8. IASB General Update

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10 November 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 is currently monitoring, including the work of the IFRS Interpretations Committee. As agreed with the Board, the Secretariat proactively monitors a range of projects being undertaken by the IASB and IFRS Interpretations Committee. This is undertaken to inform the Board about the progress and decisions being made by the IASB on active projects. Discussion by the Board may also help inform interactions with international standard setter meetings, including the IASB's Accounting Standards Advisory Forum.

Summary of the Issue

Updates on all the IASB projects the Secretariat is currently monitoring are provided in this paper. Comments or questions are welcomed on any topic, although the paper presents separately those topics the Secretariat suggests are prioritised for discussion and those presented as simply for noting. Topics identified for discussion are listed below (those expected to be discussed at the December 2022 ASAF meeting are marked with *):

  • Amendments to the Classification and Measurement of Financial Instruments
  • Business Combinations under Common Control*
  • Equity Method*
  • Post-implementation Review of IFRS 15 Revenue from Contracts with Customers*
  • Primary Financial Statements*
  • Provisions—Targeted Improvements*

Decisions for the Board

The Board is not asked to make any decisions.

Board members are asked for any questions or comments on the updates provided in this paper. In addition, the Board is asked specific questions on the following topics:

  • Business Combinations under Common Control
  • Equity Method
  • Does the Board wish to highlight to the December ASAF meeting any particular points on the practical exemptions from the acquisition method?
  • Post-implementation Review of IFRS 15 Revenue from Contracts with Customers
  • Do Board members have any advice on matters to be considered in the Post-implementation Review of IFRS 15?
  • Primary Financial Statements
  • At this time we do not know what (if any) questions on the IASB's targeted outreach on Primary Financial Statements will be asked at the December 2022 ASAF meeting. Are there any particular points on the targeted outreach that the Board wishes to highlight to the forthcoming ASAF meeting?
  • Provisions—Targeted Improvements
  • Do Board members have any comments on (i) whether discount rates for provisions should reflect the entity's own credit risk, and if so, in what circumstances; or (ii) whether financial statements currently disclose enough information about the rates companies use to discount provisions?

Recommendation

N/A

Appendices

  • Appendix A List of IASB projects
  • Appendix B Business Combinations under Common Control - Summary of Discussions
  • Appendix C Disclosure Initiative: Targeted Standards-level Review of Disclosures - Summary of Discussions

Topics for Discussion

Amendments to the Classification and Measurement of Financial Instruments

UKEB Project Status: Active Monitoring UKEB project page
IASB Next Milestone: Exposure Draft H1 2023

1On 24 October 2022, the IASB announced its decision to expand the scope of its proposed narrow-scope amendments to IFRS 9 Financial Instruments. The aim of the proposed amendments is to respond to stakeholders' feedback on the IASB's Request for Information Post-implementation Review of IFRS 9 – Classification and Measurement.

2The initial project, Contractual Cash Flow Characteristics of Financial Assets (Amendments to IFRS 9) [^1], was focused on clarifying particular aspects of IFRS 9 relating to the assessment of an asset's contractual cash flow characteristics (that is, the 'solely payments of principal and interest' or SPPI requirements).

3The revised project, now referred to as Amendments to the Classification and Measurement of Financial Instruments, will cover three areas:

  1. Contractual cash flow characteristics – clarification of the requirements in IFRS 9 Financial Instruments to assess whether a financial asset's contractual cash flows are solely payments of principal and interest (SPPI) and new requirements to disclose information about the variability in contractual cash flows for financial assets and financial liabilities not measured at fair value through profit or loss.
  2. Electronic cash transfers – proposed amendments to the derecognition requirements in IFRS 9 to permit an accounting policy choice to allow an entity to derecognise a financial liability before it delivers cash on the settlement date when specified criteria are met.
  3. Equity instruments and other comprehensive income – proposed amendments to IFRS 7 Financial Instruments: Disclosures would require disclosure of the aggregated fair value of equity investments for which the OCI presentation option is applied at the end of the reporting period; and changes in fair value recognised in other comprehensive income during the period.

4Expected timeline: An Exposure Draft for the revised project is expected in H1 2023 (the ED for the initial project was expected in Q1 2023).

5A high-level summary of the IASB's recent tentative decisions on the topics covered in the revised scope for this project - is presented in the following paragraphs.

Contractual Cash Flow Characteristics

6In October, the IASB continued its deliberations on the clarifying amendments to IFRS 9 for assessing whether contractual cash flows of financial assets are SPPI. The focus was to consider whether any additional disclosure requirements needed to be added to IFRS 7, as well as the transition requirements and a potential effective date of the proposed amendments.

7The IASB tentatively decided to propose adding a requirement to IFRS 7 for entities to disclose for each class of financial assets and financial liabilities not measured at fair value:

  1. a qualitative description of contractual terms that could change the timing or amount of contractual cash flows, including the nature of any contingent events;
  2. quantitative information about the range of changes to contractual cash flows that could result from these contractual terms; and
  3. the gross carrying amount of financial assets and amortised cost of financial liabilities subject to these contractual terms.

8The IASB also tentatively decided to propose that:

  1. An entity should apply the clarifying amendments to IFRS 9 retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, except that the entity would not be required to restate comparative information.
  2. If, on the initial application of the amendments, an entity changes the classification of a financial asset, the entity should disclose:
    1. the previous measurement category and the carrying amount determined immediately before applying these amendments; and
    2. the new measurement category and the carrying amount determined after applying these amendments.
  3. The effective date will be determined after exposure of the proposed amendments.
  4. Early application of the amendments is permitted.

Electronic cash transfers

9Next steps: The IASB will decide whether to begin the balloting process for the Exposure Draft[^2]. The UKEB Secretariat will continue to monitor IASB discussions.

10The IASB considered possible standard-setting options for matters raised by the IFRS Interpretations Committee Tentative Agenda Decision- Cash Received via Electronic Transfer as Settlement for a Financial Asset (IFRS 9). The IASB staff paper presented in October recommended a narrow scope amendment such that when payment is made using an electronic transfer system, the timing of derecognition of the associated financial liability could be treated as an accounting policy choice if all the following criteria are met:

  1. the entity is irrevocably committed to the cash payment and therefore has effectively lost control of the cash;
  2. the initiation and completion of the cash transfer takes place within a short timeframe as established by market convention for such electronic payments; and
  3. completion of the cash transfer is subject only to an administrative process and not settlement risk of the entity.

11The above principle-based approach acknowledges that in some electronic payment systems, once an entity has initiated a payment, the cash is no longer available for use by the entity and the entity has effectively lost control of the cash. Questions to consider in determining whether the entity has lost control of the cash include:

  1. whether the entity could cancel or withdraw the electronic cash transfer instruction before it is complete;
  2. whether the completion of the payment is subject to settlement risk of the entity (i.e. the entities credit risk);
  3. whether the delay between initiation and completion of the payment is purely an administrative process based on the market convention for the particular payment system; and
  4. the timeframe for completion of the payment instruction in using the specific electronic cash system and what happens in the event of failure by the bank to complete the payment.

12The IASB tentatively decided to develop an accounting policy choice to allow an entity to derecognise a financial liability before it delivers cash on the settlement date when specified criteria were met. During the meeting, there were mixed views as to whether the suggested approach should be expanded to other payment systems (e.g. cheques) and/or to consider the derecognition of financial assets. While some IASB members were in favour of expanding the scope others felt strongly against it. The IASB staff was instructed to further consider the question of scope and report back at a future meeting.

13UKEB Accounting Firms and Institutes Advisory Group (AFIAG) – The above IASB tentative decision was discussed briefly by the UKEB AFIAG. Preliminary views were that the proposed accounting policy choice for derecognition of a financial liability seemed a sensible approach, although some felt the scope might be too narrow and should include other payment types such as cheques. In this respect, a question was raised about introducing the notion of control as part of the assessment, as that may make application to other payment types more challenging. There were also calls for further clarity on the assessment for financial assets (i.e. there seems to be confusion due to the IFRS IC Tentative Agenda Decision not being ratified), potentially by issuing application guidance as part of the same exposure draft and subject to the same effective date as that for the accounting policy choice for derecognition of financial liabilities.

14Next steps: The UKEB Secretariat will continue to monitor IASB discussions on this matter, particularly around scope. In addition, the Secretariat will continue to seek input on this topic from relevant UKEB Advisory Groups as well as from the UKEB Financial Instruments Working Group when established.

Equity instruments and other comprehensive income

15The IASB considered feedback received on the IFRS 9 requirements for equity instruments for which an entity has elected to present fair value changes in other comprehensive income (OCI). During UKEB outreach, stakeholder feedback suggested this was not a high priority issue in the UK. The UKEB comment letter, which focussed on high priority UK issues, did not recommend changes to these requirements.

16In October, the IASB decided to make no changes to the IFRS 9 requirements on this topic. However, the IASB tentatively decided to amend related disclosures in IFRS 7, such that disclosure will be required for:

  1. The aggregated fair value of equity instruments for which the OCI presentation option is applied at the end of the reporting period; and
  2. Changes in fair value recognised in OCI during the period.

17Next steps: the IASB staff was asked to explore whether an illustrative example, such as a reconciliation between the opening and closing OCI balance could be provided as part of the proposed amendments. The UKEB Secretariat will continue to monitor IASB discussions.

Question for the Board

1Do Board members have any questions or comments on the Amendments to the Classification and Measurement of Financial Instruments update?

Business Combinations under Common Control

UKEB Project Status: Influencing Completed UKEB project page
IASB Next Milestone: Decide Project Direction UKEB Final Comment Letter (Published September 2021)

18The IASB has been considering feedback received on the Business Combinations under Common Control (BCUCC) discussion paper (DP) [^3]. The June 2022 IASB meeting considered the question of selecting a measurement method to apply to BCUCC. The IASB noted there was significant variety in the feedback on this topic. The DP proposals for selecting a measurement method address both selection of a method and practical considerations. The June discussion primarily addressed the former, while the practical considerations are expected to be discussed at the next IASB and ASAF meetings. No decisions were made at the June meeting.

19Appendix B provides a summary of the proposals for selecting a measurement method including practical considerations, the feedback provided in the UKEB comment letter, other feedback received by the IASB, and the IASB staff recommendations to the board on this topic.

20The IASB discussion in June broadly supported the staff recommendation to first consider the conceptual aspects of selecting a measurement method. The staff paper recommended this would result in all BCUCC using the acquisition method, but the IASB has not yet made decisions on this. Practical considerations may then identify instances where it would be more appropriate for certain BCUCC to use a book-value method.

21At the time of writing, we do not know what specific questions will be asked at the December ASAF meeting. The current agenda refers to seeking ASAF members' advice on how to respond to feedback on selecting the measurement method(s) to apply. It is possible that questions will focus on proposals such as the non-controlling shareholder and related party exemptions. Broadly, under these proposals:

  1. a book value method would be permitted if the receiving entity's shares were privately held and none of its non-controlling shareholders objected;
  2. a book value method would be required if all the receiving entity's non-controlling shareholders were related parties to the entity.

On balance the UKEB supported these proposals subject to certain further recommendations. Further detail is provided in Appendix B. The summary of feedback in the IASB June board papers noted that some stakeholders had requested that an exemption be provided to allow use of the book value method if non-controlling shareholders were insignificant, or if the objections received to use of the book value method were from insignificant non-controlling shareholders. The term insignificant was not defined.

Questions for the Board

2Does the Board wish to highlight to the December ASAF meeting any particular points on the practical exemptions from the acquisition method?

