Other regulatory
IFRS Interpretations Committee meeting — 11-12 June 2019
IFRS 16 — Incremental borrowing rate
IFRS 16 — Lease term on cancellable lease
IFRS 9 — Fair value hedge of foreign currency risk on non-financial assets
IAS 7 — Changes in liabilities arising from financing activities
IFRS 10 — Sale of a single asset entity containing real estate
IAS 1 — Presentation of liabilities or assets related to uncertain tax treatments
IFRS 15 — Compensation for delays or cancellations
Administration session
IAS 41 — Subsequent expenditure
IFRS 15 — Cost to fulfill a contract
IFRS 16 — Subsurface rights
Holdings of cryptocurrencies
IAS 19 — Effects of a potential discount on plan classification
IAS 21 — Lack of exchangeability
End date: 12 Jun 2019
The IFRS Interpretations Committee met on Tuesday 11 and Wednesday 12 June 2019.
The Committee decided to publish seven new tentative Agenda Decisions. These summaries reflect our understanding from the Committee's discussions. The tentative decisions will be published in due course.
IFRS 16 Leases—Incremental borrowing rate (Agenda Paper 2). The definition of incremental borrowing rate does not explicitly require a lessee to determine its incremental borrowing rate to reflect the interest rate in a loan with a similar payment profile to the lease payments.
IFRS 16 Leases—Lease term and useful life of leasehold improvement (Agenda Paper 3). (a) An entity considers the economics of a contract when determining the enforceable period of the lease, and not only any contractual termination payment (such as the cost of abandoning or dismantling leasehold improvements). (b) IAS 16 provides sufficient guidance to enable an entity to determine the useful life of non-removable leasehold improvements. The life is not limited to the lease term of the related lease but the lease term must be considered in determining the useful life.
IFRS 9 Financial Instruments—Fair value hedge of foreign currency risk on non-financial assets (Agenda Paper 4). Foreign currency risk can be a separately identifiable and reliably measurable risk component of a non-financial asset held for consumption that an entity can designate as the hedged item in a fair value hedge accounting relationship.
IAS 7 Statement of Cash Flows—Changes in liabilities arising from financing activities (Agenda Paper 5). The requirements in IAS 7 for information about changes in liabilities arising from financing activities required by IAS 7 are clear.
IAS 1 Presentation of Financial Statements—Presentation of an uncertain tax position (Agenda Paper 7). A liability related to uncertain tax treatments is a current (or deferred) tax liability and not a provision.
IFRS 15 Revenue from Contracts with Customers—Compensation for delays or cancellations (Agenda Paper 8). An an obligation to compensate customers for delayed or cancelled flights (as set out in legislation) is recognised as part of the transaction price and not an obligation in accordance with IAS 37.
IAS 41 Agriculture—Subsequent expenditure (Agenda Paper 9). IAS 41 allows an entity to Capitalise or expense the costs related to the biological transformation of biological assets.
Agenda decisions finalised
The Committee finalised four tentative agenda decisions.
IFRS 15 Revenue from Contracts with Customers—Costs to fulfil a contract (Agenda Paper 10). When revenue is recognised over time (in this case from a property sale, using the output method to measure progress) any costs incurred to fulfil the performance obligation are recognised as an expense when they are incurred.
IFRS 16 Leases—subsurface rights (Agenda Paper 11). When a contract between a land owner and another party gives the other party the right to place an oil pipeline in a specified underground space, with the land owner retaining the right to use the surface area of the land above the pipeline, that contract contains a lease.
IAS 19 Employee Benefits—Effect of a potential discount on plan classification (Agenda Paper 12). The existence of a potential discount on the contribution an entity is obliged to make to a post-employment benefit plan, if the ratio of plan asserts to plan liabilities exceeds a set level, does not preclude the plan from being a defined contribution plan.
Holdings of a cryptocurrency (Agenda Paper 13). A cryptocurrency does not meet the definitions of cash or a financial asset. It meets the definition of an intangible asset is accounted for in accordance with IAS 38, unless it the cryptocurrency is held for sale in the ordinary course of business—in which case IAS 2 applies.
Continuing discussions
The Committee discussed potential narrow-scope amendments to IAS 21 to define "exchangeability" and a "lack of exchangeability" and specify the requirements that would apply when there a lack of exchangeability in a currency (Agenda Paper 14).
The staff have received requests in relation to the definition of a lease and foreign operations in consolidated financial statements. The staff are in the process of analysing those matters. (Agenda Paper 15).
Agenda for the meeting
Morning session (9:30-13:20)
Administrative matters
New matters:
IFRS 16:
Incremental borrowing rate
Lease term on cancellable lease
Afternoon session (14:20-17:50)
New matters (continued):
Agenda decisions to finalise:
Cryptocurrencies — Holdings of cryptocurrencies
Items for continuing consideration
Agenda papers for this meeting are available on the IASB's website.
Meeting series
IFRS Interpretations Committee meetings (2019)
IFRS Interpretations Committee
The Committee received a submission about whether a lessee's incremental borrowing rate must reflect the interest rate in a loan with both a similar maturity to the lease and a similar payment profile to the lease payments.
The Committee received a submission about whether a lessee's incremental borrowing rate must reflect the interest rate in a loan with both a similar maturity to the lease and a similar payment profile to the lease payments. The submitter points out that different interest rates are charged for amortising loans and bullet repayment loans with the same maturity and asks if the incremental borrowing rate must also reflect the payment pattern.
Staff analysis
The staff analyse that IFRS 16 does not explicitly require a lessee to determine its incremental borrowing rate to reflect the interest rate in a loan with a similar payment profile to the lease payments. Nonetheless, the staff observe that, in applying judgement in determining its incremental borrowing rate as defined in IFRS 16, a lessee might often refer as a starting point to a readily observable rate for a loan with a similar payment profile to that of the lease. IFRS 16 states that the rate used shall take into account the terms and conditions of the lease. Hence, the staff think the definition of incremental borrowing rate provides an adequate basis for a lessee to determine the rates, while the submitter is asking for a degree of precision in applying the definition that goes beyond the definition itself. The staff acknowledge that judgement is required in estimating the incremental borrowing rate and decides not to include application guidance in IFRS 16 on this topic.
Staff recommendation
The staff recommended that a tentative agenda decision be published stating that the Committee concluded that the principles and requirements in IFRS 16 provide an adequate basis for a lessee to determine its incremental borrowing rate.
A few Committee members commented that the tentative agenda decision is too open and not specific in pinpointing the economics of the lease. Although IFRS 16 does not state explicitly that the interest rate should reflect the similar payment profile, these Committee members considered IFRS 16 is clear that the incremental borrowing rate is a lease specific rate which reflects how the contract is priced, and as such the payment profile should always be taken into consideration. A few of them did not agree with the tentative agenda decision and consider it should state that the incremental borrowing rate should reflect the payment profile.
