4.0 Ongoing monitoring of IASB projects

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16 June 2022
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Executive Summary

Project Type Monitoring
Project scope Various

Purpose of the paper

This paper provides the Board with an update on projects the Secretariat are monitoring. Appendices 1 - 3 set out the key areas on which the Secretariat expects the discussions at the ASAF meeting to focus.

Summary of the Issue

In preparation for the July ASAF meeting, the Board is asked to consider specific questions on the Post Implementation Review (PIR) of IFRS 9 Financial Instruments Classification and Measurement, the Financial Instruments with Characteristics of Equity (FICE) project, and the Subsidiaries without Public Accountability: Disclosures project. We also provide a summary of recent IASB activity on other projects.

Questions for the Board

The Board is asked a number of questions:

  • Appendix 1 – PIR IFRS 9: Questions at paragraphs 12 and 14
  • Appendix 2 – FICE: Questions at paragraphs 38, 39 and 49
  • Appendix 3 – Subsidiaries without Public Accountability: Disclosures – Questions at paragraphs 12 and 32
  • Appendix 4 – Other: Question at paras 19

Next steps

Board discussions will inform feedback provided to ASAF.

Appendices

  • Appendix 1 Ongoing monitoring of IASB projects - PIR IFRS 9
  • Appendix 2 Ongoing monitoring of IASB projects - FICE
  • Appendix 3 Ongoing monitoring of IASB projects - Subs without public accountability
  • Appendix 4 Ongoing monitoring of IASB projects - Other

Post-implementation Review of IFRS 9 Classification and Measurement – update

Project Type Influencing
Project scope Significant

Purpose

1 This paper provides an update on the classification and measurement stage of the IASB's Post-implementation Review of IFRS 9 Financial Instruments. It also presents specific application questions arising from feedback received by the IASB, which are expected to be raised at the July 2022 Accounting Standards Advisory Forum (ASAF) meeting. The Board is asked for its views on the topics presented in this paper.

Background and current status of IASB project

2 The IASB decided to carry out its post-implementation review (PIR) of IFRS 9 in three stages, addressing separately the requirements on 1) classification and measurement, 2) impairment and 3) hedge accounting. The IASB is currently conducting the classification and measurement stage. The IASB plans to start the PIR of the impairment requirements in the second half of 2022. At the time of writing this paper, there is no indication of the expected timing for the PIR of the hedge accounting requirements.

3 In September 2021, the IASB published its Request for Information on IFRS 9 classification and measurement, with a comment period ending on 28 January 2022.

4 At its March and April 2022 meetings the IASB discussed a summary of the overall feedback received on its Request for Information. Most respondents shared the view that generally the contractual cash flow characteristics assessment (i.e. the solely payments of principal and interest requirements, or SPPI requirements) works as intended. However, feedback indicated that the IASB could help entities with consistent application by clarifying some of the SPPI requirements.

5 In May 2022, the IASB decided to start a standard setting project, with a narrow-scope, to clarify the SPPI requirements of financial assets with particular features. For further details on this project see the section below: IASB's new standard setting project - contractual cash flow characteristics assessment.

6 The IASB has also discussed specific application questions raised by respondents on the contractual cash flow characteristics assessment. The IASB decided to perform further outreach on two of those application questions. For further detail see the section below: IFRS 9 classification and measurement issues – application questions.

7 Information on other topics being redeliberated by the IASB (i.e. business model assessment, equity instruments and OCI, modifications to contractual cash flows and amortised cost and the effective interest method) will be presented to the Board at future meetings.

IASB's new standard setting project - contractual cash flow characteristics assessment

8 As a result of the feedback received on its request for Information on the PIR of IFRS 9 classification and measurement, the IASB has decided to start a standard setting project to clarify certain aspects of the SPPI requirements. The IASB's intention is to keep the project narrow in scope, limited to clarifying the SPPI requirements on:

  1. ESG-linked features1 - How to assess whether a financial asset has SPPI cash flows when the instrument has ESG-linked features. This issue is considered a high priority matter. On this issue, the IASB staff considers that:

    1. It is unnecessary to create an exception from the SPPI requirements for financial instruments with these features;
    2. There is no need to make fundamental changes to the principles of the SPPI requirements; and
    3. Adding more explanations of the overall objective of the SPPI requirements and providing additional application guidance will address the issue effectively and efficiently.