3Does the Board have any other comments or questions on BCUCC?

Equity Method

UKEB Project Status: Active Monitoring
IASB Next Milestone: Decide Project Direction

Project direction

22At its October meeting, the IASB reviewed the progress of the Equity Method research project.

23The objective of the project is:

To assess whether application problems with the equity method, as set out in IAS 28 Investments in Associates and Joint Ventures, can be addressed in consolidated and individual financial statements by identifying and explaining the principles of IAS 28. [^4]

24Whilst most IASB members including the Chair agreed to continue the project with its current objective and approach, a few IASB members expressed some concerns.

25Those supporting the objective and approach of the project mentioned:

  1. answering the application questions that are being considered would support the consistent application of IAS 28; and
  2. divergent accounting practices in the application of the equity method do not provide users with comparable information.

26Other IASB members expressed the following concerns:

  1. One IASB member who did not support the continuation of the project explained that users focus on the valuation of equity accounted investments rather than on the information from the equity method. He also mentioned that identifying missing principles could lead to knock-on effects. Overall, whilst there are merits in addressing the application questions in terms of reducing cost for preparers, this is at the expense of other projects that the IASB could undertake.
  2. Developing solutions to the application questions has taken longer than anticipated.
  3. In developing solutions, the staff has more often had to use the process of identifying the missing principles. This approach contradicts the objective of the project i.e. it is not a narrow scope project as intended and is defining principles that are not currently in IAS 28.
  4. The IASB should instead undertake a fundamental review of the equity method.

Question to be raised at December 2022 ASAF meeting

27At its September meeting the IASB discussed four possible alternatives to answer the application question:

How should an investor recognise gains and losses that arise from the sale of a subsidiary to its associate applying the requirements of IFRS 10 and IAS 28?

28The application question will be discussed at the ASAF meeting on 8 - 9 December 2022. Board views on the alternatives would help inform the UKEB's feedback.

29The application question arises because there is an acknowledged inconsistency between the requirements of IFRS 10 Consolidated Financial Statements and IAS 28 for the sale of a subsidiary to an investor's associate:

  1. paragraphs 25 and B97–B99 of IFRS 10 require an investor to recognise in full the gain or loss on the loss of control of a subsidiary, remeasuring any retained interest at fair value; whereas
  2. paragraphs 28 and 30 of IAS 28 require an investor to restrict the gain or loss recognised to the extent of the unrelated investors' interests in an associate, that is an investor eliminates the gain on its related interest.

30IFRS Accounting Standards do not identify whether the equity method is a one-line consolidation method or a measurement method. If the equity method is applied as a one-line consolidation method, it follows that gains and losses on upstream and downstream transactions are eliminated. Whereas if the equity method is applied as a measurement method, it is more challenging to identify why gains and losses are eliminated.

31As the objective of elimination entries when applying the equity method is unclear and the associate is not part of the group, there is no clear basis to require the elimination of gains or losses for the investor's related interest.

32As a result of the inconsistency in IFRS Accounting Standards, most audit firm accounting manuals state that the entity has an accounting policy choice of applying consistently either IFRS 10 or IAS 28 (although IFRS Accounting Standards do not present it as an accounting policy choice). Not all audit firm accounting manuals make a distinction based on whether the subsidiary constitutes a business or not (see alternative 4 in the table below).

33The following table below summarises the four alternatives discussed by the IASB[^5]:

Alternative Overview of the alternative Rationale
Alternative 1 Full gain would be recognised on all contributions/sales of assets or businesses, regardless of whether they are housed or not in a subsidiary. No elimination entries required. The role of the elimination entries in IAS 28 is questionable because this elimination is a consolidation procedure.
Alternative 2 Partial gain would be recognised on all contributions/sales of assets or businesses, regardless of whether they are housed or not in a subsidiary. Elimination entries required. The requirements of both IFRS 10 and IAS 28 could be applied using an 'overlay' approach[^6]. Reflects the relationship between the investor and its associate without compromising the rationale underlying IFRS 10 (loss of control of the subsidiary).
Alternative 3 Is a mixture of Alternative 1 and Alternative 2. Full gain would be recognised on transactions out of the scope of IFRS 15 Revenue from Contracts with Customers. Partial gain would be recognised on transactions in the scope of IFRS 15. No elimination entries' requirements apply for transactions out of scope of IFRS 15. Assumes users disregard gains or losses (or value them differently) on transactions that are not in the scope of IFRS 15 (i.e. not an output of an entity's ordinary activities) because those transactions are often non-recurring. Therefore, the gain or loss recognised would not be restricted in this case.
Alternative 4 Full gain would be recognised when a transaction involves a business. Partial gain would be recognised when a transaction involves an asset. No elimination entries' requirements apply when a transaction involves a business. IFRS 10's requirements arose from the Business Combinations project, i.e. apply to businesses. Group of assets that do not constitute a business were not part of that project, so there is no reason to change the accounting for such contributions.

Next steps

34The IASB staff are seeking input from members of the Global Preparers Forum (GPF) in November and ASAF in December on this application question and plan to bring a decision-making paper to the IASB in Q1 of 2023.

35The UKEB Secretariat will continue monitoring the IASB discussions.

Questions for the Board

4Do Board members have any comments on the ASAF question “how should an investor recognise gains and losses that arise from the sale of a subsidiary to its associate applying the requirements of IFRS 10 and IAS 28”?

5Do Board members have any other questions or comments on the Equity Method update?

Post-implementation Review of IFRS 15 Revenue from Contracts with Customers

UKEB Project Status: Active Monitoring
IASB Next Milestone: Request for Information H1 2023

36At its meeting on 3 November 2022, UKEB AFIAG members discussed the IASB's forthcoming Post-implementation Review of IFRS 15 Revenue from Contracts with Customers [^7] (the PIR).

37The IASB expects to publish its Request for Information for this project in H1 2023. In advance of this, the IASB is seeking advice from the December 2022 ASAF meeting on matters to be considered in the PIR.

38AFIAG members were asked if they were aware of any 'fatal flaws' in IFRS 15, and if so, what those ‘fatal flaws' were. The general consensus was that there were no 'fatal flaws' in IFRS 15. AFIAG members noted that the questions they received on the application of IFRS 15 related mainly to the following areas[^8]:

  1. principal / agent considerations, particularly in the gaming industry;
  2. the application of the concept of control to purchase transactions;
  3. the application of net and gross revenue recognition, due to a degree of divergence between US GAAP and IFRS 15 (although this divergence is generally accepted and understood); and
  4. the application of definitions of contract assets, receivables, contract liabilities and financial liabilities, particularly in relation to renewals accounting and modification of licences.

39AFIAG members were asked for their views on the implementation costs and ongoing audit costs for IFRS 15. They noted that there had been significant one-off costs on implementation but that these costs had now stabilised.

40AFIAG members also noted that IFRS 15 was a significant improvement on IAS 18 and that research[^9] had found that, in some cases, IFRS 15 had led to greater collaboration between finance and business functions.

Questions for the Board

6Do Board members have any advice on “matters to be considered in the Post-implementation Review of IFRS 15”?

7Do Board members have any other questions or comments on the Post-implementation Review of IFRS 15 Revenue from Contracts with Customers update?

Primary Financial Statements

UKEB Project Status: Active Monitoring UKEB project page
IASB Next Milestone: IFRS Accounting Standard UKEB Secretariat Comment Letter (Published September 2020)

41The IASB is undertaking targeted outreach on its Primary Financial Statements project during Q4 2022 [^10]. The targeted outreach is expected to be discussed at the December 2022 ASAF meeting. The purpose of the targeted outreach is to obtain stakeholder views on those tentative decisions made during the IASB's redeliberations that differ from the proposals in the Exposure Draft General Presentation and Disclosures (the ED).

42As part of the IASB's targeted outreach, an IASB project team presented at the following UKEB Advisory Group meetings:

  1. Investor Advisory Group (IAG) on 4 October 2022;
  2. Preparer Advisory Group (PAG) on 31 October 2022; and
  3. Accounting Firms and Institutes Advisory Group (AFIAG) on 3 November 2022.

43The following paragraphs summarise the tentative decisions on which the IASB project team presented and the feedback from the UKEB Advisory Groups.

Categories and subtotals

Tentative decision to require share of profit of equity accounted associates and joint ventures to be presented in the investing category

44The IASB has tentatively decided to require the share of profit of equity accounted associates and joint ventures to be presented in the investing category. This tentative decision is intended to improve comparability.

45Advisory group members were generally supportive of this tentative decision. However, one PAG member expressed concern because, in their view, share of profit of equity accounted associates and joint ventures should be categorised in the operating category when the investment in the associate or joint venture is a main business activity. We note that this concern is partially addressed by the IASB's decision to allow a new specified subtotal: 'Operating profit after share of profit of equity accounted investments.'

Tentative decision on classification of items in the financing category

46The IASB has tentatively decided to specify that the financing category will include:

  1. all income and expenses from liabilities that involve only the raising of finance [^11]; and
  2. interest expense and the effects of changes in interest rates from other liabilities.

47The IASB has also tentatively decided that:

  1. interest on cash and cash equivalents will be included in the investing category, even when there is a net expense.
  2. net interest on pensions will be included in the financing category, even when there is a net gain.

48The tentative decisions are intended to improve comparability by specifying what types of expense should be allocated to each category. They are also intended to improve understandability by requiring finance expense to be presented in the financing category, whilst interest income is required to be presented in the investing category (apart from the exceptions noted in the previous paragraph).

49Some IAG members noted that users are typically interested in net finance expense and questioned the rationale of the tentative decision to require presentation of gross figures in separate categories. Similarly, some members of the PAG noted that this tentative decision would prohibit presentation of net interest expense in the statement of profit or loss. In their view this prohibition would not reflect the substance of some treasury strategies, where cash and debt are linked. Previous UKEB Secretariat liaison with the IASB staff on this point has highlighted that disclosure of net finance expense in the notes is not prohibited.

50Some AFIAG members noted that some types of transaction which were financing in nature, such as supplier finance arrangements or commodity transactions, may not be captured in the financing category under the IASB's working definition of a financing transaction, because that definition is based on receipt and repayment of cash or equity instruments by an entity (see footnote [^11]). The IASB project team noted this point for further consideration.

51One AFIAG member asked whether rising interest rates and consequent increases in finance expense were likely to have changed stakeholder views on the proposals relating to finance expense in the two years since the consultation on the ED. The IASB project team acknowledged the possibility that stakeholder views may have changed and noted that the current targeted outreach provided the opportunity for stakeholders to voice any changes in their views.

Tentative decision to explore removing the accounting policy choice for income and expenses from cash and cash equivalents for entities that provide financing to customers as a main business activity

52The ED proposed an accounting policy choice for entities that provide financing to customers as a main business activity. The accounting policy choice was to allow such entities to include in the operating category:

  1. all finance income and expenses; or,
  2. only those items of finance income and expense which relate to the provision of financing to customers.

53The ED proposed that income and expenses from cash and cash equivalents were included in the financing category, so the proposed accounting policy choice included income and expenses from cash and cash equivalents within its scope.

54The IASB has tentatively decided to:

  1. retain the accounting policy choice for finance income and expenses and to confirm that the accounting policy choice does not include interest related to other liabilities (e.g. provisions) within its scope; and,
  2. explore removing the accounting policy choice for income and expenses from cash and cash equivalents, which it has tentatively decided to require to be included in the investing category.