The Chair responded that the staff did not want to take the tentative Agenda Decision too far. Some Committee members agreed with that view and considered the staff analysis and the tentative agenda decision align with the wording in IFRS 16. They were worried that if the tentative agenda decision has explained too much about practice, it will result in pushing too far on the implementation on the newly issued standard. It is now too early to give prescriptive guidance when the standard has been effective for only a few months. They suggested the Board could publish education materials which could provide sufficient guidance.
In terms of the wording, one Committee member suggested to modify the sentence and state clearly "the definition of incremental borrowing rate in IFRS 16 does not explicitly require………"
The Committee decided, by a majority of votes, not to add the matter to the standard-setting and to adopt the tentative agenda decision with the above-mentioned edition.
The Committee received a submission about application of lease term requirements under IFRS 16 to a cancellable lease or a renewable lease with a particular fact pattern.
The Committee received a submission about application of lease term requirements under IFRS 16 to a cancellable lease or a renewable lease with a particular fact pattern:
Cancellable lease: an entity enters into a lease contract that does not specify a particular contractual term and continues indefinitely until either party gives notice to terminate. When either the lessee or lessor gives notice, the lease continues for a period of less than 12 months ('notice period') until termination. Neither party is obliged to make a contractual payment on termination.
Renewable lease: an entity enters into a lease contract with a specified initial period, which renews indefinitely unless terminated by either the lessee or lessor.
The submitter asks whether a lease contract is enforceable beyond the notice period of a cancellable lease or the initial period of a renewable lease (Question 1); and the useful life of any non-removable leasehold improvements is limited to the lease term of the related lease (Question 2).
Staff analysis — Question 1
IFRS 16:B34 states that a lease is no longer enforceable when the lessee and the lessor each have the right to terminate the lease without permission from the other party with no more than an insignificant penalty. Accordingly, the staff analyse that if only one party has such a right, the contract is enforceable beyond the notice period (or the initial period).
In addition, the staff observe the economics of a contract shall be taken into account to determine the lease term and the core principle is that the lease term should reflect an entity's reasonable expectation of the period during which the underlying asset will be used. Following such analysis, the significance of economic incentive to exercise the termination right by the other party of the lease is a factor to consider. The staff analyse that if on top of the fact pattern of cancellable lease set out in the submission, the underlying asset is both specialised so the lessor would be unable to lease the asset to another lessee on equivalent terms and critical to the lessee's business, the contract continues to be enforceable beyond the notice period even if there is no contractual payment on termination.
In responding the question, the staff analyse the different terms used in IAS 16 Property, Plant and Equipment, namely 'economic life' which means the period of use that would consume all of the future economic benefits embodied in the asset; and 'useful life' which means the period over which an asset is expected to be available for use by an entity.
The staff further analyse one of the factors in determining whether a lessee is reasonably certain to exercise an extension option or not to exercise a termination option (for determining the lease term) is that the significant leasehold improvements undertaken (or expected to be undertaken) over the term of the contract that are expected to have significant economic benefit for the lessee when the option to extend or terminate the lease, or to purchase the underlying asset, becomes exercisable. One of the views on useful life is that the level of certainty in assessing optional periods ('reasonably certain' applying IFRS 16) and in determining useful life ('expected to be available' applying IAS 16) are different and a lessee might conclude that the useful life can be longer than the lease term. The staff acknowledge that this is theoretically possible but view that it would be a rare outcome considering the limits on the use of the asset and the period of expected utility, and hence a lessee would conclude that the useful life of the non-removable leasehold improvements is the same as, or shorter than, the lease term of the related lease.
The staff recommended that a tentative agenda decision be published stating that the Committee concluded that the principles and requirements in IFSR 16 provide an adequate basis for an entity to determinethe lease term of cancellable and renewable leases. The Agenda Decision would also state that the Committee concluded that the requirements in IAS 16 and IFRS 16 provide an adequate basis for an entity to determine the useful life of any non-removable leasehold improvements relating to such a lease.
In respect of Question 1, most Committee members agreed with the staff analysis that the entity needs to look at the economics of the lease contract, as implied by IFRS 16:B34, rather than just the legal form of the contract. In particular, some Committee members agreed with the staff analysis that penalty is broader than payment and so economic consequences should be considered when determining the enforceable period of a lease.
However, they are puzzled about whether the lease is still enforceable in the situation that the lessor can terminate while the lessee has no termination option. IFRS 16 introduced the control notion and accordingly, when a lessor has a termination option, the lessee does not control the right-of-use asset during that period subject to the lessor's termination option. IFRS 16 does not comment on this specifically. The staff responded that IFRS 16:B34 only applies to situations when the lessee and the lessor each has the right to terminate the lease without permission from the other party with no more than an insignificant penalty. IFRS 16:B35 deals with scenarios when only one party to the lease contract has a termination option. The Committee members commented that there is lack of clarity on how to read the words in IFRS 16:B34 and how to implement it in practice and this could be looked at in a Post Implementation Review. At the same time, they suggested the Board to issue education material with examples illustrating the application of IFRS 16:B34.
In respect of Question 2, a Committee member said the tentative agenda decision analyses that the lease term determines the useful life of the leasehold improvement and the useful life determines the lease term at the same time. He was worried that this will lead to a rule-based implementation of IFRS 16. He suggested instead that the lease term should be determined first before effectively linking up between lease term and useful life. Another Committee member said IAS 16 does not cap the useful life to the lease term and questioned whether there is sufficient basis to support the agenda decision.
The general comments about the tentative agenda decision from the Committee members suggested that the tentative agenda decision is written carefully and not as strong as the staff paper. Specifically, the tentative agenda decision has not included the context of paragraphs 53 and 59 of the staff paper (which point out the staff's expectation that in majority of cases the lease term to be at least as long as the economic life of the leasehold improvement, and in rare circumstances the useful life of the leasehold improvement is longer than the lease term). Those reading the tentative agenda decision might not reach the same conclusions as those in the staff paper.
The staff responded that the intention of the tentative agenda decision is to cover all cases, and reiterated that they already considered the impact of many scenarios when preparing the tentative agenda decision. As mentioned in the tentative agenda decision, an entity needs to look at the economics of the contract, which means it does not rule out any rare cases. The staff considered the tentative agenda decision can at least can give a reasonable relationship between IAS 16 and IFRS 16.
Another Committee member said the tentative agenda decision has not addressed whether the useful life of the leasehold improvement could be greater than the enforceable period of the lease. The staff responded that it is not addressing the question in the tentative agenda decision. Further if the entity has no control over asset, the entity could not depreciate the asset.
The Committee decided, by a majority of votes, not to add the matter to the standard-setting and to adopt the tentative agenda decision.
The Committee received submissions about whether foreign currency risk can be a separately identifiable and reliably measurable risk component of a non-financial asset held for consumption (for example, property, plant and equipment and inventory denominated in a foreign currency) that an entity can designate as the hedged item in a fair value hedge accounting relationship.