      4. Potential areas of focus are the concept of a basic lending arrangement and whether and how the nature of a contingent event is relevant to determining whether the cash flows are SPPI.

  2. Contractually linked instruments2 (CLIs) – Clarifying the scope of transactions to which the CLI requirements apply and how to apply those requirements. This includes questions on the interaction between the requirements for CLIs and for financial assets with non-recourse features3.
  3. Disclosures - Whether additional disclosure requirements are needed.

9 The IASB's new standard setting project is expected to address two of the UKEB's main areas of concern. The UKEB response to the IASB noted that IFRS 9 classification and measurement requirements generally work as intended and represent an improvement on the previous rule-based requirements in IAS 39 Financial Instruments: Recognition and Measurement. The response therefore focused on the three significant areas where improvements, and potentially standard setting activity, is required. Two areas of concern relate to the application of the contractual cash flow characteristics assessment for financial assets to (i) financial instruments with ESG-linked features and (ii) contractually linked instruments and non-recourse finance. The third area of concern relates to the effective interest rate methodology, which is a topic that will be discussed by the IASB at a future meeting.

10 A project plan will be discussed by the IASB at their June 2022 meeting (see Project timeline/Next steps below).

11 The IASB intends to ask for feedback on this project from ASAF members in July. In particular, the IASB is interested in recommendations for clarifying the concept of a 'basic lending arrangement'. At the date of publication of this paper, the Secretariat is carrying out desk top research and targeted outreach with UK stakeholders and will provide a verbal update at the Board meeting.

Question for the Board

12 Do Board members have any comments on the IASB's new standard setting project or views on potential clarifications of the concept of ‘basic lending arrangement'?

IFRS 9 classification and measurement issues—application questions

13 The following table presents application questions on IFRS 9 classification and measurement arising from feedback received by the IASB. These questions are expected to be discussed at the ASAF meeting in July 2022. The IASB wants to understand whether the issues are pervasive and have substantial consequences, to help them decide what action, if any, to take (such as referring issues to the IFRS Interpretations Committee):

Application questions on IFRS 9 classification and measurement issues
>
> This paper provides the Board with background on current IASB projects. It is provided for completeness and for the Board to note information. The Board is not asked for its views at this meeting.

1. Financial instruments with contingent settlement provisions (FICE)

Background

1.1 At its May 2023 meeting, the IASB discussed the following topics:

  • The definition of a financial liability (IAS 32, paragraph 11) in the context of:
  • Put options for own shares: and
  • Provisions for issuing a variable number of own shares (IAS 32, paragraph 16).

    • - The definition of a financial asset and financial liability (IAS 32, paragraph 11) in the context of convertible instruments with contingent settlement provisions that give the issuer the choice of settling either in a fixed amount of cash or in a variable number of own shares.

    1.2 The IASB tentatively decided to amend IAS 32 to clarify that:

    1. The entity does not have an unconditional right to avoid delivering cash (or another financial asset) if it has a put option to reacquire its own equity instruments.
    2. Provisions for issuing a variable number of own shares (IAS 32, paragraph 16) should be applied to all financial instruments (including those with contingent settlement provisions) for which the entity does not have an unconditional right to avoid delivering cash (or another financial asset).

    1.3 The IASB plans to discuss further how to apply the definition of a financial asset and financial liability in the context of convertible instruments with contingent settlement provisions that give the issuer the choice of settling either in a fixed amount of cash or in a variable number of own shares at a future meeting.

    Discussion

    1.4 The IASB's tentative decisions on put options and provisions for issuing a variable number of own shares are consistent with the UKEB's previous feedback.

    1.5 At its September 2023 meeting, the IASB will consider further analysis of the accounting for convertible instruments with contingent settlement provisions.