55The rationale for exploring the removal of the accounting policy choice for income and expenses from cash and cash equivalents is that many entities that provide financing to customers also invest as a main business activity (e.g., banks). Those entities would therefore be required to include income and expenses from cash and cash equivalents in the operating category, because investing in cash and cash equivalents is a main business activity. It would not, therefore, be appropriate to retain an accounting policy choice.

56Some AFIAG members noted that not all entities that provide financing to customers invest as a main business activity (e.g., pay day loan entities), and that those entities would therefore not be required to classify income and expenses from cash and cash equivalents in the operating category. Such entities would therefore lose the option to present income and expenses from cash and cash equivalents in the operating category and would be required to present them in the investing category. This may not be a faithful representation because, whilst those entities may not invest as a main business activity, income and expenses from cash and cash equivalents do relate to their main business activity of providing finance to customers. The IASB project team noted this point for further consideration.

Disaggregation

Tentative decision to explore three potential approaches for disclosure of operating expenses by nature

57The ED proposed an analysis of all operating expenses by nature in the notes to the financial statements when presented by function in the statement of profit or loss. The IASB has tentatively decided to explore three potential approaches for the disclosure of operating expenses by nature where an entity presents operating expenses by function in the statement of profit or loss. The three potential approaches are:

  1. To require disclosure of an analysis by functional category of depreciation, amortisation and employee costs.
  2. In addition to (a), to require disclosure of an analysis by functional category of impairments and inventory write-downs.
  3. In addition to (b), to require disclosure of an analysis by functional category of any other expense separately disclosed in the notes to the financial statements.

58The tentative decision is intended to provide the opportunity to explore whether any of the three options would provide a better balance between cost and benefit than the proposal in the ED.

59The UKEB Secretariat comment letter highlighted the cost of the proposal in the ED for UK preparers and recommended further consideration of the costs and benefits of the proposal.

60The IAG voiced muted support for the tentative decision. It was noted that analysis of other expenses (for example, advertising) could be more useful, and that the usefulness of the information would vary by sector and entity.

61The PAG noted that the tentative decisions are significantly different from those in the ED and recommended full field-testing and re-exposure before reaching a final decision. One PAG member noted that option c) could have the unintended consequence of reducing disclosure of other expenses in the notes to the financial statements.

62The AFIAG was generally supportive of the IASB's tentative decision.

Management Performance Measures (MPMs)

Tentative decision to change the definition of an MPM

63The IASB has tentatively decided to change the definition of an MPM [^12] to “a subtotal of income and expenses not specified by IFRS Accounting Standards that is used in public communications outside financial statements."

64The IASB has also tentatively decided to include a rebuttable presumption that a subtotal used in public communications represents management's view of an aspect of an entity's financial performance.

65The tentative decision is intended to prevent subtotals of income and expense used in public communications outside financial statements from falling outside of the definition of an MPM on the basis of an argument that they do not represent management's view of an entity's financial performance.

66Advisory group members were generally supportive of the tentative decision.

Tentative decision to allow a simplified approach to calculating the tax impact of reconciling items between MPMs and the closest IFRS subtotal

67The IASB has tentatively decided to allow a simplified calculation of the tax impact of reconciling items between MPMs and the nearest IFRS subtotal. The tentative decision is intended to balance cost and benefit.

68IAG members generally viewed the tentative decision as a pragmatic solution. One PAG member noted that they currently voluntarily disclose a similar reconciliation in response to investor requests.

69IAG and AFIAG members noted that it would be important to clarify whether the simplified approach was an accounting policy choice or whether it could be used selectively. The IASB project team confirmed that this point will be included in future IASB discussions.

Questions for the Board

8At this time we do not know what (if any) questions on the IASB's targeted outreach on Primary Financial Statements will be asked at the December 2022 ASAF meeting. Are there any particular points on the targeted outreach that the Board wishes to highlight to the forthcoming ASAF meeting?

9Does the Board have any other questions on Primary Financial Statements?

Provisions—Targeted Improvements

UKEB Project Status: Active Monitoring
IASB Next Milestone: Decide Project Direction

70At present, IAS 37 Provisions, Contingent Liabilities and Contingent Assets does not specify whether the rate a company uses to discount a provision for the time value of money should reflect the entity's own credit risk. As a result, the IASB has identified that there is diversity in practice and that the effects can be significant on the amounts reported by entities with large long-term provisions – for example, provisions for asset decommissioning or environmental rehabilitation costs recognised by power generation, oil and gas, mining and telecoms companies.

71The IASB is considering whether to develop proposals to specify in IAS 37 whether or not the discount rate should reflect the entity's own credit risk. To help develop the IASB proposals, they have asked ASAF members for input on:

  1. whether discount rates for provisions should reflect the entity's own credit risk, and if so, in what circumstances; and
  2. whether financial statements currently disclose enough information about the rates companies use to discount provisions, and if not, what information is lacking and how should IAS 37 be amended.

72The following table summarises the key measurement inputs to discount rates in the main IFRS Accounting Standards that use present value measurement. For more detail see the IASB's project summary from its discount rates project [^13]:

Category IAS 37[^14] IFRS 13[^15] IAS 36[^16] IAS 19[^17]
Measurement basis Amount to settle or transfer Fair value Value in use Present value of estimated ultimate cost
Measurement Includes:
Time value of money Yes Yes Yes Yes
Risk premium[^18] Implicit (mixed practice) Yes Yes No
Liquidity Unclear Yes Yes Implicit
Own Credit Risk Unclear (mixed practice) Yes N/A Some (implicit)

73In addition, IFRS 17 requires an entity to disregard its own credit risk when measuring fulfilment cashflows. This is on the basis that including the effect of the entity's own performance risk in the measurement of an insurance liability would not provide useful information [^19].

74IAS 37 paragraph 84(e) currently requires entities to disclose, for each class of provision, 'the increase during the period in the discounted amount arising from the passage of time and the effect of any change in the discount rate'. However, unlike other IFRS Accounting Standards [^20], IAS 37 has no specific requirement for entities to disclose either the discount rates used in measurement provisions or the basis on which those rates have been determined. This might mean that entities disclose this information only if management judges disclosure is necessary to meet the overarching requirements of IAS 1.

Topics for Noting

Rate-regulated Activities

UKEB Project Status: Active Monitoring UKEB project page
IASB next milestone: IFRS Accounting Standard UKEB Final Comment Letter (August 2021)

75The IASB is continuing its redeliberations following feedback on its Exposure Draft Regulatory Assets and Regulatory Liabilities (RRA ED) [^21].

76The table below summarises the IASB's proposals contained in the ED, the recommendations made by the UKEB in its comment letter and the IASB's tentative decisions made at its October 2022 meeting.

ED proposal UKEB comment letter IASB tentative decision
a. The ED defines allowable expense as an expense, as defined in IFRS Standards, that a regulatory agreement entitles an entity to recover by adding an amount in determining a regulated rate. b. In applying this [draft] Standard, an entity shall treat that allowable expense as relating to the supply of goods or services in the period when the entity recognises the expense applying IFRS Standards. Thus, the amount that recovers that allowable expense forms part of total allowed compensation for goods or services supplied in that period. c. These illustrative examples show that regulatory assets or regulatory liabilities arise when part or all of the total allowed compensation for the goods or services supplied in a period is included in regulated rates charged in a different period. a. We agree with the proposed definitions of regulatory assets and regulatory liabilities and consider that they are consistent with the Conceptual Framework for Financial Reporting, as set out in paragraphs BC37-BC47 of the Basis for Conclusions. b. We also agree that an entity should account for regulatory assets and regulatory liabilities separately from the rest of the regulatory agreement as this is a supplementary model, applied after an entity has applied other IFRS. The IASB tentatively decided that the Standard: a. retain the proposed definition of allowable expense; b. clarify that a regulatory agreement may determine the amount that compensates an entity for an allowable expense using a basis different from the basis the entity uses to measure the expense in accordance with IFRS Accounting Standards; and c. clarify the treatment of allowable expenses based on benchmarks and include examples to help entities identify differences in timing in those cases.
Regulatory assets and regulatory liabilities arising from difference between the regulatory recovery period and the assets' useful lives
a. The ED defines allowable expenses as an expense, as defined in IFRS Standards, that a regulatory agreement entitles an entity to recover by adding an amount in determining a regulated rate. b. In applying this [draft] Standard, an entity shall treat that allowable expense as relating to the supply of goods or services in the period when the entity recognises the expense applying IFRS Standards. Thus, the amount that recovers that allowable expense forms part of total allowed compensation for goods or services supplied in that period. c. If a regulatory agreement allows an entity to recover the cost of an asset through the regulated rates charged to customers, the depreciation expense recognised in a period, by applying IAS 16, is an allowable expense and the amount that recovers that depreciation expense forms part of the total allowed compensation for goods or services supplied in the same period. That is the case even if, under the terms of the regulatory agreement, the recovery of the depreciation expense occurs in a different period—for example, if the regulatory agreement uses a longer or shorter period of recovery than the asset's useful life. a. This guidance does not address the situation whereby the recovery period for an asset is longer than the period of the license agreement or pricing period under the regulatory agreement, for example, where the asset recovery period is 40 years, but the regulatory license is a 25-year rolling period and the pricing period is five years. b. We would encourage the IASB to include illustrative examples that reflect these situations to ensure consistent application of the proposed requirements. These examples would be more likely to reflect situations in practice due to the long-lived nature of some of the assets. The IASB tentatively decided that the Standard: a. provide guidance to help an entity determine whether its regulatory capital base and its property, plant and equipment have a direct relationship; b. retain the proposals for an entity to account for regulatory assets or regulatory liabilities arising from differences between the regulatory recovery period and the assets' useful lives if the entity has concluded that its regulatory capital base and its property, plant and equipment have a direct relationship; and c. require an entity that has concluded that its regulatory capital base and its property, plant and equipment have no direct relationship to provide disclosures to enable users of financial statements to understand the reasons for its conclusions.

77Overall these tentative decisions appear broadly consistent with the recommendations in the UKEB comment letter submitted to the IASB in July 2021: (i) the proposed definition of allowable expense will be retained; (ii) guidance will be provided to help an entity determine whether its regulatory capital base and its property, plant and equipment have a direct relationship; and (iii) illustrative examples will be included to provide better guidance for entities applying the standard.

78The IASB also discussed advice from its Consultative Group for Rate Regulation on how the IASB could respond to feedback on the RRA ED.

79Next steps—The IASB will continue its redeliberation on the feedback received on the ED at future meetings.

80The UKEB Secretariat will continue to monitor the IASB discussions.

Post-implementation Review of IFRS 9 – Classification and Measurement

UKEB Project Status: Active Monitoring UKEB project page
IASB Next Milestone: Feedback Statement December 2022 UKEB Final Comment Letter (Published January 2022)

81In October, the IASB discussed feedback on three aspects of its Post-implementation Review of IFRS 9 Financial Instruments – Classification and Measurement.

  1. Equity instruments and other comprehensive income – Subsequent to the October meeting the IASB announced its decision to consider this topic as part of its proposed narrow-scope amendments to IFRS 9. A high-level summary of the IASB's tentative decisions on this topic is presented in Amendments to the Classification and Measurement of Financial Instruments above.
  2. Exploring possible narrow-scope amendments for electronic cash transfers - Subsequent to the October meeting the IASB announced its decision to consider this topic as part of its proposed narrow-scope amendments to IFRS 9. A high-level summary of the IASB's tentative decisions on this topic is presented in Amendments to the Classification and Measurement of Financial Instruments above.
  3. Business model assessment - The IASB decided to take no further action on feedback received during the PIR related to the business model requirements. This is consistent with the UKEB comment letter which noted the requirements generally work as intended and are an improvement on the previous requirements of IAS 39 Financial Instruments: Recognition and Measurement.