The Committee received submissions about whether foreign currency risk can be a separately identifiable and reliably measurable risk component of a non-financial asset held for consumption (for example, property, plant and equipment and inventory denominated in a foreign currency) that an entity can designate as the hedged item in a fair value hedge accounting relationship. One submitter also points out that a similar question can be applied to lease liabilities denominated in a foreign currency.
The staff analyse that in such cases, an entity is exposed to foreign currency risk because the fair value of the non-financial asset could change in the market participants' perspective and the change in fair value could affect profit or loss through translation of the fair value into an entity's functional currency. This would be the case when the fair value of a non-financial asset is determined only in a foreign currency. The staff further analyse that IAS 39 and IFRS 9 had allowed designation of non-financial items as hedged items only for foreign currency risks, or in their entirety for all risks. Accordingly, the staff view that foreign currency risk can be a separately identifiable and reliably measurable risk component of a non-financial asset, based on an assessment within the context of the particular market structure and other relevant facts and circumstances.
Next, the staff analyse the qualifying criteria for hedge accounting, one of which is at the inception of the hedging relationship, the formal designation and documentation of the hedging relationship and entity's risk management objective and strategy for undertaking the hedge. Provided that the risk management objective is about risk management activities rather than simply translation of foreign currency in the financial statements, the staff expect an entity would manage and hedge exposures to changes in fair value of non-financial assets held for consumption only in very limited circumstances.
The staff also highlight that all other requirements in IFRS 9, including the designation of a hedge and hedge effectiveness, shall also be carefully considered in determining whether an entity can apply hedge accounting.
The staff recommended that the that a tentative agenda decision be published stating that the Committee concluded that the requirements in IFRS 9 provide an adequate basis for an entity to conclude on whether foreign currency risk can be a separately identifiable and reliably measurable risk component of a non-financial asset held for consumption that an entity can designate as the hedged item in a fair value hedge accounting relationship.
Most of the Committee members agreed with the staff analysis (except for the 'accounting requirements' detailed below). One Committee member expressed his concern about the inconsistencies of the conclusion in the tentative agenda decision with the implementation guidance (IAS 39:IG F.6.5) which states that fair value hedge accounting cannot be applied for a non-monetary asset carried at cost. He asked the staff whether this IG of IAS 39 is still applicable. The staff responded that IAS 39 IG were developed in the context of IAS 39, and so it is difficult to draw any analogy when analysing the subject matter under IFRS 9. However, that Committee member expressed his view that although the IG was not included in IFRS 9, the Board do not think the IG is not effective and many people actually follow the guidance set out in the IG. The Chair supplemented that IG are only examples designed to explain the requirements of the standards and cannot override the requirements of the standard. For the subject matter discussed, it is more appropriate to use the requirements in the standard and therefore the IG is not used. The Chair disagreed with a suggestion to indicate in the tentative agenda decision the application of the IG.
A few Committee members did not agree with the staff analysis on "we would not expect an entity's risk management activities to change simply because of a change in accounting requirements", especially on those new accounting requirements. There was a 'natural hedge' under the existing accounting standard. As a result of the new accounting standard, the entity's risk management activities may try to change to hedge the volatility associated with the financial statements and so that would be part of the risk management activities. The staff responded that the entity needed to be genuinely managing the foreign exchange risk inherent in the non-financial asset (instead of just finding items to offset on the financial statements) in order to apply hedge accounting. One of the qualifying hedging relationships must have hedged item and the hedged risk, which are not affected by the change in accounting requirements. However, the staff agreed that 'accounting requirements' is a very broad statement and entities may manage it in many ways, and therefore agreed with the Committee members' view to remove this from the tentative agenda decision.
Another Committee member found the statement in the tentative agenda decision 'depending on the particular facts and circumstances, a non-financial asset may be priced only in a currency other than an entity's functional currency' could be misleading. The staff said that this sentence refers to a situation where a component of the asset is routinely priced in a currency other than the entity's functional currency, rather than the overall price of the asset.
The Committee decided, by a majority of votes, not to add the matter to the standard-setting and to adopt the tentative agenda decision, subject to the changes of removing the 'accounting requirements' paragraph.
The Committee received a submission setting out feedback from users of financial statements in relation to the disclosure relating to changes in liabilities arising from financing activities applying IAS 7.
The Committee received a submission setting out feedback from users of financial statements ('investors') in relation to the disclosure relating to changes in liabilities arising from financing activities applying IAS 7. The submission does not direct to a particular question or a specific fact pattern but it raises the concern that the disclosure does not always meet the information needs of investors. The submission sets out the observation of (i) an inconsistency in the definitions of 'debt' or 'net debt' used as the basis for the IAS 7 reconciliation, (ii) insufficient disaggregation and inadequate explanation, and (iii) presentation or disclosure errors, and as such the disclosure objective in IAS 7 may not be met in certain practical scenarios.
The investors observe that some entities define 'net debt' in a way which is inconsistent with financial liabilities in the statement of financial position. The staff consider that IAS 7 already set out clear requirements of linking up items in IAS 7 reconciliation to other areas of the financial statements including the statement of financial position and statement of cash flows, and IAS 7 permitted disclosure of additional information separately in the reconciliation.
The investors feedback that information in IAS 7 reconciliations is not always sufficiently disaggregated to enable investors to link items included in the reconciliation to other areas of financial statements, for example some entities abuse the category of 'other changes'. Investors also found difficulties in understanding the accounting treatment and nature of items in the IAS 7 reconciliation. The staff analyse the requirements in IAS 1 Presentation of Financial Statements and IAS7:BC10 and consider that they already provide an adequate basis for an entity to apply judgement and determine the appropriate level of disaggregation in IAS 7 reconciliation, as well as any explanation required to meet the disclosure objective in IAS 7.
The staff recommended that the that a tentative agenda decision be published stating that the Committee concluded that the requirements in IFRS Standards provide an adequate basis for an entity to disclose information about changes in liabilities arising from financing activities that enables investors to evaluate those changes.
Before starting the discussion, the staff highlighted that this is the first time the staff have been approached directly by investors. Many Committee members thought the tentative agenda decision was strange because it has nothing about the application of IFRS Standards and much of the content is merely repeating the wording in IAS 7. They thought it was not necessary to use an agenda decision to express the views of investors. The issues in the tentative agenda decision are best dealt with by regulators and the IFRS Interpretations Committee cannot answer those questions. Moreover, the Committee is not in a positon to comment on whether standard-setting is required based on the agenda decision. Such an assessment requires more research to determine how big the issue is.
Some Committee members were also curious about what view the enforcers The tentative agenda decision stated that investors are looking for a net debt reconciliation. One Committee member shared his experience, saying that net debt reconciliations are provided in the annual report but not as part of the financial statements. It is prepared using non-GAAP measures and auditor would not allow it to be included in the financial statements. He said he was fine with the agenda decision but that the matter should be taken to the Board. on the issue also relates to the project on primary financial statements and non-GAAP measures.