    1.6 The UKEB will continue to monitor developments on the FICE project and will update the Board at future meetings.

    Question for the Board

    1.7 Do Board members have any comments or questions on the IASB's tentative decisions?

    2. Dynamic Risk Management (DRM)

    Background

    2.1 The IASB's DRM project is developing an optional accounting model for dynamic risk management activities undertaken by entities, particularly in the banking sector. The project aims to improve the usefulness of financial statements by better reflecting these activities.

    2.2 The IASB is currently considering feedback on its Exposure Draft (ED) Dynamic Risk Management that was published in April 2022. The comment period for the ED ended on 23 September 2022.

    2.3 At its September 2023 meeting, the IASB will consider the feedback received from its recent targeted outreach on two topics:

    1. The scope of the accounting model (i.e., whether the accounting model should only apply to certain portfolios or be available to all portfolios that are managed on a dynamic basis); and
    2. The rebalancing of the accounting model (i.e., how to reflect management’s decisions to adjust the target profile of a portfolio).

    2.4 The IASB plans to publish a feedback statement summarizing the feedback received on the ED in the fourth quarter of 2023.

    Discussion

    2.5 The UKEB has previously provided feedback to the IASB on the DRM project (UKEB Comment Letter and UKEB Feedback Statement). The UKEB continues to monitor developments on the DRM project and will update the Board at future meetings.

    Question for the Board

    2.6 Do Board members have any comments or questions on the IASB's recent discussions on the DRM project?

    3. Post-implementation Review of IFRS 15 Revenue from Contracts with Customers (PIR IFRS 15)

    Background

    3.1 The IASB is currently conducting a Post-implementation Review (PIR) of IFRS 15 Revenue from Contracts with Customers. The PIR is being conducted in two phases. Phase 1 focuses on identifying areas that may have resulted in unexpected costs or where stakeholders had difficulty implementing the Standard, including those areas in which the IASB’s Conceptual Framework might be further developed. Phase 2 focuses on redeliberating feedback received on Phase 1, deciding whether to amend IFRS 15, or develop new guidance, and if so, how.

    3.2 The IASB published a Request for Information (RFI) for Phase 1 of the PIR in March 2023. The comment period for the RFI ended on 31 October 2023.

    3.3 The RFI sought feedback on the following questions:

    1. The effectiveness of IFRS 15 in improving the financial reporting of revenue;
    2. The costs and benefits of applying IFRS 15;
    3. Whether IFRS 15 faithfully reflects revenue transactions;
    4. Whether stakeholders have encountered any unexpected application issues, or whether IFRS 15 is difficult to apply, in particular in some specific industries such as software and other subscription services, telecommunications, construction and real estate;
    5. Whether stakeholders have encountered any unexpected costs or unexpected benefits when applying IFRS 15; and
    6. Whether the IASB should address the matters raised by stakeholders.

    3.4 The IASB plans to discuss a summary of the feedback received on the RFI in the fourth quarter of 2023.

    Discussion

    3.5 The UKEB provided feedback to the IASB on PIR IFRS 15 in its Comment Letter on the RFI. The UKEB continues to monitor developments on the PIR IFRS 15 project and will update the Board at future meetings.

    Question for the Board

    3.6 Do Board members have any comments or questions on the PIR IFRS 15 project?

    4. Business Combinations – Disclosures, Goodwill and Impairment (BCDG&I)

    Background

    4.1 The IASB's Business Combinations – Disclosures, Goodwill and Impairment (BCDG&I) project aims to improve the information provided to users of financial statements about a business combination, particularly about the acquired business's subsequent performance.

    4.2 At its May 2023 meeting, the IASB concluded the following:

    1. Improve the disclosure objectives and requirements in IFRS 3 to help users understand a business combination's subsequent performance;
    2. Not reintroduce amortisation of goodwill;
    3. Improve the effectiveness of the impairment test in IAS 36 Impairment of Assets, including by exploring options for:
      1. Requiring entities to disaggregate goodwill to a level below cash-generating units (CGUs); and
      2. Increasing the factors an entity considers when estimating the pre-tax discount rate.
    4. Add a new disclosure objective and requirements to IFRS 3 for entities to disclose the objectives and expected synergies for a business combination and how the achievement of these objectives and synergies is being monitored.