82Next steps: The IASB will continue its discussions on the Post-implementation Review at a future meeting. A feedback statement is expected to be published by the IASB in December 2022. The UKEB Secretariat will continue to monitor the IASB discussions.

Goodwill and Impairment

UKEB Project Status: UKEB project page
IASB Next Milestone: Decide Project Direction November 2022 UKEB Report: Subsequent Measurement of Goodwill - A Hybrid Model (Published September 2022)

83At its October 2022 meeting, the IASB discussed a staff paper which set out the research undertaken by the IASB to date on goodwill and impairment. Ten of the sixty-five paragraphs in the paper summarised the UKEB goodwill research project.

84The IASB was asked to comment on the paper ahead of its expected vote in November on whether to further explore amortisation. The general view was that the paper was comprehensive.

85The IASB Chair asked Board Members for initial views on whether they would consider an accounting policy choice as a potential solution to the current debate on subsequent measurement of goodwill, given the intensity of views held on amortisation and impairment. He referenced FRS 10 as an example of a financial reporting regime which had allowed an accounting policy choice for subsequent measurement of goodwill (FRS 10 was effective in the UK from 1997 to 2005 and permitted either amortisation or impairment testing). The idea did not attract general support given its potential to reduce comparability between entities. However, the IASB staff agreed to include it as an option in the November IASB board paper.

86One IASB Member suggested that the IASB's vote on whether to further explore amortisation be deferred until the IASB's intangibles project was further progressed, to allow for a more holistic consideration of recognition and measurement across all types of intangible asset, including goodwill. This suggestion was not widely supported.

87A summary of the UKEB Technical Director's presentation of the UKEB research on subsequent measurement of goodwill was included in the IASB's published summary of the September 2022 ASAF meeting and EFRAG's published summary of the September 2022 IFASS meeting.

88The UKEB Technical Director has been invited to present the UKEB's goodwill research project at the British Accounting and Finance Association (FARSIG) January 2023 Symposium on Intangibles.

Disclosure Initiative: Targeted Standards-level Review of Disclosures

UKEB Project Status: Influencing Completed UKEB project page
IASB Next Milestone: Project Summary Q1 2023 UKEB Final Comment Letter (Published December 2021)

89At its October meeting the IASB board made final decisions on the Disclosure Initiative: Targeted Standards-level Review of Disclosures (the “Disclosure Pilot") project.

90Appendix C summarises the IASB proposals, feedback provided by the UKEB in its comment letter, and the final decisions made by the IASB. We note that much of the feedback provided by the UKEB has been incorporated in the final IASB position.

Subsidiaries without Public Accountability: Disclosures

UKEB Project Status: Active Monitoring UKEB project page
IASB Next Milestone: IFRS Accounting Standard UKEB Final Comment Letter (Published February 2022)

91At its October meeting, the IASB discussed the Exposure Draft's proposals [^22] on the following topics:

  1. Objective of the proposed IFRS Accounting Standard.
  2. Approach to developing the proposed disclosure requirements.
  3. Structure of the draft standard.

Objective of the draft Standard

92The Exposure Draft (ED) proposed:

The objective of the draft Standard is to permit eligible subsidiaries to apply the disclosure requirements in this [draft] Standard and the recognition, measurement and presentation requirements in IFRS Standards.

93The IASB tentatively decided to confirm the proposed objective of the proposed IFRS Accounting Standard Subsidiaries without Public Accountability: Disclosures (proposed standard).

94In our Final Comment Letter (FCL) we supported the IASB's efforts to develop an IFRS Accounting Standard that would permit eligible subsidiaries to apply IFRS Accounting Standards with reduced disclosure requirements and highlighted the benefits of the IASB's reduced disclosure regime [^23].

Approach to developing the proposed disclosure requirements

95The IASB tentatively decided to:

  1. Modify its approach to ensure that the language used in the disclosure requirements is the same as the language in full IFRS Accounting Standards.
  2. Explain in the Basis for Conclusions on the IFRS Accounting Standard:
    1. why the disclosure requirements in the IFRS for SMEs Accounting Standard are the appropriate starting point;
    2. how 'cost-benefit' is considered; and
    3. the reason for the exceptions made to the approach to developing the proposed disclosure requirements.

96In developing the disclosure requirements in the ED, the IASB started with the disclosure requirements in the IFRS for SMEs Standard—a ‘bottom-up approach'. In addition, the IASB compared the recognition and measurement requirements in IFRS Accounting Standards and in the IFRS for SMEs Accounting Standard to identify differences. Where differences are identified, the ED tailors the disclosure requirements in IFRS Accounting Standards by applying the principles in paragraph BC157 of the IFRS for SMEs Accounting Standard. These principles identify the information that users find important.

97In our FCL we suggested that the IASB reconsidered its ‘bottom-up approach' and considered aligning it more closely with the ‘top-down approach' that the UK experience has demonstrated as being cost effective for preparers and which provides decision-useful information for users.

98The IASB's tentative decision to align the language used with IFRS Accounting Standards partly addresses some of our concerns with the 'bottom-up approach'—consistency of language is deemed particularly helpful by stakeholders when transitioning to the draft standard, and better reflects the needs of the users of these accounts who are unlikely to be familiar with the disclosure requirements of the IFRS for SMEs Accounting Standard.

99We also note the IASB staff recommendation to explain in the Basis for Conclusions why starting with the disclosure requirements in the IFRS for SMEs Accounting Standard would give the same outcome as starting with the disclosure requirements in IFRS Accounting Standards.

Structure of the draft Standard

100The ED proposed the following structure for the proposed IFRS Accounting Standard:

  1. a main body that includes the proposed disclosure requirements, organised under a subheading for each IFRS Accounting Standard;
  2. Appendix A that lists the disclosure requirements in other IFRS Accounting Standards that would be replaced by the standard (i.e. no longer required); and
  3. to assist application, disclosure requirements in other IFRS Accounting Standards that remain applicable are generally indicated in a footnote to the subheading of the IFRS Accounting Standard to which they relate.

101The IASB tentatively decided to:

  1. omit Appendix A proposed in the draft Standard; and
  2. include cross-references to disclosure requirements that remain applicable in other IFRS Accounting Standards under each IFRS Accounting Standard subheading, rather than in footnotes.

102We did not express strong views on Appendix A in our FCL. Whilst at the September ASAF meeting we supported retaining Appendix A, we note that removing Appendix A would (i) address concerns that listing disclosure requirements that do not apply could confuse preparers and (ii) avoid ambiguity with paragraph 16 of the proposed standard which explains that there are circumstances when an entity considers whether to provide additional disclosures to those required.

103On the other hand, in our FCL we expressed concerns about the footnotes as it could be confusing when determining the disclosure requirements required under the proposed standard. We considered that a better solution would be to reproduce the disclosure requirements within the relevant disclosure sections in the main body of the proposed standard: this would improve understandability and accessibility and reduce the risk that these requirements are overlooked. However, we note IASB staff arguments for not reproducing the full text of those disclosure requirements that remain applicable in the main body of the Standard: it would complicate application of the Standard and potentially lead to the inclusion of some recognition, measurement or presentation requirements in the Standard when these requirements cannot be separated from disclosure requirements. For example, paragraph 22 of IAS 20 Accounting for Government Grants and Disclosure of Government Assistance states:

'A government grant may become receivable by an entity as compensation for expenses or losses incurred in a previous period. Such a grant is recognised in profit or loss of the period in which it becomes receivable, with disclosure to ensure that its effect is clearly understood

Next steps

104The IASB discussed and agreed on the staff recommended process to address the comments on proposed disclosure requirements in the ED. The process includes the following steps:

  1. Step 1—stratify the comments on the proposed disclosure requirements based on how they were developed;
  2. Step 2—assess comments against a set of factors: consider principles on users' information needs of non-publicly accountable entities' financial statements, cost-benefit considerations, distribution of the comment, overall usefulness of information and previous IASB discussions and decisions on the topic; and
  3. Step 3—recommend changes to the proposed disclosure requirements in the draft Standard.

105The IASB staff plan to present the following papers in November and December 2022 to continue the IASB's redeliberation of the ED proposals:

Topics IASB Board Meeting
Remaining aspects on the scope of the proposed standard
- whether to clarify when financial statements are 'available for public use' November 2022
- whether to extend the eligibility of entities that can apply the draft Standard to those within groups using local GAAPs that might be deemed equivalent to IFRS Accounting Standards.
Applying the draft Standard December 2022
- statement of compliance with IFRS Accounting Standards
Proposed disclosure requirements
- disclosure requirements in IFRS 8 Operating Segments, IFRS 17 Insurance Contracts and IAS 33 Earnings per Share which remain applicable and excluded from the ED - comments received on IAS 34 Interim Financial Reporting

106The UKEB Secretariat will continue monitoring the IASB discussions.

Question for the Board

11Do Board members have any questions or comments on the topics for noting?

IFRS Interpretations Committee

107The UKEB's [draft] Due Process Handbook notes that the UKEB expects to respond to a limited number of tentative agenda decisions published by the IFRS Interpretations Committee (Interpretations Committee). Some factors to consider when deciding whether to respond may be:

  1. the degree of impact of the tentative agenda decision on UK companies (for example, in cases where the tentative agenda decision is expected to affect a significant number of UK companies);
  2. disagreement with the Interpretation Committee's analysis; or
  3. usefulness of the explanations and clarifications included in the tentative agenda decision.

108The Secretariat will provide an update on the Interpretations Committee's November meeting at the next Board Meeting.

109The following Agenda Decisions were ratified at the IASB's October meeting:

  1. Multi-currency Groups of Insurance Contracts (IFRS 17 and IAS 21).
  2. Special Purpose Acquisition Companies (SPAC): Accounting for Warrants at Acquisition.
  3. Lessor Forgiveness of Lease Payments (IFRS 9 and IFRS 16).

Matters received but not yet presented to the Interpretations Committee

Lease payments linked to cadastral value Consolidation of a non-hyperinflationary subsidiary by a hyperinflationary parent
Topic Lease payments linked to cadastral value Consolidation of a non-hyperinflationary subsidiary by a hyperinflationary parent
Standard IFRS 16 IAS 29 / IAS 21
Tabled March April
Question* Lease payments in land leases (e.g. from municipal, regional or federal authorities) are often determined based on the valuations of the land plots recorded in the state register (cadastre). How should the lessee treat lease payments linked to cadastral value when measuring the lease liability? How a parent with a functional and presentation currency that is hyperinflationary consolidates a subsidiary with a functional currency that is not hyperinflationary
UKEB Sec view We recommend no action at this time. We are not aware that this is a significant issue in the UK. We recommend no action at this time. We are not aware that this is a significant issue in the UK.

*This provides a summary only, please review the IFRS Website for the full details.

Matters under consideration by the Interpretations Committee

TENTATIVE AGENDA DECISIONS OPEN FOR COMMENT
Topic None to report
Standard
Comments due
Question*
Tentative conclusion*
UKEB Sec view

*This provides a summary only, please review the IFRS Website for the full details.

TENTATIVE AGENDA DECISIONS CLOSED FOR COMMENT
Topic None to report
Standard
Next Step
Question*
Tentative conclusion*
Observation

*This provides a summary only, please review the IFRS Website for the full details.