A Committee member suggested investors should communicate through investors relations/roadshows to their specific investors rather than to IFRIC. Different investors will have different information needs – e.g. financial institutions or insurance companies may not view net debt is a key disclosure but for some manufacturing company net debt might be important.
The staff explained that in 1999 UK GAAP required a net debt reconciliation and this is likely to be why some investors want it. A few Committee members suggested that education material to illustrate best practices could be developed in addition to the tentative agenda decision. The staff also explained that paragraph 5.14 of Due Process Handbook states IASB and IFRIC are responsible for concerns expressed by investors about poorly specified disclosure requirements. Some Committee members questioned whether the disclosure requirements are clear in terms of the disclosure objective and whether there are compliance issues because of poorly specified disclosures.
The Chair acknowledged the concerns from the Committee members and asked the staff to modify the wording of the tentative agenda decision for further discussion on the second day of the meeting.
The revised tentative agenda decision has changed the wording in the issue of the subject matter as the investors' concern on whether the disclosure requirements sufficiently meet the disclosure objectives in IAS 7, as well as the conclusion corresponds with the issue, which is more specific to the question.
The Committee decided, by a majority of votes, adopt the revised tentative agenda decision, subject to editorial changes.
The Committee received a submission about whether an entity shall apply requirements in IFRS 15 or IFRS 10:B98 if an entity, as part of its ordinary activities, enters into a contract with a customer to sell real estate through selling the equity interest in a single asset entity that is a subsidiary.
The Committee received a submission about whether an entity shall apply requirements in IFRS 15 or IFRS 10:B98 if an entity, as part of its ordinary activities, enters into a contract with a customer to sell real estate through selling the equity interest in a single asset entity that is a subsidiary. The submission also asks how the resulting gain or loss from the transaction be presented.
The staff analyse that IFRS 15 scopes out contracts with customers that fall within the scope of IFRS 9 or IFRS 10 and as such the entity shall account for the transaction under IFRS 10—i.e. loss of control of a subsidiary. Based on the analysis of consistency with similar requirements in other IFRS Standards, the staff analyse that the resulting gain or loss from the transaction shall be presented as net in one line item in the statement of profit or loss instead of component parts of the gain or loss in separate lines.
The staff recommended that a tentative agenda decision be issued stating that the Committee's concluded that IFRS Standards provide an adequate basis for accounting for such a transaction.
In respect of Question 1, overall, most of the Committee members agreed with the staff analysis and found it is hard to dispute with the result. A Committee member expressed his view that he can only accept this accounting outcome if there is no narrow scope amendments to IFRS 10 and IFRS 15. However, they found that in practice many companies are not following the same treatment as in the staff analysis as the preparers of financial statements see through the corporate wrapper and focus on the substance of the transaction – i.e. disposal of the real estate in the ordinary course of business. They are not convinced of the different accounting outcome for acquisition of these subsidiaries with real estate (treated as asset acquisition) and disposal, and consider such treatment does not reflect the economic substance of the transaction or provide useful information. A few Committee members, on the other hand, considered transactions of disposing entities and disposing assets have economic differences and therefore it is reasonable to have different accounting treatment. Most of the Committee members suggested in the meeting that there is a need of standard-setting to avoid different accounting treatment for transactions essentially and economically the same as a result of something only driven by legal form.
The Chair expressed her sympathy with the situation and she said she saw there are other cases with different answers just because of the existence of an entity in the middle. The Chair said if the next step is standard-setting, it is not a small standard-setting exercise. The Committee would need to draw a distinction about what types of transactions to cover. At the same time, a Committee member said that the same arrangement is found for solar farms or wind farms, however it is hard to define the "asset" to be derecognised because there is a license and buildings.
In respect of Question 2, a Committee member is not convinced that the wording in IAS 1:34 and analogy to other standards is clear enough to go to the conclusion of "net presentation".
On the basis that most Committee members tend to agree with the technical analysis of Question 1 in the staff paper and the practical situation, the Chair concluded by suggesting the Board to consider narrow scope standard-setting to address this type of transactions and simultaneously issuing the tentative agenda decision based on the staff analysis. The issuance of the tentative agenda decision can help communicate to the Board to facilitate the standard-setting process. At the same time, the standard setting should involve careful consideration of the determination of the substance of the transactions in order to avoid inconsistencies of practices among different entities.
In terms of wording, a Committee member found the statement 'subsidiary established sometimes before entering into the contract' in the tentative agenda decision is not providing useful information and suggested removing it.
A majority of the Committee members voted and agreed with the technical analysis of Question 1, while the staff will work further on Question 2.
The Committee agreed with the tentative agenda decision with respect to Question 1, however, they disagreed with the tentative agenda decision with respect to Question 2. Consequently, the tentative agenda decision will not be published in its current form and will be redeliberated at a future meeting.
The Committee received a submission about whether an entity, in its statement of financial position, presents a liability related to uncertain tax treatments as a current (or deferred) tax liability or as a provision.
The staff analyse that IFRIC 23 is intended to clarify the application of recognition and presentation requirements in IAS 12 (including how an entity determines taxable profit, tax bases, unused tax loss, unused tax credits and tax rates) when there is uncertainty over income tax treatments. Accordingly, the calculation of taxable profit on which current tax, as defined in IAS 12, is calculated is the taxable profit that reflects any uncertainty applying IFRIC 23. Based on the disclosure requirements set out in IAS 1:54 & 57, which lists items that are sufficiently different in nature or function to warrant separate presentation in the statement of financial position, the staff analyse that the current tax liability that includes the uncertain tax liability under IFRIC 23 shall be presented on the statement of financial position, and the uncertain tax liability under IFRIC 23 shall not be disaggregated or aggregated with provisions that are within the scope of IAS 37. The same logic applies to uncertain tax assets. The staff also observed that if the presentation of uncertain tax liabilities or assets separately from other tax liabilities or assets would be relevant to an understanding of its financial position, an entity would disaggregate the line items required by IAS 1:54(n) & (o) to present uncertain tax liabilities or assets separately from other tax liabilities or assets (IAS 1:55).
The staff recommended that a tentative agenda decision be issued stating that the Committee's concluded that IFRS Standards provide an adequate basis to determine the presentation of uncertain tax liabilities and assets.
Before going into discussion, a Committee member highlighted that in his jurisdiction, some uncertain tax liability are disclosed as 'provisions'. Most of the Committee members agreed that IFRIC 23 is addressing recognition and measurement issues which serves as additional guidance on measurement requirements of IAS 12. IAS 12 has not changed in any aspects, including disclosure. One Committee member considered the uncertain tax treatment is in substance a contingency and cannot coincide with the definition of current tax recoverable or payable as set out in IAS 12 and opined that it is not entirely clear in IAS 12.
