United States: On The Horizon For IFRS - January 15, 2013

IFRIC meeting November 2012

Introduction

All decisions reached at IFRS Interpretations Committee (IFRIC or the 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.

The IFRS Interpretations Committee has issued the November 2012 IFRIC Update, which summarizes the deliberations during its meeting in London on November 13-14, 2012. Highlights of the meeting are discussed below.

Key IFRIC issues

  • Current agenda:
  • IAS 1, Presentation of Financial Statements ‒ disclosures about going concern. The Committee discussed the timing and content for disclosing material uncertainties related to an entity's ability to continue as a going concern and tentatively decided that those issues should be addressed in a narrow-focused amendment to IAS 1.
  • 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. The Committee discussed the initial and subsequent accounting for variable payments, but did not reach any tentative decisions.
  • IAS 19, Employee Benefits ‒ employee benefit plans with a guaranteed return on contributions or notional contributions. The Committee discussed the discount rate that should be used to calculate the present value of the employee benefit for plans that fall within the scope of this project, but did not reach a tentative decision. The Committee did tentatively agree that the "higher of option" in employee benefit plans would be measured at its intrinsic value at the reporting date.
  • IAS 37, Provisions, Contingent Liabilities and Contingent Assets ‒ Interpretation on levies. The Committee discussed the comments received on the Draft IFRIC Interpretation, Levies Charged by Public Authorities on Entities that Operate in a
  • Specific Market, and reached several tentative decisions that will affect the final Interpretation.
  • Agenda decisions: The Committee decided not to add the following issues to its agenda:
    • IAS 18, Revenue, IAS 37, Provisions, Contingent Liabilities and Contingent Assets, and IAS 39, Financial Instruments: Recognition and Measurement ‒ regulatory assets and liabilities
    • IAS 39, Financial Instruments: Recognition and Measurement ‒ scope of paragraph AG5
  • Tentative agenda decisions: The Committee tentatively decided not to add the following issues to its agenda:
    • IFRS 3, Business Combinations, and IFRS 2, Share-based Payment ‒ accounting for reverse acquisitions that do not constitute a business
    • IAS 41, Agriculture, and IFRS 13, Fair Value Measurement ‒ valuation of biological assets using a residual method
  • Issues considered for Annual Improvements:
    • Annual Improvements to IFRSs 2010-2012 Cycle ‒ recommended for finalization:
    • IFRS 8, Operating Segments ‒ aggregation of operating segments
    • IFRS 8, Operating Segments ‒ reconciliation of the total of the reportable segments' assets to the entity's assets
    • IFRS 13, Fair Value Measurement ‒ short-term receivables and payables
    • Annual Improvements to IFRSs 2010-2012 Cycle requiring further consideration:
    • IAS 12, Income Taxes ‒ recognition of deferred tax assets for unrealized losses
    • Issues recommended for inclusion in the next Annual Improvements cycle:
    • IFRS 3, Business Combinations ‒ mandatory purchase of noncontrolling interests in business combinations
    • IAS 34, Interim Financial Reporting ‒ disclosure of information "elsewhere in the interim financial report"
  • IFRS Interpretations Committee's work in progress:
    • IAS 10, Events after the Reporting Period ‒ reissuing previously issued financial statements. The Committee discussed the accounting implications of applying IAS 10 when previously issued financial statements are reissued in connection with an offering document. The Committee was not in favor of amending IFRS for this issue and asked the staff to draft a tentative agenda decision for consideration at a future meeting.
    • IAS 19, Employee Benefits ‒ measurement of the net defined benefit obligation for post employment benefit plans with employee contributions. The Committee considered several examples illustrating how to apply the requirements in paragraph 93 of IAS 19 (Revised 2011), as well as the effect of different discount rate and salary growth assumptions on the calculation of the net benefit, but did not reach any decisions. Further discussion is expected at a future meeting.
    • IAS 19, Employee Benefits ‒ actuarial assumptions: discount rate. The Committee discussed how to determine the rate used to discount post-employment benefit obligations in accordance with the guidance in paragraph 83 of IAS 19 (Revised 2011), but did not reach any decisions. Further discussion is expected at a future meeting.