    4.3 At its September 2023 meeting, the IASB will further discuss the following topics:

    1. The disclosure objectives and requirements on goodwill and intangible assets;
    2. The IASB's preliminary views on the impairment test in IAS 36 Impairment of Assets; and
    3. Next steps of the project.

    4.4 The IASB plans to publish a Discussion Paper or Exposure Draft in the second quarter of 2024.

    Discussion

    4.5 The UKEB has previously provided feedback to the IASB on the BCDG&I project (UKEB Position Paper). The UKEB continues to monitor developments on the BCDG&I project and will update the Board at future meetings.

    Question for the Board

    4.6 Do Board members have any comments or questions on the BCDG&I project?

    5. Climate-related risks in financial statements (CRFS)

    Background

    5.1 The IASB's Climate-related risks in financial statements (CRFS) project aims to explore whether and, if so, what targeted actions, beyond educational material, it could take to improve the reporting of climate-related risks in the financial statements.

    5.2 At its September 2023 meeting, the IASB will discuss the following topics:

    1. The scope of the project and the potential targeted actions the IASB could take to improve the reporting of climate-related risks in the financial statements; and
    2. Due process steps and timeline for the project.

    Discussion

    5.3 The UKEB has provided feedback to the IASB on the CRFS project in its Comment Letter on the IASB's Request for Information for its Third Agenda Consultation. The UKEB continues to monitor developments on the CRFS project and will update the Board at future meetings.

    Question for the Board

    5.4 Do Board members have any comments or questions on the CRFS project?

    6. IASB Consultative Groups

    Background

    6.1 The IASB has a number of consultative groups that assist it with its work. The IASB's consultative groups include the:

    1. Accounting Standards Advisory Forum (ASAF);
    2. Emerging Economies Group (EEG);
    3. IFRS Advisory Council; and
    4. Small and Medium-sized Enterprises (SME) Implementation Group.

    6.2 At its September 2023 meeting, the IASB will consider changes to the Terms of Reference for the ASAF and the IFRS Advisory Council. These changes reflect recent developments in the IASB's work, including the creation of the International Sustainability Standards Board (ISSB) and its interaction with the IASB.

    Discussion

    6.3 The UKEB monitors the work of the IASB's consultative groups and will update the Board on any significant developments.

    Question for the Board

    6.4 Do Board members have any comments or questions on the IASB's consultative groups?

    7. Wider corporate reporting

    Background

    7.1 The IASB's work is focused on financial statements, but its role in the IFRS Foundation's wider corporate reporting agenda includes:

    1. Contributing to the IFRS Foundation's integrated reporting initiative;
    2. Considering the implications of the ISSB's work for the IASB's projects;
    3. Working with other standard-setters and regulators on wider corporate reporting matters; and
    4. Providing input into the IASB's Conceptual Framework.

    7.2 At its September 2023 meeting, the IASB will consider the following topics:

    1. The IASB's involvement in the IFRS Foundation's integrated reporting initiative;
    2. The implications of the ISSB's work for the IASB's projects; and
    3. Next steps of the IASB's wider corporate reporting agenda.

    Discussion

    7.3 The UKEB monitors developments in wider corporate reporting and will update the Board on any significant developments.

    Question for the Board

    7.4 Do Board members have any comments or questions on the IASB's wider corporate reporting agenda?

    Footnotes

    1. Financial assets with interest rates linked to environmental, social or governance (ESG) targets. These typically provide general funding to a borrower but have a contractual interest rate that is adjusted depending on the borrower achieving a pre-determined ESG target that is specific to the borrower (ESG-linked features). These are different from other forms of sustainability-linked finance products such as 'green finance'. Green finance typically refers to loans or bonds used to finance an environmentally friendly activity and their cash flows do not necessarily include ESG adjustments. ↩

    2. Types of transactions in which an issuer prioritises payments to holders of financial assets using multiple contractually linked instruments that create concentrations of risk (tranches). ↩

    3. Financial assets have a non-recourse feature when they limit a creditor's claim to specified assets of the debtor or to the cash flows from specified assets. ↩