A Committee member questioned about the disaggregation criteria as set out in the tentative agenda decision. Some other Committee members agreed that it may be applicable in some scenarios but this will raise the issue of 'unit of account' and therefore suggested to remove it.
The Committee received a submission about whether an airline entity shall account for its obligations to compensate customers for delayed or cancelled flights either as part of the transaction price; or as obligations under IAS 37.
The Committee received a submission about whether an airline entity shall account for its obligations to compensate customers for delayed or cancelled flights either as part of the transaction price; or as obligations under IAS 37. In the fact pattern submitted, legislation stipulates customers' rights to receive compensation.
The staff analyse the definition of 'transaction price' under IFRS 15 includes 'penalties'. The staff further analyse that IFRS 15:B33 set out that the compensation stipulated by law for harm or damage caused by an entity's products are accounted for in accordance with IAS 37. In order to address the question, the staff view that the performance obligation in the contract is to transport the customer from one specific location to another by a specified time on a particular date based on the existence of the legislation, and such that the compensation directly relates to the entity's performance under the contract because it is payable for non-performance of performance obligation set out in the contract, rather than a compensation for harm or damage caused by a performance obligation that is already completed.
The staff recommended that a tentative agenda decision be issued stating that the Committee's concluded that IFRS Standards provide an adequate basis for an entity to determine its accounting for obligations to compensate customers for delays or cancellations.
Some Committee members agreed with the staff analysis but a few of them cannot see the specific correlation of compensation to the original source of performance. The compensation term is due to legislation (law become part of the contract) rather than contractual terms (although it may vary among jurisdictions). The compensation might not be just a flat rate and it can be in other forms. They were not convinced that it should always be treated as a reduction of revenue. Another Committee member suggested that in differentiating between harm and variable consideration, the entity needs to be very clear about what promise is to be transferred to the customer. In the staff paper, the law forms part of the contract and as such 'damage' is considered as part of the consideration.
A Committee member started discussing about the application of IFRS 15:B33 in analysing the subject matter. He was confused on how broad or how narrow the term "damage" should be interpreted. IFRS 15:B33 talks about harm caused by the products provided by the entity. As such, it does not apply to the fact pattern because there is no direct link between the delay and harm since the customers do not have to prove that they are harmed to receive compensation. The staff explained that the Board developed IFRS 15:B33 with a particular narrow scope. It is about "products causing harm or damage" under product liability law. The intention of the staff of including IFRS 15:B33 in the paper is to ask the question 'Do you consider any compensation paid for delay or cancellation to be part of contract between airline entity and the customer that might affect the transaction price, or is it something separate from the contract?'. The staff analysed that IFRS 15:B33 deals with promises which are separate to the contract. As the compensation directly related to the entity's performance, the compensation for delay is all about the promise in the contract. The Committee member suggested, and the staff agreed, to modify in the tentative agenda decision that the compensation does not represent compensation for harm or damage caused by the products.
A Committee member said he is not sure how to support the tentative agenda decision. He pointed out that delayed flight and cancelled flight are not the same – in terms of compensation, for cancelled flight (which services were not delivered at all), the compensation could be higher than the ticket price. Such 'negative revenue' appears to be more like harm and damage, rather than variable compensation. Also the staff paper did not explicitly deal with the issue if the compensation exceeds the amount of consideration received.
After listening to the comments from the Committee members, the staff suggested the wordings changes in the tentative agenda decision including (a) specifying the right to be compensated include separate reimbursement of actual cost and that stipulated for legislation; (b) highlighting the fact that negative revenue is not being considered and (c) removing the example of construction services and instead including IFRS 15:IE20 in the analysis.
The Committee decided, by a majority of votes, not to add the matter to the standard-setting and to adopt the tentative agenda decision subject to the above-mentioned changes.
The Committee will discuss items currently in research or in process of analysing.
Work in progress (Agenda Paper 16)
The staff have received requests in relation to the definition of a lease and foreign operations in consolidated financial statements. The staff are in the process of analysing those matters.
The staff are in the process of analysing two matters.
The Committee received a submission about an entity shall capitalise or expense the costs related to the biological transformation of biological assets (subsequent expenditure) applying IAS 41.
The Committee received a submission about an entity shall capitalise or expense the costs related to the biological transformation of biological assets (subsequent expenditure) applying IAS 41. The submitter also considers given there is lack of guidance in IAS 41, IAS 41 should be amended in order to reduce diversity in practice and enhance comparability of financial information across entities in the same industry.
The staff analyse that IAS 41 does not prescribe how to account for subsequent expenditure. Biological assets are measured at fair value less costs to sell at the end of each reporting period, except in particular situations in which fair value cannot be measured reliably. Capitalising or expensing subsequent expenditure does not affect the measurement of biological assets nor does it have any effect on profit or loss (if measured at fair value less costs to sell). In the absence of requirements in IAS 41 and guidance set out in paragraph BC4 of IAS 23 Borrowing Costs, the staff think entities can either capitalise or expense subsequent expenditure. The staff also highlight the respective requirements of consistency in application of accounting policy and disclosure set out in IAS 8 and IAS 1.
With regards to the standard-setting agenda, the staff first consider whether there shall be a requirement to either capitalise or expense the subsequent expenditure. IAS 40 is used by analogy but the staff note the difference is that the requirement to capitalise subsequent expenditure for investment properties was agreed by the Board. However, the staff think significant time and effort is required to develop an amendment that requires capitalisation of subsequent expenditure because of the existence of diverse range of biological assets and difficulty in identifying capitalisation criteria.
The staff recommended publishing a tentative agenda decision acknowledging that IAS 41 allows either approach but that the Committee does not consider that amending IAS 41 is justified.
A Committee member acknowledged IAS 41 has no specific requirements and so entities need to make an accounting policy choice with reference to IAS 8:10 that focuses on relevance and reliability in selecting the accounting policy. Another Committee member stated that if an entity considers the requirements in IAS 8:11 it can make an accounting policy choice of capitalising the subsequent expenditure – i.e. considering requirements in other similar IFRS Standards.
In practical scenarios, a Committee member pointed out that mandating one policy over the other may not increase the transparency of the financial information for different sectors of industries. Another Committee member observed some biological assets grow by nature (with minimum cost) while some grow by a lot of efforts by the human beings and hence the Board can consider developing models that cater for different types of biological assets.
The majority of comment letters agreed with the Committee's decision not to add the matter to its standard-setting agenda. However, one respondent comments that the tentative agenda decision does not adequately explain the reason why costs described in the submission do not meet the criteria in IFRS 15:95 to be recognised as an asset.
In March 2019 the Committee discussed a submission about whether an entity, which is a property developer and revenue from property sales are recognised over time, recognises an asset or an expense in respect of the cost incurred to fulfil a performance obligation. Output method is used to measure the progress towards the satisfaction of the performance obligation.
