope project that would include specific guidance on how to account for the corresponding entry for the eliminated gain in excess of the carrying amount of the entity's interest in the joint venture in a downstream transaction.

Work in progress

Accounting for share-based payment transactions in which the manner of settlement is contingent on future events

The Committee was asked to clarify how to account for share-based payment transactions in which the manner of settlement is contingent on either (a) a future event that is outside the control of both the entity and the counterparty or (b) a future event that is within the control of the counterparty.

The Committee noted that IFRS 2, Share-based Payment, does not provide specific guidance on share-based payment transactions whose settlement is contingent on a future event that is outside the control of both the entity and the counterparty. Because there is significant diversity in accounting for this type of transaction, the Committee asked the staff to explore approaches to providing guidance for it, which the Committee will discuss at a future meeting.

Fair value measurement portfolios

The Committee was asked to clarify the interaction between the use of Level 1 inputs and the portfolio exception in IFRS 13, Fair Value Measurement, which permits an entity to measure its net exposure to either market risks or credit risk arising from a group of financial assets and financial liabilities in specified circumstances. The specific issue discussed by the Committee is whether an entity is:

• Permitted to apply the portfolio exception to measure the resulting net risk exposure of a portfolio comprising solely identical Level 1 instruments; or
• Required to measure the financial assets and the financial liabilities of such a portfolio on an individual basis, using the corresponding Level 1 prices for each financial instrument.

The Committee decided that this issue needs to be considered by the IASB because there is insufficient guidance in IFRS 13 to resolve it. Therefore, the Committee asked the staff to present its concerns to the IASB.

Actuarial assumptions: discount rate

Previously, the Committee was asked to provide guidance on determining the rate used to discount post-employment benefit obligations under IAS 19, Employee Benefits. The specific issue is whether corporate bonds with an internationally recognized rating lower than "AA" can be considered high quality corporate bonds.

In March 2013, the staff reported that a majority of IASB members agreed with the Committee's observations on determining the discount rate. Consequently, the Committee asked the staff to consult with experts (for example, actuaries) and to prepare proposals for a narrow-scope amendment to IAS 19.

At the May 2013 meeting, the Committee considered the staff proposals for a narrow-scope amendment to IFRS 19, but decided that they were too broad. Therefore, the Committee asked the staff to refocus its work on an analysis of whether "high quality" is a relative or an absolute concept. The Committee will consider whether to issue an agenda decision, develop guidance, or recommend some amendments to IAS 19 depending on the conclusions of the staff's analysis.

Other work

Definition of a business

The Committee was asked to clarify whether an asset with relatively simple associated processes meets the definition of a business in accordance with IFRS 3, Business Combinations. The specific question is whether the acquisition of a single investment property that has lease agreements with multiple tenants over varying periods and associated processes, such as cleaning, maintenance and administrative services would constitute a business as defined in IFRS 3.

The Committee noted that the difficulty in determining whether an acquisition meets the definition of a business is not limited to the acquisition of investment property. The Committee also noted that this broader issue goes beyond the scope of the Committee's activities and should be addressed by the IASB as part of its post-implementation review of IFRS 3. However, the Committee believes that its review of this issue and its related experience will be useful to that process. Therefore, the Committee asked the staff to continue its discussions with the FASB staff and its outreach with interested parties from other industry sectors, with the aim of providing the IASB with relevant information for its post-implementation review.

At the May 2013 meeting, the Committee discussed the results of the staff's work and decided to contribute a summary of these discussions to the post-implementation review of IFRS 3.

Outstanding issues update

The Committee was updated on seven new issues and five ongoing issues for consideration at a future meeting. Another issue is on hold and will also be considered at a future meeting. All other requests received and considered by the staff were discussed at this meeting.

The next Committee meeting will be held on July 16-17, 2013.

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