Agenda decisions ratified by IASB

| | Multi-currency Groups of Insurance Contracts | Special purpose acquisition companies (SPAC): accounting for warrants at acquisition ``` [TOC]

Executive Summary

Project Type Monitoring
Project Scope Various

Purpose of the paper

This paper provides the Board with an update on projects the Secretariat is currently monitoring, including the work of the IFRS Interpretations Committee. As agreed with the Board, the Secretariat proactively monitors a range of projects being undertaken by the IASB and IFRS Interpretations Committee. This is undertaken to inform the Board about the progress and decisions being made by the IASB on active projects. Discussion by the Board may also help inform interactions with international standard setter meetings, including the IASB's Accounting Standards Advisory Forum.

Summary of the Issue

Updates on all the IASB projects the Secretariat is currently monitoring are provided in this paper. Comments or questions are welcomed on any topic, although the paper presents separately those topics the Secretariat suggests are prioritised for discussion and those presented as simply for noting. Topics identified for discussion are listed below (those expected to be discussed at the December 2022 ASAF meeting are marked with *):

  • Amendments to the Classification and Measurement of Financial Instruments
  • Business Combinations under Common Control*
  • Equity Method*
  • Post-implementation Review of IFRS 15 Revenue from Contracts with Customers*
  • Primary Financial Statements*
  • Provisions—Targeted Improvements*

Decisions for the Board

The Board is not asked to make any decisions.

Board members are asked for any questions or comments on the updates provided in this paper. In addition, the Board is asked specific questions on the following topics:

  • Business Combinations under Common Control
  • Equity Method
  • Does the Board wish to highlight to the December ASAF meeting any particular points on the practical exemptions from the acquisition method?
  • Post-implementation Review of IFRS 15 Revenue from Contracts with Customers
  • Do Board members have any advice on matters to be considered in the Post-implementation Review of IFRS 15?
  • Primary Financial Statements
  • At this time we do not know what (if any) questions on the IASB's targeted outreach on Primary Financial Statements will be asked at the December 2022 ASAF meeting. Are there any particular points on the targeted outreach that the Board wishes to highlight to the forthcoming ASAF meeting?
  • Provisions—Targeted Improvements
  • Do Board members have any comments on (i) whether discount rates for provisions should reflect the entity's own credit risk, and if so, in what circumstances; or (ii) whether financial statements currently disclose enough information about the rates companies use to discount provisions?

Recommendation

N/A

Appendices

  • Appendix A List of IASB projects
  • Appendix B Business Combinations under Common Control - Summary of Discussions
  • Appendix C Disclosure Initiative: Targeted Standards-level Review of Disclosures - Summary of Discussions

Topics for Discussion

Amendments to the Classification and Measurement of Financial Instruments

UKEB Project Status: Active Monitoring UKEB project page
IASB Next Milestone: Exposure Draft H1 2023

1On 24 October 2022, the IASB announced its decision to expand the scope of its proposed narrow-scope amendments to IFRS 9 Financial Instruments. The aim of the proposed amendments is to respond to stakeholders' feedback on the IASB's Request for Information Post-implementation Review of IFRS 9 – Classification and Measurement.

2The initial project, Contractual Cash Flow Characteristics of Financial Assets (Amendments to IFRS 9) [^1], was focused on clarifying particular aspects of IFRS 9 relating to the assessment of an asset's contractual cash flow characteristics (that is, the 'solely payments of principal and interest' or SPPI requirements).

3The revised project, now referred to as Amendments to the Classification and Measurement of Financial Instruments, will cover three areas:

  1. Contractual cash flow characteristics – clarification of the requirements in IFRS 9 Financial Instruments to assess whether a financial asset's contractual cash flows are solely payments of principal and interest (SPPI) and new requirements to disclose information about the variability in contractual cash flows for financial assets and financial liabilities not measured at fair value through profit or loss.
  2. Electronic cash transfers – proposed amendments to the derecognition requirements in IFRS 9 to permit an accounting policy choice to allow an entity to derecognise a financial liability before it delivers cash on the settlement date when specified criteria are met.
  3. Equity instruments and other comprehensive income – proposed amendments to IFRS 7 Financial Instruments: Disclosures would require disclosure of the aggregated fair value of equity investments for which the OCI presentation option is applied at the end of the reporting period; and changes in fair value recognised in other comprehensive income during the period.

4Expected timeline: An Exposure Draft for the revised project is expected in H1 2023 (the ED for the initial project was expected in Q1 2023).

5A high-level summary of the IASB's recent tentative decisions on the topics covered in the revised scope for this project - is presented in the following paragraphs.

Contractual Cash Flow Characteristics

6In October, the IASB continued its deliberations on the clarifying amendments to IFRS 9 for assessing whether contractual cash flows of financial assets are SPPI. The focus was to consider whether any additional disclosure requirements needed to be added to IFRS 7, as well as the transition requirements and a potential effective date of the proposed amendments.

7The IASB tentatively decided to propose adding a requirement to IFRS 7 for entities to disclose for each class of financial assets and financial liabilities not measured at fair value:

  1. a qualitative description of contractual terms that could change the timing or amount of contractual cash flows, including the nature of any contingent events;
  2. quantitative information about the range of changes to contractual cash flows that could result from these contractual terms; and
  3. the gross carrying amount of financial assets and amortised cost of financial liabilities subject to these contractual terms.

8The IASB also tentatively decided to propose that:

  1. An entity should apply the clarifying amendments to IFRS 9 retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, except that the entity would not be required to restate comparative information.
  2. If, on the initial application of the amendments, an entity changes the classification of a financial asset, the entity should disclose:
    1. the previous measurement category and the carrying amount determined immediately before applying these amendments; and
    2. the new measurement category and the carrying amount determined after applying these amendments.
  3. The effective date will be determined after exposure of the proposed amendments.
  4. Early application of the amendments is permitted.

Electronic cash transfers

9Next steps: The IASB will decide whether to begin the balloting process for the Exposure Draft[^2]. The UKEB Secretariat will continue to monitor IASB discussions.

10The IASB considered possible standard-setting options for matters raised by the IFRS Interpretations Committee Tentative Agenda Decision- Cash Received via Electronic Transfer as Settlement for a Financial Asset (IFRS 9). The IASB staff paper presented in October recommended a narrow scope amendment such that when payment is made using an electronic transfer system, the timing of derecognition of the associated financial liability could be treated as an accounting policy choice if all the following criteria are met:

  1. the entity is irrevocably committed to the cash payment and therefore has effectively lost control of the cash;
  2. the initiation and completion of the cash transfer takes place within a short timeframe as established by market convention for such electronic payments; and
  3. completion of the cash transfer is subject only to an administrative process and not settlement risk of the entity.

11The above principle-based approach acknowledges that in some electronic payment systems, once an entity has initiated a payment, the cash is no longer available for use by the entity and the entity has effectively lost control of the cash. Questions to consider in determining whether the entity has lost control of the cash include:

  1. whether the entity could cancel or withdraw the electronic cash transfer instruction before it is complete;
  2. whether the completion of the payment is subject to settlement risk of the entity (i.e. the entities credit risk);
  3. whether the delay between initiation and completion of the payment is purely an administrative process based on the market convention for the particular payment system; and
  4. the timeframe for completion of the payment instruction in using the specific electronic cash system and what happens in the event of failure by the bank to complete the payment.

12The IASB tentatively decided to develop an accounting policy choice to allow an entity to derecognise a financial liability before it delivers cash on the settlement date when specified criteria were met. During the meeting, there were mixed views as to whether the suggested approach should be expanded to other payment systems (e.g. cheques) and/or to consider the derecognition of financial assets. While some IASB members were in favour of expanding the scope others felt strongly against it. The IASB staff was instructed to further consider the question of scope and report back at a future meeting.

13UKEB Accounting Firms and Institutes Advisory Group (AFIAG) – The above IASB tentative decision was discussed briefly by the UKEB AFIAG. Preliminary views were that the proposed accounting policy choice for derecognition of a financial liability seemed a sensible approach, although some felt the scope might be too narrow and should include other payment types such as cheques. In this respect, a question was raised about introducing the notion of control as part of the assessment, as that may make application to other payment types more challenging. There were also calls for further clarity on the assessment for financial assets (i.e. there seems to be confusion due to the IFRS IC Tentative Agenda Decision not being ratified), potentially by issuing application guidance as part of the same exposure draft and subject to the same effective date as that for the accounting policy choice for derecognition of financial liabilities.

14Next steps: The UKEB Secretariat will continue to monitor IASB discussions on this matter, particularly around scope. In addition, the Secretariat will continue to seek input on this topic from relevant UKEB Advisory Groups as well as from the UKEB Financial Instruments Working Group when established.

Equity instruments and other comprehensive income

15The IASB considered feedback received on the IFRS 9 requirements for equity instruments for which an entity has elected to present fair value changes in other comprehensive income (OCI). During UKEB outreach, stakeholder feedback suggested this was not a high priority issue in the UK. The UKEB comment letter, which focussed on high priority UK issues, did not recommend changes to these requirements.

16In October, the IASB decided to make no changes to the IFRS 9 requirements on this topic. However, the IASB tentatively decided to amend related disclosures in IFRS 7, such that disclosure will be required for:

  1. The aggregated fair value of equity instruments for which the OCI presentation option is applied at the end of the reporting period; and
  2. Changes in fair value recognised in OCI during the period.

17Next steps: the IASB staff was asked to explore whether an illustrative example, such as a reconciliation between the opening and closing OCI balance could be provided as part of the proposed amendments. The UKEB Secretariat will continue to monitor IASB discussions.

Question for the Board

1Do Board members have any questions or comments on the Amendments to the Classification and Measurement of Financial Instruments update?

Business Combinations under Common Control

UKEB Project Status: Influencing Completed UKEB project page
IASB Next Milestone: Decide Project Direction UKEB Final Comment Letter (Published September 2021)

18The IASB has been considering feedback received on the Business Combinations under Common Control (BCUCC) discussion paper (DP) [^3]. The June 2022 IASB meeting considered the question of selecting a measurement method to apply to BCUCC. The IASB noted there was significant variety in the feedback on this topic. The DP proposals for selecting a measurement method address both selection of a method and practical considerations. The June discussion primarily addressed the former, while the practical considerations are expected to be discussed at the next IASB and ASAF meetings. No decisions were made at the June meeting.

19Appendix B provides a summary of the proposals for selecting a measurement method including practical considerations, the feedback provided in the UKEB comment letter, other feedback received by the IASB, and the IASB staff recommendations to the board on this topic.

20The IASB discussion in June broadly supported the staff recommendation to first consider the conceptual aspects of selecting a measurement method. The staff paper recommended this would result in all BCUCC using the acquisition method, but the IASB has not yet made decisions on this. Practical considerations may then identify instances where it would be more appropriate for certain BCUCC to use a book-value method.

21At the time of writing, we do not know what specific questions will be asked at the December ASAF meeting. The current agenda refers to seeking ASAF members' advice on how to respond to feedback on selecting the measurement method(s) to apply. It is possible that questions will focus on proposals such as the non-controlling shareholder and related party exemptions. Broadly, under these proposals:

  1. a book value method would be permitted if the receiving entity's shares were privately held and none of its non-controlling shareholders objected;
  2. a book value method would be required if all the receiving entity's non-controlling shareholders were related parties to the entity.

On balance the UKEB supported these proposals subject to certain further recommendations. Further detail is provided in Appendix B. The summary of feedback in the IASB June board papers noted that some stakeholders had requested that an exemption be provided to allow use of the book value method if non-controlling shareholders were insignificant, or if the objections received to use of the book value method were from insignificant non-controlling shareholders. The term insignificant was not defined.