The staff analyse that in order to fulfil the capitalisation criterion as required in IFRS 15:95(b), the cost incurred has to be used in satisfying the performance obligation in the future. During the process of construction, there is no resource created in order to satisfy the performance obligation in the future. Instead, the resource (e.g. a contract asset or a receivable) arose from past performance. Accordingly, the cost to fulfil the contract is recognised as an expense in accordance with the requirement in IFRS 15:98(c).
Comment letters were received and majority agree with the Committee's decision not to add the matter to its standard-setting agenda. However, one respondent comments that the tentative agenda decision does not adequately explain the reason why costs described in the submission do not meet the criteria in IFRS 15:95 to be recognised as an asset.
In responding to the comment, the staff suggest highlighting in the agenda decision the linkage between IFRS 15:95(b) & 98(c), which states the criteria for capitalising the cost as asset and scenario of expensing the cost as incurred respectively.
The staff recommended finalising the agenda decision subject to the above-mentioned changes.
All Committee members were supportive of the agenda decision. The Committee decided, by a majority of votes, to adopt the wording in the agenda decision.
The majority of comment letters agreed with the Committee's decision not to add this matter to its standard-setting agenda. However, one comment letter expresses the concern of whether the underground space is tangible or not and another raises that contracts of subsurface rights often include compensation to the supplier for elements other than subsurface rights and so suggests specifying in the agenda decision that IFRS Standards provide an adequate basis for an entity to determine whether the contract in the request contains a lease component.
In March 2019 the Committee discussed a submission about the accounting for a particular contract for subsurface rights. In the contract described in the request, a pipeline operator (customer) obtains the right to place an oil pipeline in an underground space for 20 years in exchange for a consideration. The contract specifies the exact location and dimensions (path, width and depth) of the underground space within which the pipeline will be placed. The land owner retains the right to use the surface area of the land above the pipeline, but the right to assess and use the specified underground space rests with the entity.
In identifying whether the contract contains a lease, the staff analysed the matter by using the guidance set out in IFRS 16:B31 and concluded that the contract contains a lease because:
The entity has an identified asset since the underground space is physically distinct from the remainder of the farmer's land, and the exact location and dimension of the pipeline are specified in the contract. The farmer does not have a substantive substitution right due to practical impracticability.
The customer (i.e. the entity) has the right to obtain substantially all of the economic benefits from the use of the asset throughout the period of use, and the customer has the right to direct how and for which purpose the asset is used throughout the period of use. This is on the basis that the 20-year period is exclusive for the entity and the farmer has no right to access, to use or to change the defined underground space.
The staff highlighted that the conclusion that it is an identified asset and meets the definition of a lease is reached considering the particular facts and circumstances of the contract described in the submission and a different accounting response would result under different terms.
Comment letters were received and a majority agrees with the Committee's decision not to add this matter to its standard-setting agenda. However, one comment letter expresses the concern of whether the underground space is tangible or not and another raises that contracts of subsurface rights often include compensation to the supplier for elements other than subsurface rights and so suggests specifying in the agenda decision that IFRS Standards provide an adequate basis for an entity to determine whether the contract in the request contains a lease component.
The staff consider existing IAS 38 and IAS 16 are clear in reaching the decision of whether the subsurface rights are tangible or not. The staff also consider not to make the suggestion of changing the conclusion in the tentative agenda decision in order to better address the question specified in the submission and avoid confusion of non-lease components, which is not discussed in the tentative agenda decision.
The staff recommended finalising the agenda decision with no changes.
Comment letters were received in response to the tentative agenda decision. Some respondents agree with the Committee's technical analysis while some of them have comments on it. A few respondents also suggest changes in wordings. On the other hand, more than half of respondents suggest the Board consider undertaking standard-setting in addition to the agenda decision.
In 2018, the International Accounting Standards Board (Board) and the IFRS Interpretations Committee (Committee), respectively, discussed holdings of cryptocurrencies.
Based on the staff analysis that was agreed in the Committee's November 2018 meeting and the Board's November 2018 meeting, cryptocurrencies do not meet the definition of financial assets in IFRS 9 or cash equivalents in IAS 7, and the entity would account for holdings of cryptocurrencies applying IAS 38, unless it is determined that they are within the scope of another IFRS Standard (e.g. IAS 2 when entities hold cryptocurrencies for sale in the ordinary course of business). In the Board's November 2018 meeting, the Board decided not to add this matter to its work plan but instead asked the Committee to consider publishing an agenda decision.
Some respondents consider cryptocurrencies can be used as a medium of exchange in certain transactions and so meet the definition of cash and one respondent suggests the Board consider a project to review and update the definition of cash in IFRS Standards. The staff continue to agree with the analysis of why cryptocurrencies are not cash as discussed in previous meetings. Another respondent suggests the Committee consider including in the agenda decision the presentation requirements such as current versus non-current and classification as disposal group under IFRS 5, but the staff analyse the application shall follow the requirements in the existing IAS 1 and IFRS 5. Certain respondents suggest including IAS 1 and the Conceptual Framework in the agenda decision however the staff analyse they are not applicable because it is not an extremely rare circumstance for departing from the existing IFRS requirements and there are requirements in IFRS Standards dealing with similar and related issues as cryptocurrencies.
Regarding the wording suggestions from the respondents, the staff suggest amending the definition of cryptocurrencies to be clear that all the characteristics set out in the agenda decision shall be met. One respondent suggests changing one of the characteristics of cryptocurrencies ("a cryptocurrency is not issued by a jurisdictional authority or other party") to "a cryptocurrency is issued to the public by other than a sovereign authority authorised to issue currency or similar organisation", however the staff consider acknowledging such interpretation departs from most market participants. Another respondent suggests including a reference to IAS 1:17(c) in the agenda decision but the staff consider this may imply IFRS Standards would not result in a fair presentation of holdings of cryptocurrencies, and instead recommend including reference to IAS 1:112 in the agenda decision.
In its November 2018 meeting, the Board decided not to undertake standard-setting but instead to monitor developments in crypto-assets based on the technical analysis performed by the staff and discussions in the Committee. The staff has not changed the technical analysis and conclusions in this subject matter and view that application of existing IFRS Standards provides useful information to financial statement users.
The staff recommended finalising the agenda decision with the above-mentioned change and certain editorial changes.
Before going to the discussion, the Chair has highlighted again that the Board decided not to undertake standard-setting and the discussion should be carried out on this basis. Despite this, some Committee members still expressed their views on the need for standard-setting. Other than that, in general, the Committee members agreed with the thought process in the staff analysis that reflects their understanding to the existing requirements and can at least reduce diversity in practice.
The Committee decided, by a majority of votes, to adopt the wording in the agenda decision.
Certain respondents disagree with the Committee's technical analysis and the decision not to add this matter to the Committee's standard-setting agenda, mainly because of the aspects of "actuarial and investment risk" and "fixed contributions".