Current agenda

At its November 2012 meeting, the Committee discussed the following items on its current agenda.

IAS 1, Presentation of Financial Statements ‒ disclosures about going concern

Background

The Committee was asked to clarify the guidance on disclosing material uncertainties related to an entity's ability to continue as a going concern in IAS 1, Presentation of Financial Statements. IAS 1 requires an entity to disclose material uncertainties about its ability to continue as a going concern when management becomes aware of those uncertainties.

Current discussion

The Committee tentatively decided to consider only two questions about the disclosure of material uncertainties related to an entity's ability to continue as a going concern:

  • When should the disclosure be made?
  • What information should be disclosed about the uncertainties?

The Committee also tentatively agreed on the following points:

  • The high threshold for preparing financial statements on a basis other than going concern discussed in paragraph 25 of IAS 1 is appropriate.
  • A threshold for disclosing material uncertainties related to an entity's ability to continue as a going concern would be more clearly identified in IAS 1.
  • The objectives for disclosures related to an entity's ability to continue as a going concern would be included in IAS 1.

The Committee also tentatively decided that this issue should be addressed as a narrow-focused amendment to IAS 1 and asked the staff to identify specific disclosures that should be required.

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 they are incurred over the term of the concession 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, but reached no conclusions on, in 2011.

In September 2012, the Committee discussed whether the principles that the IASB is developing in the project on leases should be used as a basis to account for variable payments made for separate purchases of property, plant, and equipment and intangible assets. However, some Committee members were uncertain about applying the proposed leasing principles because that project is incomplete and the timing of a final leases standard remains uncertain. Therefore, the Committee asked the staff to draft a paper on all of the models being considered regarding this issue. The staff was also asked to propose alternative models that focus on the debit side of the transaction instead of the recognition and measurement of the liability and to consider whether the remeasurement of the liability should be treated as an adjustment to the cost of the asset.

Current discussion

The Committee discussed the initial accounting for variable payments, but could not reach a consensus on the following issues:

  • Whether the fair value of all variable payments should be included in the initial measurement of the liability on the purchase date of the asset
  • Whether variable payments that depend on future activities of the purchaser should be excluded from the initial measurement of the liability until the activity is performed

The Committee also discussed the subsequent accounting for variable payments and agreed that adjustments to the liability, other than finance costs, would be recognized as an adjustment to the cost of the asset acquired in certain circumstances. The Committee asked the staff to develop some examples that illustrate this situation for discussion at a future meeting. The staff was also asked to draft a paper that addresses whether the initial accounting would affect the subsequent accounting for variable payments.

IAS 19, Employee Benefits ‒ employee benefit plans with a guaranteed return on contributions or notional contributions

Background

Several years ago, the Committee proposed IFRIC Draft Interpretation D9, Employee Benefit Plans with a Promised Return on Contributions or Notional Contributions, to address the accounting for contribution-based promises. Rather than completing work on this issue, the Committee referred it to the IASB to include in the Board's post-employment benefits project. Because of the Board's decision not to address this issue currently, together with ongoing concerns about the accounting for contribution-based promises, the Committee decided to reconsider it.

In September 2012, the Committee discussed the scope of this project and tentatively decided that employee benefit plans with certain characteristics would fall within its scope. The Committee also tentatively decided that an employee post-employment benefit plan or other employee long-term benefits would be within the scope of the project, subject to certain conditions.