Questions for the Board

2Does the Board wish to highlight to the December ASAF meeting any particular points on the practical exemptions from the acquisition method?

3Does the Board have any other comments or questions on BCUCC?

Equity Method

UKEB Project Status: Active Monitoring
IASB Next Milestone: Decide Project Direction

Project direction

22At its October meeting, the IASB reviewed the progress of the Equity Method research project.

23The objective of the project is:

To assess whether application problems with the equity method, as set out in IAS 28 Investments in Associates and Joint Ventures, can be addressed in consolidated and individual financial statements by identifying and explaining the principles of IAS 28. [^4]

24Whilst most IASB members including the Chair agreed to continue the project with its current objective and approach, a few IASB members expressed some concerns.

25Those supporting the objective and approach of the project mentioned:

  1. answering the application questions that are being considered would support the consistent application of IAS 28; and
  2. divergent accounting practices in the application of the equity method do not provide users with comparable information.

26Other IASB members expressed the following concerns:

  1. One IASB member who did not support the continuation of the project explained that users focus on the valuation of equity accounted investments rather than on the information from the equity method. He also mentioned that identifying missing principles could lead to knock-on effects. Overall, whilst there are merits in addressing the application questions in terms of reducing cost for preparers, this is at the expense of other projects that the IASB could undertake.
  2. Developing solutions to the application questions has taken longer than anticipated.
  3. In developing solutions, the staff has more often had to use the process of identifying the missing principles. This approach contradicts the objective of the project i.e. it is not a narrow scope project as intended and is defining principles that are not currently in IAS 28.
  4. The IASB should instead undertake a fundamental review of the equity method.

Question to be raised at December 2022 ASAF meeting

27At its September meeting the IASB discussed four possible alternatives to answer the application question:

How should an investor recognise gains and losses that arise from the sale of a subsidiary to its associate applying the requirements of IFRS 10 and IAS 28?

28The application question will be discussed at the ASAF meeting on 8 - 9 December 2022. Board views on the alternatives would help inform the UKEB's feedback.

29The application question arises because there is an acknowledged inconsistency between the requirements of IFRS 10 Consolidated Financial Statements and IAS 28 for the sale of a subsidiary to an investor's associate:

  1. paragraphs 25 and B97–B99 of IFRS 10 require an investor to recognise in full the gain or loss on the loss of control of a subsidiary, remeasuring any retained interest at fair value; whereas
  2. paragraphs 28 and 30 of IAS 28 require an investor to restrict the gain or loss recognised to the extent of the unrelated investors' interests in an associate, that is an investor eliminates the gain on its related interest.

30IFRS Accounting Standards do not identify whether the equity method is a one-line consolidation method or a measurement method. If the equity method is applied as a one-line consolidation method, it follows that gains and losses on upstream and downstream transactions are eliminated. Whereas if the equity method is applied as a measurement method, it is more challenging to identify why gains and losses are eliminated.

31As the objective of elimination entries when applying the equity method is unclear and the associate is not part of the group, there is no clear basis to require the elimination of gains or losses for the investor's related interest.

32As a result of the inconsistency in IFRS Accounting Standards, most audit firm accounting manuals state that the entity has an accounting policy choice of applying consistently either IFRS 10 or IAS 28 (although IFRS Accounting Standards do not present it as an accounting policy choice). Not all audit firm accounting manuals make a distinction based on whether the subsidiary constitutes a business or not (see alternative 4 in the table below).

33The following table below summarises the four alternatives discussed by the IASB[^5]:

Alternative Overview of the alternative Rationale
Alternative 1 Full gain would be recognised on all contributions/sales of assets or businesses, regardless of whether they are housed or not in a subsidiary. No elimination entries required. The role of the elimination entries in IAS 28 is questionable because this elimination is a consolidation procedure.
Alternative 2 Partial gain would be recognised on all contributions/sales of assets or businesses, regardless of whether they are housed or not in a subsidiary. Elimination entries required. The requirements of both IFRS 10 and IAS 28 could be applied using an 'overlay' approach[^6]. Reflects the relationship between the investor and its associate without compromising the rationale underlying IFRS 10 (loss of control of the subsidiary).
Alternative 3 Is a mixture of Alternative 1 and Alternative 2. Full gain would be recognised on transactions out of the scope of IFRS 15 Revenue from Contracts with Customers. Partial gain would be recognised on transactions in the scope of IFRS 15. No elimination entries' requirements apply for transactions out of scope of IFRS 15. Assumes users disregard gains or losses (or value them differently) on transactions that are not in the scope of IFRS 15 (i.e. not an output of an entity's ordinary activities) because those transactions are often non-recurring. Therefore, the gain or loss recognised would not be restricted in this case.
Alternative 4 Full gain would be recognised when a transaction involves a business. Partial gain would be recognised when a transaction involves an asset. No elimination entries' requirements apply when a transaction involves a business. IFRS 10's requirements arose from the Business Combinations project, i.e. apply to businesses. Group of assets that do not constitute a business were not part of that project, so there is no reason to change the accounting for such contributions.

Next steps

34The IASB staff are seeking input from members of the Global Preparers Forum (GPF) in November and ASAF in December on this application question and plan to bring a decision-making paper to the IASB in Q1 of 2023.

35The UKEB Secretariat will continue monitoring the IASB discussions.

Questions for the Board

4Do Board members have any comments on the ASAF question “how should an investor recognise gains and losses that arise from the sale of a subsidiary to its associate applying the requirements of IFRS 10 and IAS 28”?

5Do Board members have any other questions or comments on the Equity Method update?

Post-implementation Review of IFRS 15 Revenue from Contracts with Customers

UKEB Project Status: Active Monitoring
IASB Next Milestone: Request for Information H1 2023

36At its meeting on 3 November 2022, UKEB AFIAG members discussed the IASB's forthcoming Post-implementation Review of IFRS 15 Revenue from Contracts with Customers [^7] (the PIR).

37The IASB expects to publish its Request for Information for this project in H1 2023. In advance of this, the IASB is seeking advice from the December 2022 ASAF meeting on matters to be considered in the PIR.

38AFIAG members were asked if they were aware of any 'fatal flaws' in IFRS 15, and if so, what those ‘fatal flaws' were. The general consensus was that there were no 'fatal flaws' in IFRS 15. AFIAG members noted that the questions they received on the application of IFRS 15 related mainly to the following areas[^8]:

  1. principal / agent considerations, particularly in the gaming industry;
  2. the application of the concept of control to purchase transactions;
  3. the application of net and gross revenue recognition, due to a degree of divergence between US GAAP and IFRS 15 (although this divergence is generally accepted and understood); and
  4. the application of definitions of contract assets, receivables, contract liabilities and financial liabilities, particularly in relation to renewals accounting and modification of licences.

39AFIAG members were asked for their views on the implementation costs and ongoing audit costs for IFRS 15. They noted that there had been significant one-off costs on implementation but that these costs had now stabilised.

40AFIAG members also noted that IFRS 15 was a significant improvement on IAS 18 and that research[^9] had found that, in some cases, IFRS 15 had led to greater collaboration between finance and business functions.

Questions for the Board

6Do Board members have any advice on “matters to be considered in the Post-implementation Review of IFRS 15”?

7Do Board members have any other questions or comments on the Post-implementation Review of IFRS 15 Revenue from Contracts with Customers update?

Primary Financial Statements

UKEB Project Status: Active Monitoring UKEB project page
IASB Next Milestone: IFRS Accounting Standard UKEB Secretariat Comment Letter (Published September 2020)

41The IASB is undertaking targeted outreach on its Primary Financial Statements project during Q4 2022 [^10]. The targeted outreach is expected to be discussed at the December 2022 ASAF meeting. The purpose of the targeted outreach is to obtain stakeholder views on those tentative decisions made during the IASB's redeliberations that differ from the proposals in the Exposure Draft General Presentation and Disclosures (the ED).

42As part of the IASB's targeted outreach, an IASB project team presented at the following UKEB Advisory Group meetings:

  1. Investor Advisory Group (IAG) on 4 October 2022;
  2. Preparer Advisory Group (PAG) on 31 October 2022; and
  3. Accounting Firms and Institutes Advisory Group (AFIAG) on 3 November 2022.

43The following paragraphs summarise the tentative decisions on which the IASB project team presented and the feedback from the UKEB Advisory Groups.

Categories and subtotals

Tentative decision to require share of profit of equity accounted associates and joint ventures to be presented in the investing category

44The IASB has tentatively decided to require the share of profit of equity accounted associates and joint ventures to be presented in the investing category. This tentative decision is intended to improve comparability.

45Advisory group members were generally supportive of this tentative decision. However, one PAG member expressed concern because, in their view, share of profit of equity accounted associates and joint ventures should be categorised in the operating category when the investment in the associate or joint venture is a main business activity. We note that this concern is partially addressed by the IASB's decision to allow a new specified subtotal: 'Operating profit after share of profit of equity accounted investments.'

Tentative decision on classification of items in the financing category

46The IASB has tentatively decided to specify that the financing category will include:

  1. all income and expenses from liabilities that involve only the raising of finance [^11]; and
  2. interest expense and the effects of changes in interest rates from other liabilities.

47The IASB has also tentatively decided that:

  1. interest on cash and cash equivalents will be included in the investing category, even when there is a net expense.
  2. net interest on pensions will be included in the financing category, even when there is a net gain.

48The tentative decisions are intended to improve comparability by specifying what types of expense should be allocated to each category. They are also intended to improve understandability by requiring finance expense to be presented in the financing category, whilst interest income is required to be presented in the investing category (apart from the exceptions noted in the previous paragraph).

49Some IAG members noted that users are typically interested in net finance expense and questioned the rationale of the tentative decision to require presentation of gross figures in separate categories. Similarly, some members of the PAG noted that this tentative decision would prohibit presentation of net interest expense in the statement of profit or loss. In their view this prohibition would not reflect the substance of some treasury strategies, where cash and debt are linked. Previous UKEB Secretariat liaison with the IASB staff on this point has highlighted that disclosure of net finance expense in the notes is not prohibited.

50Some AFIAG members noted that some types of transaction which were financing in nature, such as supplier finance arrangements or commodity transactions, may not be captured in the financing category under the IASB's working definition of a financing transaction, because that definition is based on receipt and repayment of cash or equity instruments by an entity (see footnote [^11]). The IASB project team noted this point for further consideration.

51One AFIAG member asked whether rising interest rates and consequent increases in finance expense were likely to have changed stakeholder views on the proposals relating to finance expense in the two years since the consultation on the ED. The IASB project team acknowledged the possibility that stakeholder views may have changed and noted that the current targeted outreach provided the opportunity for stakeholders to voice any changes in their views.

Tentative decision to explore removing the accounting policy choice for income and expenses from cash and cash equivalents for entities that provide financing to customers as a main business activity

52The ED proposed an accounting policy choice for entities that provide financing to customers as a main business activity. The accounting policy choice was to allow such entities to include in the operating category:

  1. all finance income and expenses; or,
  2. only those items of finance income and expense which relate to the provision of financing to customers.

53The ED proposed that income and expenses from cash and cash equivalents were included in the financing category, so the proposed accounting policy choice included income and expenses from cash and cash equivalents within its scope.

54The IASB has tentatively decided to:

  1. retain the accounting policy choice for finance income and expenses and to confirm that the accounting policy choice does not include interest related to other liabilities (e.g. provisions) within its scope; and,
  2. explore removing the accounting policy choice for income and expenses from cash and cash equivalents, which it has tentatively decided to require to be included in the investing category.