The Committee received a request about whether the existence of the potential discount on a contribution to a post-employment benefit plan will result in a defined benefit plan classification applying IAS 19. In the fact pattern described in the request, an entity sponsors a post-employment benefit plan (the plan) that is administered by a third party. The entity has an obligation to pay fixed annual contributions to the plan but it will have no legal or constructive obligation to pay further contributions if the plan does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. On the other hand, the entity is entitled to a potential discount on its annual contributions. The discount arises if the ratio of plan assets to plan liabilities exceeds a set level.
In considering whether the potential discount meets the criterion of "fixed contributions", the staff analyse and consider that the definition of defined contribution plans focuses on the downside risk that the cost to the entity may increase, and the definition does not exclude the upside potential that the cost to the entity may be less than expected. The staff further analyse that the actuarial risk and investment risk do not fall in substance on the entity for this specific facts. Accordingly, the staff conclude that the potential discount does not preclude the defined contribution plan classification.
The staff did not recommend to add this matter to the Committee's standard-setting agenda and instead publish an agenda decision. In March 2019 meeting there was a lively discussion about the exposure to "downside risk" by the employer. Some Committee members expressed their concerns that the tentative agenda decision considers a very narrow fact pattern and that the particular facts and circumstances in the fact pattern should be included in the agenda decision.
Comment letters were received and certain respondents disagree with the Committee's technical analysis, mainly in the aspects of "actuarial and investment risk" and "fixed contributions".
Respondents say the tentative agenda decision takes a narrow view of the reference to actuarial risk and downside risk in IAS 19:28 & 30. They have a broader view that, if contributions were structured so that the entity expects to receive a discount, the risk of failure to receive that discount constitutes actuarial risk for the entity, and the entity is exposed to downside risk as this risk relates to expectation. The staff do not disagree with the importance of assessment of actuarial risk and downside risk but consider the description of actuarial risk and downside risk are only the first part of the relevant paragraphs, and therefore the part of "entity's obligations (legally or constructively) towards employees" shall be the focus which draws the distinction between a defined contribution plan and defined benefit plan in IAS 19. If the entity's obligation is to pay fixed contributions into a separate entity and will have no legal or constructive obligation to pay further contributions, it is a defined contribution plan, otherwise it would be a defined benefit plan.
Certain respondents consider the contribution paid by an entity that could be partially refunded is not fixed. The staff disagree with this viewpoint based on the discussion in the agenda decision Defined Contribution Plans with Vesting Conditions published in July 2011 and IAS 19:51(a).
Other respondents say the agenda decision could lead to inconsistent accounting between economically similar plans. The staff consider the classification of a post-employment benefit plan as defined benefit or defined contribution depends on the entity's obligation to make a fixed contribution towards employees, not whether it voluntarily decides to make that contribution.
There were also respondents saying the fact pattern described in the submission has no sufficient detail to permit a conclusion on the classification of the plan. The staff agree that it is essential to consider all relevant terms and conditions of the plan as well as any informal practices that might give rise to a constructive obligation, and therefore recommending wording changes by (a) adding the requirements in IAS 19:27 in the agenda decision and (b) clarifying in the agenda decision the terms and conditions set out in the fact pattern are "the only relevant terms and conditions".
The staff recommend finalising the agenda decision subject to the above-mentioned changes.
A Committee member agreed with the editions to the tentative agenda decision but he still struggled with the downside risk notion which is fundamental to the entire analysis. IAS 19:BC29 states that downside risk should be assessed against the expected cost that is going to achieve an outcome that reflects the substance of the arrangement. As such, the narrow scope of downside risk could lead to different classification of the plan. He did not agree to finalise the agenda decision.
A few other Committee members are troubled with the term 'fixed contributions' as they did not think the amounts that could be refunded in the future are fixed because the contribution is in substance varied by actuarial experience and therefore continued to disagree with the staff analysis and agenda decision. The staff explained that, as set out in the agenda decision, the fundamental principle is whether the entity will have no legal or constructive obligation to pay further contributions. The Chair also explained that based on IAS 19:39, the entity's obligation may be increased if actuarial experience is worse than expected and hence the contributions subject to refund as set out in the fact pattern is not considered as 'vary with actuarial risk'. In order to address the Committee members' concerns, the staff also suggested some wording changes to the agenda decision about the link between the benefit formula and actuarial risk when assessing whether the benefit plan might give rise to a constructive obligation. For example, if the plan includes a benefit formula, the determination of the entity's obligation must consider how the fixed contribution is set and whether it directly or indirectly relates to the investment risk.
On the other hand, some Committee members were comfortable with the revised wording of the agenda decision and consider that it should address the concerns about abusing the classification of defined contribution plan in practice. They thought the agenda decision was clear enough to answer the specific narrow-scope question in the fact pattern described in the request.
A Committee member expressed his concern over the conclusion paragraph which states in the fact pattern described in the request, the existence of a right to a potential discount would not itself result in classifying the plan as a defined benefit plan applying IAS 19. He considered that the entity still needs to consider other factors (such as frequency and duration) as well as other terms and conditions and some plans with discount could turn to a defined benefit plan classification. The conclusion in the agenda decision should include such a warning statement.
Based on the discussion, the changes to the tentative agenda decision to be made include (a) assessment of the frequency and manner of the contributions and discounts, when assessing the relevant terms and conditions of the plan, (b) the stronger link between the benefit formula and actuarial risk as mentioned above and (c) adding 'nonetheless the Committee reiterated the importance of assessing all the relevant terms and conditions as outlined in the earlier agenda decision' in the conclusion paragraph.
The Committee decided, by a majority of votes, to adopt the wording in the agenda decision subject to the above-mentioned changes.
In May, June and September 2018, the Committee discussed the difficulties in applying IAS 21 when a currency suffers from an extreme long-term lack of exchangeability and that foreign operation has not been able to access foreign currencies using the available legal exchange mechanisms, such as with the Venezuelan Bolivar. The Committee agreed to publish a tentative agenda decision after June 2018 meeting. Since the Committee observed that IAS 21 does not include relevant explicit requirements, the Committee members agreed with the narrow-scope standard-setting due to the urgency of the matter.
Based on the discussions and feedback from the Committee members, the narrow-scope standard-setting approach shall cover a broader scope applicable not only a particular circumstance and not reconsider the fundamental principles in IAS 21. The scope includes (i) providing clarity on the definitions of "exchangeability" and "lack of exchangeability" (Agenda Paper 14A); (ii) developing requirements in developing the exchange rate in the circumstances which exchangeability is lacking (Agenda Paper 14B); and (iii) setting out disclosure requirements (Agenda Paper 14C).