Current discussion

The Committee discussed how to measure plans that fall within the scope of this project and identified the following main issues:

  • The discount rate that should be used to calculate the present value of the employee benefit
  • The measurement of the "higher of option" in employee benefit plans

Discount rate

IAS 19, Employee Benefits, requires that the benefit obligation of an employee benefit plan be projected forward at the expected rate of return on the "reference" assets or index and that those projected cash flows be discounted using the rate specified in IAS 19, which is generally a high quality corporate bond rate. A concern was raised that applying the requirements in IAS 19 may not faithfully represent the benefit obligation of plans within the scope of this project because IAS 19 requires the benefit to be projected forward at the expected rate on the reference assets or index and discounted using the rate specified in IAS 19. Some think that unless the benefit is defined by reference to the return on the same assets as that discount rate (such as high quality corporate bonds), the measurement of the benefit will not faithfully represent the risk of the assets that the benefit is based on.

The Committee did not reach any decisions on this issue, but asked the staff to prepare examples to illustrate how the measurement approach would apply to different employee benefit designs for discussion at a future meeting.

Higher of option

The phrase "higher of option" refers to a situation where an employee is guaranteed the higher of two or more possible outcomes (for example, a fixed return of 4 percent and the actual rate of the contributions made by the employer). However, IAS 19 does not specify how to measure the value of the option when using the projected unit credit method. The Committee tentatively decided that the "higher of option" would be measured at its intrinsic value at the reporting date.

The Committee also discussed, but did not reach a decision on, the accounting and presentation of the "higher of option."

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

Background

In May 2012, the Committee published draft IFRIC Interpretation, Levies Charged by Public Authorities on Entities that Operate in a Specific Market, for a period of public comment ending September 5, 2012. The draft Interpretation addresses the accounting for levies recognized in accordance with the definition of a "liability" in IAS 37, Provisions, Contingent Liabilities and Contingent Assets.

Current discussion

Although a significant number of respondents agreed that the proposed accounting in the draft Interpretation is a technically correct interpretation of the requirements in IAS 37, they also believe that the result of the proposed accounting does not provide a fair representation of the economic effects of levies when the liability and the corresponding expense are recognized at a specific point in time. Those respondents think that a recurring levy is, in substance, a charge associated with a specific period rather than a charge triggered on a specific date. The Committee asked the staff to inform the IASB about those comments.

After considering the concerns and comments of respondents, the Committee 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 that are within the scope of the IASB's project on emissions trading schemes
  • Define the term "levy"
  • Provide guidance on the accounting for the liability to pay a levy in annual and interim financial statements
  • Not require additional disclosures specific to levies

The committee also tentatively decided the following:

  • To reconsider whether the Interpretation should address the accounting for levies with minimum thresholds, which was excluded from the scope of the draft Interpretation
  • To confirm the guidance on accounting for a liability to pay a levy, which was provided in the consensus of the draft Interpretation
  • Not to perform a further impact analysis of the final Interpretation
  • Not to introduce specific requirements regarding levies in IAS 34
  • To ask the IASB to consider the issues regarding the accounting for levies when developing the definition and recognition criteria for a liability in the Conceptual Framework project

For discussion at a future meeting, the staff was asked to prepare a paper that

  • Analyzes the different alternatives to account for levies with minimum thresholds
  • Discusses whether the final Interpretation should address the accounting for levies that are exchange transactions
  • Discusses whether the final Interpretation should refer to other IFRS to account for the debit side of the liability
  • Proposes a definition for the term "levy"

The Committee also asked the staff to prepare an updated version of the draft Interpretation based on the tentative decisions reached at its November 2012 meeting.

IFRS 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 deliberation and due process, including a formal vote. Interpretations become final only when approved by the IASB.

After reviewing the following issues during the November 2012 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 IFRIC Update for the November 2012 meeting.

IAS 18, Revenue, IAS 37, Provisions, Contingent Liabilities and Contingent Assets, and IAS 39, Financial Instruments: Recognition and Measurement ‒ regulatory assets and liabilities

Background

Previously, the Committee was asked to clarify whether a regulatory asset or regulatory liability should be recognized if a regulated entity is either permitted to recover costs or required to refund some amounts independently of the delivery of future services. Specifically, the two questions raised in the submission are:

  • Can the population of customers be regarded as a single unit of account?
  • If so, is it acceptable to recognize an asset or liability?