55The rationale for exploring the removal of the accounting policy choice for income and expenses from cash and cash equivalents is that many entities that provide financing to customers also invest as a main business activity (e.g., banks). Those entities would therefore be required to include income and expenses from cash and cash equivalents in the operating category, because investing in cash and cash equivalents is a main business activity. It would not, therefore, be appropriate to retain an accounting policy choice.

56Some AFIAG members noted that not all entities that provide financing to customers invest as a main business activity (e.g., pay day loan entities), and that those entities would therefore not be required to classify income and expenses from cash and cash equivalents in the operating category. Such entities would therefore lose the option to present income and expenses from cash and cash equivalents in the operating category and would be required to present them in the investing category. This may not be a faithful representation because, whilst those entities may not invest as a main business activity, income and expenses from cash and cash equivalents do relate to their main business activity of providing finance to customers. The IASB project team noted this point for further consideration.

Disaggregation

Tentative decision to explore three potential approaches for disclosure of operating expenses by nature

57The ED proposed an analysis of all operating expenses by nature in the notes to the financial statements when presented by function in the statement of profit or loss. The IASB has tentatively decided to explore three potential approaches for the disclosure of operating expenses by nature where an entity presents operating expenses by function in the statement of profit or loss. The three potential approaches are:

  1. To require disclosure of an analysis by functional category of depreciation, amortisation and employee costs.
  2. In addition to (a), to require disclosure of an analysis by functional category of impairments and inventory write-downs.
  3. In addition to (b), to require disclosure of an analysis by functional category of any other expense separately disclosed in the notes to the financial statements.

58The tentative decision is intended to provide the opportunity to explore whether any of the three options would provide a better balance between cost and benefit than the proposal in the ED.

59The UKEB Secretariat comment letter highlighted the cost of the proposal in the ED for UK preparers and recommended further consideration of the costs and benefits of the proposal.

60The IAG voiced muted support for the tentative decision. It was noted that analysis of other expenses (for example, advertising) could be more useful, and that the usefulness of the information would vary by sector and entity.

61The PAG noted that the tentative decisions are significantly different from those in the ED and recommended full field-testing and re-exposure before reaching a final decision. One PAG member noted that option c) could have the unintended consequence of reducing disclosure of other expenses in the notes to the financial statements.

62The AFIAG was generally supportive of the IASB's tentative decision.

Management Performance Measures (MPMs)

Tentative decision to change the definition of an MPM

63The IASB has tentatively decided to change the definition of an MPM [^12] to “a subtotal of income and expenses not specified by IFRS Accounting Standards that is used in public communications outside financial statements."

64The IASB has also tentatively decided to include a rebuttable presumption that a subtotal used in public communications represents management's view of an aspect of an entity's financial performance.

65The tentative decision is intended to prevent subtotals of income and expense used in public communications outside financial statements from falling outside of the definition of an MPM on the basis of an argument that they do not represent management's view of an entity's financial performance.

66Advisory group members were generally supportive of the tentative decision.

Tentative decision to allow a simplified approach to calculating the tax impact of reconciling items between MPMs and the closest IFRS subtotal

67The IASB has tentatively decided to allow a simplified calculation of the tax impact of reconciling items between MPMs and the nearest IFRS subtotal. The tentative decision is intended to balance cost and benefit.

68IAG members generally viewed the tentative decision as a pragmatic solution. One PAG member noted that they currently voluntarily disclose a similar reconciliation in response to investor requests.

69IAG and AFIAG members noted that it would be important to clarify whether the simplified approach was an accounting policy choice or whether it could be used selectively. The IASB project team confirmed that this point will be included in future IASB discussions.

Questions for the Board

8At this time we do not know what (if any) questions on the IASB's targeted outreach on Primary Financial Statements will be asked at the December 2022 ASAF meeting. Are there any particular points on the targeted outreach that the Board wishes to highlight to the forthcoming ASAF meeting?

9Does the Board have any other questions on Primary Financial Statements?

Provisions—Targeted Improvements

UKEB Project Status: Active Monitoring
IASB Next Milestone: Decide Project Direction

70At present, IAS 37 Provisions, Contingent Liabilities and Contingent Assets does not specify whether the rate a company uses to discount a provision for the time value of money should reflect the entity's own credit risk. As a result, the IASB has identified that there is diversity in practice and that the effects can be significant on the amounts reported by entities with large long-term provisions – for example, provisions for asset decommissioning or environmental rehabilitation costs recognised by power generation, oil and gas, mining and telecoms companies.

71The IASB is considering whether to develop proposals to specify in IAS 37 whether or not the discount rate should reflect the entity's own credit risk. To help develop the IASB proposals, they have asked ASAF members for input on:

  1. whether discount rates for provisions should reflect the entity's own credit risk, and if so, in what circumstances; and
  2. whether financial statements currently disclose enough information about the rates companies use to discount provisions, and if not, what information is lacking and how should IAS 37 be amended.

72The following table summarises the key measurement inputs to discount rates in the main IFRS Accounting Standards that use present value measurement. For more detail see the IASB's project summary from its discount rates project [^13]:

Category IAS 37[^14] IFRS 13[^15] IAS 36[^16] IAS 19[^17]
Measurement basis Amount to settle or transfer Fair value Value in use Present value of estimated ultimate cost
Measurement Includes:
Time value of money Yes Yes Yes Yes
Risk premium[^18] Implicit (mixed practice) Yes Yes No
Liquidity Unclear Yes Yes Implicit
Own Credit Risk Unclear (mixed practice) Yes N/A Some (implicit)

73In addition, IFRS 17 requires an entity to disregard its own credit risk when measuring fulfilment cashflows. This is on the basis that including the effect of the entity's own performance risk in the measurement of an insurance liability would not provide useful information [^19].

74IAS 37 paragraph 84(e) currently requires entities to disclose, for each class of provision, 'the increase during the period in the discounted amount arising from the passage of time and the effect of any change in the discount rate'. However, unlike other IFRS Accounting Standards [^20], IAS 37 has no specific requirement for entities to disclose either the discount rates used in measurement provisions or the basis on which those rates have been determined. This might mean that entities disclose this information only if management judges disclosure is necessary to meet the overarching requirements of IAS 1.

Topics for Noting

Rate-regulated Activities

UKEB Project Status: Active Monitoring UKEB project page
IASB next milestone: IFRS Accounting Standard UKEB Final Comment Letter (Published August 2021)

75The IASB is continuing its redeliberations following feedback on its Exposure Draft Regulatory Assets and Regulatory Liabilities (RRA ED) [^21].

76The table below summarises the IASB's proposals contained in the ED, the recommendations made by the UKEB in its comment letter and the IASB's tentative decisions made at its October 2022 meeting.

ED proposal UKEB comment letter IASB tentative decision
a. The ED defines allowable expense as an expense, as defined in IFRS Standards, that a regulatory agreement entitles an entity to recover by adding an amount in determining a regulated rate. b. In applying this [draft] Standard, an entity shall treat that allowable expense as relating to the supply of goods or services in the period when the entity recognises the expense applying IFRS Standards. Thus, the amount that recovers that allowable expense forms part of total allowed compensation for goods or services supplied in that period. c. These illustrative examples show that regulatory assets or regulatory liabilities arise when part or all of the total allowed compensation for the goods or services supplied in a period is included in regulated rates charged in a different period. a. We agree with the proposed definitions of regulatory assets and regulatory liabilities and consider that they are consistent with the Conceptual Framework for Financial Reporting, as set out in paragraphs BC37-BC47 of the Basis for Conclusions. b. We also agree that an entity should account for regulatory assets and regulatory liabilities separately from the rest of the regulatory agreement as this is a supplementary model, applied after an entity has applied other IFRS. The IASB tentatively decided that the Standard: a. retain the proposed definition of allowable expense; b. clarify that a regulatory agreement may determine the amount that compensates an entity for an allowable expense using a basis different from the basis the entity uses to measure the expense in accordance with IFRS Accounting Standards; and c. clarify the treatment of allowable expenses based on benchmarks and include examples to help entities identify differences in timing in those cases.
Regulatory assets and regulatory liabilities arising from difference between the regulatory recovery period and the assets' useful lives
a. The ED defines allowable expenses as an expense, as defined in IFRS Standards, that a regulatory agreement entitles an entity to recover by adding an amount in determining a regulated rate. b. In applying this [draft] Standard, an entity shall treat that allowable expense as relating to the supply of goods or services in the period when the entity recognises the expense applying IFRS Standards. Thus, the amount that recovers that allowable expense forms part of total allowed compensation for goods or services supplied in that period. c. If a regulatory agreement allows an entity to recover the cost of an asset through the regulated rates charged to customers, the depreciation expense recognised in a period, by applying IAS 16, is an allowable expense and the amount that recovers that depreciation expense forms part of the total allowed compensation for goods or services supplied in the same period. That is the case even if, under the terms of the regulatory agreement, the recovery of the depreciation expense occurs in a different period—for example, if the regulatory agreement uses a longer or shorter period of recovery than the asset's useful life. a. This guidance does not address the situation whereby the recovery period for an asset is longer than the period of the license agreement or pricing period under the regulatory agreement, for example, where the asset recovery period is 40 years, but the regulatory license is a 25-year rolling period and the pricing period is five years. b. We would encourage the IASB to include illustrative examples that reflect these situations to ensure consistent application of the proposed requirements. These examples would be more likely to reflect situations in practice due to the long-lived nature of some of the assets. The IASB tentatively decided that the Standard: a. provide guidance to help an entity determine whether its regulatory capital base and its property, plant and equipment have a direct relationship; b. retain the proposals for an entity to account for regulatory assets or regulatory liabilities arising from differences between the regulatory recovery period and the assets' useful lives if the entity has concluded that its regulatory capital base and its property, plant and equipment have a direct relationship; and c. require an entity that has concluded that its regulatory capital base and its property, plant and equipment have no direct relationship to provide disclosures to enable users of financial statements to understand the reasons for its conclusions.

77Overall these tentative decisions appear broadly consistent with the recommendations in the UKEB comment letter submitted to the IASB in July 2021: (i) the proposed definition of allowable expense will be retained; (ii) guidance will be provided to help an entity determine whether its regulatory capital base and its property, plant and equipment have a direct relationship; and (iii) illustrative examples will be included to provide better guidance for entities applying the standard.

78The IASB also discussed advice from its Consultative Group for Rate Regulation on how the IASB could respond to feedback on the RRA ED.

79Next steps—The IASB will continue its redeliberation on the feedback received on the ED at future meetings.

80The UKEB Secretariat will continue to monitor the IASB discussions.

Post-implementation Review of IFRS 9 – Classification and Measurement

UKEB Project Status: Active Monitoring UKEB project page
IASB Next Milestone: Feedback Statement December 2022 UKEB Final Comment Letter (Published January 2022)

81In October, the IASB discussed feedback on three aspects of its Post-implementation Review of IFRS 9 Financial Instruments – Classification and Measurement.

  1. Equity instruments and other comprehensive income – Subsequent to the October meeting the IASB announced its decision to consider this topic as part of its proposed narrow-scope amendments to IFRS 9. A high-level summary of the IASB's tentative decisions on this topic is presented in Amendments to the Classification and Measurement of Financial Instruments above.
  2. Exploring possible narrow-scope amendments for electronic cash transfers - Subsequent to the October meeting the IASB announced its decision to consider this topic as part of its proposed narrow-scope amendments to IFRS 9. A high-level summary of the IASB's tentative decisions on this topic is presented in Amendments to the Classification and Measurement of Financial Instruments above.
  3. Business model assessment - The IASB decided to take no further action on feedback received during the PIR related to the business model requirements. This is consistent with the UKEB comment letter which noted the requirements generally work as intended and are an improvement on the previous requirements of IAS 39 Financial Instruments: Recognition and Measurement.