Staff analysis—Agenda Paper 14A
Given the lack of guidance in IAS 21, the staff analyse exchangeability is lacking when an entity would be unable to exchange a currency for another currency at a specified date. The staff analyse the following considerations in identifying when an entity is able to obtain foreign currency and when not:
a) Timeframe within which an entity is able to settle a foreign currency transaction—having considered the definition of 'spot rate', the staff analyse that the entity shall, in order to assess exchangeability, consider whether it could obtain immediate delivery of other currency. The staff acknowledge the completion of an exchange transaction may not always occur instantaneously in practical scenarios and therefore include consideration of normal administrative delay in addition to immediate delivery of other currency. The staff recommend no application guidance to be provided and the assessment would depend on facts and circumstances.
b) No intention to exchange a currency—the staff consider lack of exchangeability is caused by laws, regulations or other events outside the control of the entity and therefore view that the assessment of the entity's intention is not relevant.
c) Means of accessing foreign currency—the staff consider the importance of enforceability of rights and obligations of the exchange mechanisms and view that in assessing exchangeability, an entity shall consider only markets or exchange mechanisms that it can legally access.
d) Purpose of obtaining foreign currency—The staff acknowledge there are situations that different exchange rates apply for differing uses of foreign currency, for example a rate for settling foreign currency payments and a different rate for dividend remittance abroad. The staff recommend that in assessing exchangeability an entity would assume the purpose of obtaining foreign currency is (a) to settle individual foreign currency transactions, or assets or liabilities related to those transactions, when it reports foreign currency transactions in the functional currency or (b) to realise the entity's net assets when it uses a presentation currency other than the functional currency. The assessment of exchangeability shall be performed separately for (a) and (b) above, and the staff consider that such analysis has not violated the 'several exchange rate' principles set out in IAS 21:26.
e) Amounts of foreign currency exchanged—the staff analyse the effects of different extent of foreign currency that the entity is able to obtain and recommend exchangeability is lacking when an entity is unable to obtain more than an insignificant amount of foreign currency. The staff consider this amendment could cover more circumstances and not overly restrictive.
The Chair acknowledged that there are too many market practices. The Committee members expressed many of their personal views on the subject matter. A Committee member is concerned about enforceability (legally permissible to access the market). Other Committee members shared similar views that such guidance will create practical problems because something may be permitted but not explicitly stated in the law for some of the jurisdictions or legal systems. Therefore she suggested to remove the term 'legally' and just keep 'permissible and enforceable'. The staff considered the focus should be on what is creating the enforceable rights and obligations, which is a more objective assessment.
A Committee member asked about magnitude of 'significant amount' and the staff responded that it is a matter of judgement. Another Committee member suggested not to put an amount in illustrating what is 'more than an insignificant amount' because that may imply a threshold while such determination is a very judgmental and very facts specific area.
The Committee members recognised that the staff acknowledged the challenge of existence of multiple rates. The practical problem of which could be 'unit of account'. The Chair agreed that 'unit of account' does matter.
Another Committee member expressed her view on blended rate. There is a practical problem because the system is hard to manage if different exchange rates are used for different transactions.
No decisions were made in the meeting.
Staff analysis—Agenda Paper 14B
In respect of determining the exchange rate, certain Committee members said the first subsequent rate (as set out in IAS 21:26) at which exchanges could be made may not always reflect the conditions existing at the reporting date. The staff acknowledge that and therefore develop a framework with the core principle that an entity should use a spot rate that reflects conditions existing at the reporting date. The staff has prepared a flowchart in illustrating on how to determine the exchange rate when the currency is subject to a lack of exchangeability—the observable exchange rate is used as spot rate at the reporting date if there is an observable rate at the reporting date that meets the definition of spot rate and approximates the spot rate at the reporting date. If not, then the entity would consider if the exchangeability has been restored when the financial statements are authorised for issue. If the first subsequent exchange rate after the restoration of exchangeability approximate the spot rate at the reporting date, that rate shall be used, otherwise, the entity would estimate the spot rate at the reporting period.
As a next step, the staff analyse the requirements in estimating the spot rate. The staff acknowledge the complexity of the estimation process involved in such an exercise and observe the practice of using an observable rate which is not a spot rate or a spot rate at a date other than the reporting date as a starting point. The staff agree that it involves a high level of judgement and so an entity shall assess carefully its own facts and circumstances by considering indicators when assessing whether an observable rate would approximate the spot rate. The staff recommend the amendment neither specifies the method of estimation nor prescribes a particular estimation technique. At the same time, disclosure requirements are introduced in order to maintain the faithfulness of the representation of that estimation.
Most Committee members agreed with the analysis and proposal in the staff paper. A Committee member also reminded the staff to be careful of what is the objective of estimating the rate. The staff analysed that it should be an estimated rate to get as close as possible the exact rate. However the Committee member said it should be the best rate that approximate the economic situation at a given point in time, for example at the end of the reporting period.
Another Committee member pointed out the practical challenge of using the first subsequent exchange rate after the restoration of exchangeability as an approximate of the spot rate at the reporting date. The exchange rate may be restored after the end of the reporting period but right before the earning release date and that will create a problem in a practical preparer perspective. The Committee members considered it is a non-adjusting event because the exchange rate restoration is happened after the year end. The staff suggested to change this to the first exchange rate at which the transaction could be made.
Some Committee members expressed their appreciation for the flowchart in the staff paper which is very clear and useful and serves as a good summary of the staff paper.
Another Committee member said the staff paper should state that the estimated rate is not the spot rate. Spot rate is the rate that the entity can immediately get when converting the currency while an estimated rate is not.
Staff analysis—Agenda Paper 14C
In respect of the disclosure requirements, the staff recommend the Board develop:
a) A high-level disclosure objective which captures how a lack of exchangeability affects an entity's financial statements at the reporting date. The overall disclosure objective is recommended to be: "an entity shall disclose information that enables users of financial statements to understand how a currency's lack of exchangeability affects, or is expected to affect, an entity's financial performance, position and cash flows"; and
b) Specific disclosure requirements, including the spot rate used, nature of the spot rate, the estimation process including inputs (qualitative information), uncertainties (quantitative information) as well as a sensitivity analysis.
The Committee members generally agreed with the staff analysis. Some Committee members had concerns about the disclosure requirements of sensitivity analysis. One Committee member said the sensitivity should be based on reasonably possible other choices of (instead of reasonably possible change in) the estimated rate because it is important to highlight the different measurement basis (i.e. other possible choices from the measurement perspective or other potential basis).
Another Committee member expressed his concern on the usefulness of the disclosure of sensitivity analysis. He considered there is already a lot qualitative and quantitative information disclosed. He also opined that estimating the rate is already a very complex process that involves so many parameters and questioned whether providing additional estimates provides useful information. The preparation of the disclosure of sensitivity analysis will increase costs but not provide useful information to the investors. The Chair replied that there is a need to do investors outreach in order to understand what are the interests of investors.
A Committee member highlighted that disclosure of the underlying assumptions is very important for the users of the financial statements to understand the modelling or mechanics of arriving the specific rate used. Greater granularity about mechanics might be more important than some of the overall sensitivity analysis.
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