The Committee did not address these two questions specifically, but in 2005 had concluded that an entity would recognize only assets that qualify for recognition according to the IASB's Conceptual Framework and other authoritative guidance, such as IAS 11, Construction Contracts, IAS 18, Revenue, IAS 16, Property, Plant and Equipment, and IAS 38, Intangible Assets. That conclusion, the Committee noted, is still valid because there have been no major changes made to these IFRS that would necessitate revisiting this issue.

In July 2012, the Committee tentatively decided not to add this issue to its agenda because (1) it is too broad for the Committee to address within the confines of existing IFRS and the IASB's conceptual framework and (2) the IASB recently expressed support for developing a standards-level project in the near future.

Current discussion

The Committee reaffirmed its tentative conclusion reached in July 2012, subject to minor editorial changes, and noted that the IASB had recently resumed a comprehensive project on rate-regulated activities and expects to publish a related Discussion Paper in the second half of 2013.

IAS 39, Financial Instruments: Recognition and Measurement ‒ scope of paragraph AG5

Background

Previously, the Committee addressed several issues that resulted from the restructuring of Greek government bonds (GGBs) in 2012. On one issue, the Committee concluded that GGBs surrendered in March 2012 would be derecognized, which means the new GGBs received as part of the debt restructuring would be recognized as new assets. At the July 2012 meeting, the Committee considered whether paragraph AG5 of IAS 39, Financial Instruments: Recognition and Measurement, would apply when determining the effective interest rate used when new GGBs are initially recognized. Applying paragraph AG5 of IAS 39 means that the effective interest rate would be determined at initial recognition using estimated cash flows that take into account incurred credit losses.

At its July 2012 meeting, the Committee noted that acquired assets include both purchased and originated assets. The Committee also noted that while origination of a debt instrument with an incurred loss is rather unusual, such transactions do occur. The Committee cited an example that involves debt instruments outside the normal underwriting process that are instead forced upon existing lenders by a restructuring. This scenario could include situations in which modifications of debt instruments result in the derecognition of the original financial asset and the recognition of a new financial asset that could have incurred losses on initial recognition. The Committee noted that whether an incurred loss exists when an asset is initially recognized is a factual matter, which requires judgment.

Based on an analysis of the existing requirements of IAS 39, the Committee tentatively decided not to add the issue to its agenda.

Current discussion

The Committee reaffirmed its previous tentative decision not to add this issue to its agenda, subject to minor editorial changes.

IFRS Interpretations Committee tentative agenda decisions

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

After reviewing the following issues during the November 2012 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 March 2013 meeting. For the full text of the Committee's tentative agenda decisions, please refer to the November 2012 IFRIC Update.

IFRS 3, Business Combinations, and IFRS 2, Share-based Payment ‒ accounting for reverse acquisitions that do not constitute a business

Background

The Committee was asked to provide guidance on how to account for reverse acquisition transactions when the accounting acquiree is not a business. Because IFRS 3, Business Combinations, does not provide such guidance, different views exist on how to account for these transactions.

The two scenarios submitted include a non-operating entity (an accounting acquiree / legal parent) with a public listing that is used to provide an existing non-listed operating entity (an accounting acquirer / legal subsidiary) with a market listing through a combination of both entities. After the combination, the combined entity retains the non-operating entity's listing, and the former shareholders of the operating entity become the majority shareholders of the combined entity. As a result of the combination, there is a difference between the consideration received from the accounting acquiree and the consideration transferred by the accounting acquirer.

In September 2012, the Committee observed that the guidance for reverse acquisitions in paragraphs B19–B27 of IFRS 3 could be applied to this situation by analogy because the transactions have some features of a reverse acquisition. The Committee also tentatively observed that a reverse acquisition transaction in which the accounting acquiree is not a business is a share-based payment transaction that would be accounted for in accordance with IFRS 2, Share-based Payment. In addition, the Committee tentatively observed that the difference between the amount of consideration transferred and the identifiable assets acquired (cash and/or other net assets that do not constitute a business) would be recognized as an expense (representing the cost of the listing).

In September 2012, the Committee asked the staff to draft a tentative agenda decision that would include the main issues discussed for consideration at a future meeting.

Current discussion

The Committee discussed the tentative decision drafted by the staff and tentatively agreed not to add this issue to its agenda based on the following analysis.

The transactions being analyzed have some features of a reverse acquisition under IFRS 3 because the former shareholders of the legal subsidiary obtained control of the legal parent. Therefore, in accordance with paragraphs 10–12 of IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, it is appropriate to apply the guidance for reverse acquisitions in paragraphs B19–B27 of IFRS 3 by analogy.

Under the guidance for reverse acquisitions, the non-listed operating entity would be identified as the accounting acquirer, and the listed non-operating entity would be identified as the accounting acquiree. Under paragraph B20 of IFRS 3, the accounting acquirer is deemed to have issued shares to obtain control of the acquiree.

The Committee also noted that the listed non-operating entity is not a business under the guidance in paragraph B7 of IFRS 3. Therefore, the transactions are not business combinations and do not fall within the scope of IFRS 3. Instead, these transactions are share-based payment transactions that should be accounted for under IFRS 2. Based on the guidance in paragraph 13A of IFRS 2, any difference between the fair value of the shares deemed to have been issued by the accounting acquirer and the fair value of the accounting acquiree's identifiable net assets represents a service received by the accounting acquirer (that is, a stock exchange listing for its shares).

The Committee also observed that a stock exchange listing does not meet the definition of an "intangible asset" under IAS 38, Intangible Assets. Therefore, the cost of the service received is recognized as an expense under the guidance in paragraph 8 of IFRS 2.

IAS 41, Agriculture, and IFRS 13, Fair Value Measurement ‒ valuation of biological assets using a residual method

Background

Previously, the Committee was asked to clarify paragraph 25 of IAS 41, Agriculture, which permits the use of a residual method to arrive at the fair value of biological assets physically attached to land if no market exists for the biological assets but an active market exists for the combined assets. Under the residual method, the fair value of raw land and land improvements should be deducted from the fair value of the combined assets to arrive at the fair value of biological assets.

Under IFRS 13, Fair Value Measurement, the fair value measurement of a non-financial asset is based on its highest and best use. The submitter's concern is that the residual method might result in either a minimal or nil fair value for the biological assets if the highest and best use of the raw land and land improvements differs from its current use.

In September 2012, the Committee noted that the IASB was planning to discuss whether to add a limited-scope project on IAS 41 for bearer biological assets to its technical agenda. Therefore, the Committee decided to defer making a tentative agenda decision until the IASB makes its decision.

Current discussion

The Committee noted that the IASB has tentatively decided to undertake a limited scope project on IAS 41 to address the accounting for bearer biological assets. The Committee also noted that guidance for applying the highest and best use concept in IFRS 13 will form part of the educational material for IFRS 13. 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 IFRSs 2010-2012 Cycle ‒ comment letter analysis

The Committee deliberated the comments received on four proposed amendments that are included in the Exposure Draft, Annual Improvements to IFRSs 2010-2012 Cycle, published in May 2012.

Annual Improvements to IFRS recommended for finalization

The Committee decided to recommend that three of these proposed amendments be included in the Annual Improvements to IFRSs 2010-2012 Cycle, subject to its final review of drafting changes. The amendments are expected to be issued in the second quarter of 2013.

IFRS 8, Operating Segments ‒ aggregation of operating segments

The Committee recommended that the IASB finalize the proposed amendment to paragraph 22 of IFRS 8, Operating Segments. The proposed amendment would require an additional disclosure that would include a description of both the operating segments that have been aggregated and the economic indicators that have been assessed to conclude that the operating segments have "similar economic characteristics" in accordance with paragraph 12 of IFRS 8. The Committee also recommended that the IASB eliminate the examples of economic indicators in the proposed new paragraph to avoid confusion and include minor edits to clarify the proposed amendment.

Since IFRS 8 is substantially converged with the guidance on segments in U.S. GAAP, the Committee also recommended that the staff discuss the proposed amendment with the FASB staff.

IFRS 8, Operating Segments ‒ reconciliation of the total of the reportable segments' assets to the entity's assets

The Committee recommended that the IASB finalize the proposed amendment to paragraph 28(c) of IFRS 8, Operating Segments. The proposed amendment would clarify that entities are required to disclose a reconciliation of the total of the reportable segments' assets to the entity's assets only if a measure of total assets for each reportable segment is regularly provided to the chief operating decision maker. This clarification would make this paragraph consistent with the guidance in paragraphs 23 and 28(d) of IFRS 8.

The Committee also recommended that the staff discuss the proposed amendment with the FASB staff since IFRS 8 is substantially converged with the guidance on segments in U.S. GAAP.

IFRS 13, Fair Value Measurement ‒ short-term receivables and payables

The Committee recommended that the IASB finalize the proposed changes in the Basis for Conclusions of IFRS 13, Fair Value Measurement, subject to some wording changes. The proposed changes explain the Board's rationale for removing certain guidance in IFRS 9, Financial Instruments, and in IAS 39, Financial Instruments: Recognition and Measurement, which allowed entities to measure short-term receivables and payables with no stated interest rate at invoice amounts if the effect of discounting is not material. The removal of the guidance in IFRS 9 and IAS 39 was not intended to change the measurement requirements for short-term receivables and payables. Instead, that guidance was deleted because the materiality principle in IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, and the guidance for using present value techniques in IFRS 13 already covered such requirements.

Annual Improvements to IFRS requiring further consideration

IAS 12, Income Taxes ‒ recognition of deferred tax assets for unrealized losses

The proposed amendment to IAS 12, Income Taxes, would clarify that:

  • An entity assesses whether to recognize the tax effect of a deductible temporary difference as a deferred tax asset in combination with other deferred tax assets. If tax law restricts the utilization of tax loss deductions against a specific type of income, the entity must still assess a deferred tax asset in combination with other deferred tax assets, but only deferred tax assets of the appropriate type.
  • Taxable profit against which an entity assesses a deferred tax asset for recognition is the amount before any reversal of a deductible temporary difference.
  • An action that results only in the reversal of existing deductible temporary differences is not a tax planning opportunity. An action needs to create or increase taxable profit to qualify as a tax planning opportunity.

The Committee recommended amending IAS 12 to clarify the accounting for deferred tax assets for unrealized losses. However, certain comments received on the proposed amendment raised questions about two matters that the Committee believes require further analysis:

  • 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 the contractual cash flows
  • Whether an entity can assume the recovery of an asset for more than its carrying amount when estimating probable future taxable profits against which deductible temporary differences can be utilized

Although the Committee recommends that these two issues be resolved, it is unclear whether they can be resolved within the constraints of the Annual Improvements process or if a narrow-scope amendment to IAS 12 would be more appropriate. The Committee decided to consult with the IASB on how to proceed before addressing these two matters.

Issues recommended for inclusion in the next Annual Improvements cycle

IFRS 3, Business Combinations ‒ mandatory purchase of noncontrolling interests in business combinations

Background

The Committee was asked to address the accounting for the mandatory purchase of noncontrolling interests in a sequence of transactions that begins with the acquirer gaining control over another entity. Shortly thereafter, the acquirer purchases an additional ownership interest as a result of a regulatory requirement to offer to purchase the additional interest. The submitter noted that IFRS 3, Business Combinations, does not specifically address the accounting in this situation.

The Committee considered the following questions regarding this issue:

  • Should the initial acquisition of the controlling interest and the subsequent mandatory tender offer be treated as separate transactions or as a single acquisition (linked transactions)?
  • Should a liability be recognized for the mandatory tender offer at the date the acquirer obtains control of the acquiree?

Current discussion

On the first question, the Committee tentatively agreed that the initial acquisition of the controlling interest and the subsequent mandatory tender offer would be treated as a single acquisition. To make that assessment, the Committee tentatively agreed that entities would apply the guidance in IFRS 3 for determining whether the disposal of a subsidiary achieved in stages should be accounted for as one or more transactions. The Committee also tentatively decided to ask the IASB to amend IFRS 3 through Annual Improvements to reflect this issue.

On the second question, the Committee noted that IAS 37, Provisions, Contingent Liabilities and Contingent Assets, excludes contracts that are executory in nature from its scope. Therefore, the Committee tentatively concluded that a liability would not be recognized for the mandatory tender offer. The Committee tentatively decided to recommend that the IASB not amend IFRS 3 for this issue.

IAS 34, Interim Financial Reporting ‒ disclosure of information "elsewhere in the interim financial report"

Background

The Committee was asked whether the phrase "interim financial report" in paragraph 4 of IAS 34, Interim Financial Reporting, covers only the information reported under IFRS (that is, the IFRS interim financial statements) or if it also includes management reports and other elements.

Current discussion

The Committee noted that IAS 34 explicitly states that the information required by paragraph 16A could be provided "elsewhere in the interim financial report" and therefore does not have to be included in the notes to the interim financial statements.

Based on the explicit guidance in paragraph 16A, the Committee tentatively concluded that the interim financial report may include management reports or other elements in addition to IFRS interim financial statements. The Committee also tentatively concluded that it would be appropriate to include a cross-reference from the interim financial statements to the location of the information required by paragraph 16A.

The Committee tentatively decided to propose amendments to paragraph 16A through Annual Improvements to clarify the meaning of disclosing information "elsewhere in the interim financial report" and to require entities to include a cross-reference from the interim financial statements to the location of this information.

IFRS Interpretations Committee's work in progress

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. This issue could arise 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, unless the adjustment is required.

Current discussion

The majority of the Committee members expressed concern that addressing this issue might conflict with national laws and regulations that exist in certain jurisdictions. Consequently, they were not in favor of amending IFRS and asked the staff to draft a tentative agenda decision for consideration at a future meeting.

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

Background

In May 2012, 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). IAS 19 (Revised 2011) is effective for annual periods beginning on or after January 1, 2013.

The submitter is concerned that the guidance in paragraph 93 of IAS 19 (Revised 2011) could affect any plan with employee contributions, resulting in a change in how the net defined benefit obligation (DBO) is measured for substantially all of those plans, which is probably an unintended consequence of the language in that paragraph. The submitter is also concerned that, in periods in which the discount rate increases, employee contributions made in earlier periods have a higher value, which might cause the net benefit to be back-end loaded and increase the DBO.

In September 2012, the Committee tentatively observed that paragraph 93 of IAS 19 (Revised 2011) requires entities to consider employee contributions, including expected future contributions resulting from employee service in both current and prior periods, when calculating the DBO. However, in light of the concerns about the clarity of guidance in paragraph 93, the Committee asked the staff to develop specific examples illustrating how to account for employee contributions for discussion at a future meeting.

Current discussion

The Committee considered several examples illustrating the application of the requirements in paragraph 93 of IAS 19 (Revised 2011), as well as the effect of different discount rate and salary growth assumptions on the calculation of the net benefit. Although the Committee agreed that the calculations in the examples are in line with the requirements for employee contributions under paragraph 93, it was concerned about the complexity of the required calculations and the potential confusion that may result in practice.

The Committee noted that paragraph 92 of IAS 19 (Revised 2011) states that employee contributions either are set out in the formal terms of a plan or are discretionary. Discretionary contributions reduce service cost upon payment. However, employee contributions that are set out in the formal terms of the plan are accounted for under paragraph 93 of IAS 19 (Revised 2011).

The Committee observed that the distinction between discretionary contributions and contributions that form part of a plan's formal terms is not necessarily clear. Therefore, the scope of employee contributions that are subject to paragraph 93 of IAS 19 (Revised 2011) is unclear. The Committee also observed that some employee contributions, such as contributions related to service rendered in the same period, might be classified as a reduction of short-term employee benefits and would therefore not be within the scope of paragraph 93.

The Committee asked the staff to prepare an analysis of this issue for discussion at a future meeting.

IAS 19, Employee Benefits ‒ actuarial assumptions: discount rate

Background

The Committee was asked to provide guidance on the determination of the rate used to discount post-employment benefit obligations in accordance with the guidance in paragraph 83 of IAS 19, Employee Benefits (Revised 2011). Paragraph 83 of IAS 19 (Revised 2011) requires that the discount rate be determined by reference to market yields on "high quality corporate bonds" at the end of the reporting period. The submitter noted that

  • Paragraph 83 of IAS 19 (Revised 2011) does not specify which corporate bonds qualify as "high quality corporate bonds."
  • The prevailing past practice has been to consider listed corporate bonds to be "high quality corporate bonds" if they receive one of the two highest ratings given by a recognized rating agency (for example, "AAA" and "AA").
  • The number of corporate bonds rated "AAA" or "AA" has decreased due to the ongoing financial crisis.
  • The specific issue before the Committee is whether corporate bonds with a rating lower than "AA" can be considered "high quality corporate bonds."

Current discussion

The Committee noted that under paragraphs 84 and 85 of IAS 19 (Revised 2011), the discount rate

  • Reflects the time value of money, but not the actuarial or investment risk
  • Does not reflect the entity-specific credit risk
  • Does not reflect the risk that future experience may differ from actuarial assumptions
  • Reflects the estimated timing of benefit payments

Although the predominant past practice has been to consider corporate bonds to be high quality if they receive one of the two highest ratings given by a recognized rating agency (for example, "AAA" and "AA"), the Committee observed that IAS 19 (Revised 2011) does not specify how to determine the market yields on "high quality corporate bonds" and, in particular, which bond grades should be designated as high quality. According to the Committee, an entity is required to apply judgment to determine the current market yields on "high quality corporate bonds." That determination should take into consideration the guidance in paragraphs 84 and 85 of IAS 19 (Revised 2011).

The Committee also noted that in accordance with the requirements in IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors:

  • An entity's policy for determining the discount rate would be applied consistently over time, and, in particular, the exclusion of the effects of actuarial risk and investment risk on the discount rate would be applied consistently from period to period.
  • An entity may need to revise its estimate if changes occur in the circumstances on which the estimate was based or as a result of new information or more experience. However, the Committee does not expect that an entity's method of determining the discount rate to reflect yields on "high quality corporate bonds" will change significantly from period to period, other than to reflect changes in the time value of money and the estimated timing and amounts of benefit payments.

The Committee discussed whether a change in the way an entity determines the discount rate would be a change in accounting policy or a change in estimate, but did not reach any conclusions. However, the Committee noted that

  • Any changes in accounting policy for determining the discount rate would be applied retrospectively in accordance with paragraph 19(b) of IAS 8, and the effects of that change on the current, prior, and future periods would be explained and disclosed in accordance with paragraph 29 of IAS 8. In addition, entities must disclose the effects of any change in estimates that result from determining the yields on "high quality corporate bonds" on both the current and future periods, in accordance with paragraph 39 of IAS 8
  • In accordance with paragraph 122 of IAS 1, Presentation of Financial Statements, entities must also disclose any judgments that are made in the process of applying its accounting policies and that have the most significant effect on the amounts recognized in the financial statements.

Further discussion of this issue is expected at a future meeting.

Outstanding issues update

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

Future meetings

The next Committee meeting will be held on January 22-23, 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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