82Next steps: The IASB will continue its discussions on the Post-implementation Review at a future meeting. A feedback statement is expected to be published by the IASB in December 2022. The UKEB Secretariat will continue to monitor the IASB discussions.

Goodwill and Impairment

UKEB Project Status: UKEB project page
IASB Next Milestone: Decide Project Direction November 2022 UKEB Report: Subsequent Measurement of Goodwill - A Hybrid Model (Published September 2022)

83At its October 2022 meeting, the IASB discussed a staff paper which set out the research undertaken by the IASB to date on goodwill and impairment. Ten of the sixty-five paragraphs in the paper summarised the UKEB goodwill research project.

84The IASB was asked to comment on the paper ahead of its expected vote in November on whether to further explore amortisation. The general view was that the paper was comprehensive.

85The IASB Chair asked Board Members for initial views on whether they would consider an accounting policy choice as a potential solution to the current debate on subsequent measurement of goodwill, given the intensity of views held on amortisation and impairment. He referenced FRS 10 as an example of a financial reporting regime which had allowed an accounting policy choice for subsequent measurement of goodwill (FRS 10 was effective in the UK from 1997 to 2005 and permitted either amortisation or impairment testing). The idea did not attract general support given its potential to reduce comparability between entities. However, the IASB staff agreed to include it as an option in the November IASB board paper.

86One IASB Member suggested that the IASB's vote on whether to further explore amortisation be deferred until the IASB's intangibles project was further progressed, to allow for a more holistic consideration of recognition and measurement across all types of intangible asset, including goodwill. This suggestion was not widely supported.

87A summary of the UKEB Technical Director's presentation of the UKEB research on subsequent measurement of goodwill was included in the IASB's published summary of the September 2022 ASAF meeting and EFRAG's published summary of the September 2022 IFASS meeting.

88The UKEB Technical Director has been invited to present the UKEB's goodwill research project at the British Accounting and Finance Association (FARSIG) January 2023 Symposium on Intangibles.

Disclosure Initiative: Targeted Standards-level Review of Disclosures

UKEB Project Status: Influencing Completed UKEB project page
IASB Next Milestone: Project Summary Q1 2023 UKEB Final Comment Letter (Published December 2021)

89At its October meeting the IASB board made final decisions on the Disclosure Initiative: Targeted Standards-level Review of Disclosures (the “Disclosure Pilot") project.

90Appendix C summarises the IASB proposals, feedback provided by the UKEB in its comment letter, and the final decisions made by the IASB. We note that much of the feedback provided by the UKEB has been incorporated in the final IASB position.

Subsidiaries without Public Accountability: Disclosures

UKEB Project Status: Active Monitoring UKEB project page
IASB Next Milestone: IFRS Accounting Standard UKEB Final Comment Letter (Published February 2022)

91At its October meeting, the IASB discussed the Exposure Draft's proposals [^22] on the following topics:

  1. Objective of the proposed IFRS Accounting Standard.
  2. Approach to developing the proposed disclosure requirements.
  3. Structure of the draft standard.

Objective of the draft Standard

92The Exposure Draft (ED) proposed:

The objective of the draft Standard is to permit eligible subsidiaries to apply the disclosure requirements in this [draft] Standard and the recognition, measurement and presentation requirements in IFRS Standards.

93The IASB tentatively decided to confirm the proposed objective of the proposed IFRS Accounting Standard Subsidiaries without Public Accountability: Disclosures (proposed standard).

94In our Final Comment Letter (FCL) we supported the IASB's efforts to develop an IFRS Accounting Standard that would permit eligible subsidiaries to apply IFRS Accounting Standards with reduced disclosure requirements and highlighted the benefits of the IASB's reduced disclosure regime [^23].

Approach to developing the proposed disclosure requirements

95The IASB tentatively decided to:

  1. Modify its approach to ensure that the language used in the disclosure requirements is the same as the language in full IFRS Accounting Standards.
  2. Explain in the Basis for Conclusions on the IFRS Accounting Standard:
    1. why the disclosure requirements in the IFRS for SMEs Accounting Standard are the appropriate starting point;
    2. how 'cost-benefit' is considered; and
    3. the reason for the exceptions made to the approach to developing the proposed disclosure requirements.

96In developing the disclosure requirements in the ED, the IASB started with the disclosure requirements in the IFRS for SMEs Standard—a ‘bottom-up approach'. In addition, the IASB compared the recognition and measurement requirements in IFRS Accounting Standards and in the IFRS for SMEs Accounting Standard to identify differences. Where differences are identified, the ED tailors the disclosure requirements in IFRS Accounting Standards by applying the principles in paragraph BC157 of the IFRS for SMEs Accounting Standard. These principles identify the information that users find important.

97In our FCL we suggested that the IASB reconsidered its ‘bottom-up approach' and considered aligning it more closely with the ‘top-down approach' that the UK experience has demonstrated as being cost effective for preparers and which provides decision-useful information for users.

98The IASB's tentative decision to align the language used with IFRS Accounting Standards partly addresses some of our concerns with the 'bottom-up approach'—consistency of language is deemed particularly helpful by stakeholders when transitioning to the draft standard, and better reflects the needs of the users of these accounts who are unlikely to be familiar with the disclosure requirements of the IFRS for SMEs Accounting Standard.

99We also note the IASB staff recommendation to explain in the Basis for Conclusions why starting with the disclosure requirements in the IFRS for SMEs Accounting Standard would give the same outcome as starting with the disclosure requirements in IFRS Accounting Standards.

Structure of the draft Standard

100The ED proposed the following structure for the proposed IFRS Accounting Standard:

  1. a main body that includes the proposed disclosure requirements, organised under a subheading for each IFRS Accounting Standard;
  2. Appendix A that lists the disclosure requirements in other IFRS Accounting Standards that would be replaced by the standard (i.e. no longer required); and
  3. to assist application, disclosure requirements in other IFRS Accounting Standards that remain applicable are generally indicated in a footnote to the subheading of the IFRS Accounting Standard to which they relate.

101The IASB tentatively decided to:

  1. omit Appendix A proposed in the draft Standard; and
  2. include cross-references to disclosure requirements that remain applicable in other IFRS Accounting Standards under each IFRS Accounting Standard subheading, rather than in footnotes.

102We did not express strong views on Appendix A in our FCL. Whilst at the September ASAF meeting we supported retaining Appendix A, we note that removing Appendix A would (i) address concerns that listing disclosure requirements that do not apply could confuse preparers and (ii) avoid ambiguity with paragraph 16 of the proposed standard which explains that there are circumstances when an entity considers whether to provide additional disclosures to those required.

103On the other hand, in our FCL we expressed concerns about the footnotes as it could be confusing when determining the disclosure requirements required under the proposed standard. We considered that a better solution would be to reproduce the disclosure requirements within the relevant disclosure sections in the main body of the proposed standard: this would improve understandability and accessibility and reduce the risk that these requirements are overlooked. However, we note IASB staff arguments for not reproducing the full text of those disclosure requirements that remain applicable in the main body of the Standard: it would complicate application of the Standard and potentially lead to the inclusion of some recognition, measurement or presentation requirements in the Standard when these requirements cannot be separated from disclosure requirements. For example, paragraph 22 of IAS 20 Accounting for Government Grants and Disclosure of Government Assistance states:

'A government grant may become receivable by an entity as compensation for expenses or losses incurred in a previous period. Such a grant is recognised in profit or loss of the period in which it becomes receivable, with disclosure to ensure that its effect is clearly understood

Next steps

104The IASB discussed and agreed on the staff recommended process to address the comments on proposed disclosure requirements in the ED. The process includes the following steps:

  1. Step 1—stratify the comments on the proposed disclosure requirements based on how they were developed;
  2. Step 2—assess comments against a set of factors: consider principles on users' information needs of non-publicly accountable entities' financial statements, cost-benefit considerations, distribution of the comment, overall usefulness of information and previous IASB discussions and decisions on the topic; and
  3. Step 3—recommend changes to the proposed disclosure requirements in the draft Standard.

105The IASB staff plan to present the following papers in November and December 2022 to continue the IASB's redeliberation of the ED proposals:

Topics IASB Board Meeting
Remaining aspects on the scope of the proposed standard
- whether to clarify when financial statements are 'available for public use' November 2022
- whether to extend the eligibility of entities that can apply the draft Standard to those within groups using local GAAPs that might be deemed equivalent to IFRS Accounting Standards.
Applying the draft Standard December 2022
- statement of compliance with IFRS Accounting Standards
Proposed disclosure requirements
- disclosure requirements in IFRS 8 Operating Segments, IFRS 17 Insurance Contracts and IAS 33 Earnings per Share which remain applicable and excluded from the ED - comments received on IAS 34 Interim Financial Reporting

106The UKEB Secretariat will continue monitoring the IASB discussions.

Questions for the Board

11Do Board members have any questions or comments on the topics for noting?

IFRS Interpretations Committee

107The UKEB's [draft] Due Process Handbook notes that the UKEB expects to respond to a limited number of tentative agenda decisions published by the IFRS Interpretations Committee (Interpretations Committee). Some factors to consider when deciding whether to respond may be:

  1. the degree of impact of the tentative agenda decision on UK companies (for example, in cases where the tentative agenda decision is expected to affect a significant number of UK companies);
  2. disagreement with the Interpretation Committee's analysis; or
  3. usefulness of the explanations and clarifications included in the tentative agenda decision.

108The Secretariat will provide an update on the Interpretations Committee's November meeting at the next Board Meeting.

109The following Agenda Decisions were ratified at the IASB's October meeting:

  1. Multi-currency Groups of Insurance Contracts (IFRS 17 and IAS 21).
  2. Special Purpose Acquisition Companies (SPAC): Accounting for Warrants at Acquisition.
  3. Lessor Forgiveness of Lease Payments (IFRS 9 and IFRS 16).

Matters received but not yet presented to the Interpretations Committee

Lease payments linked to cadastral value Consolidation of a non-hyperinflationary subsidiary by a hyperinflationary parent
Topic Lease payments linked to cadastral value Consolidation of a non-hyperinflationary subsidiary by a hyperinflationary parent
Standard IFRS 16 IAS 29 / IAS 21
Tabled March April
Question* Lease payments in land leases (e.g. from municipal, regional or federal authorities) are often determined based on the valuations of the land plots recorded in the state register (cadastre). How should the lessee treat lease payments linked to cadastral value when measuring the lease liability? How a parent with a functional and presentation currency that is hyperinflationary consolidates a subsidiary with a functional currency that is not hyperinflationary
UKEB Sec view We recommend no action at this time. We are not aware that this is a significant issue in the UK. We recommend no action at this time. We are not aware that this is a significant issue in the UK.

*This provides a summary only, please review the IFRS Website for the full details.

Matters under consideration by the Interpretations Committee

TENTATIVE AGENDA DECISIONS OPEN FOR COMMENT
Topic None to report
Standard
Comments due
Question*
Tentative conclusion*
UKEB Sec view

*This provides a summary only, please review the IFRS Website for the full details.

TENTATIVE AGENDA DECISIONS CLOSED FOR COMMENT
Topic None to report
Standard
Next Step
Question*
Tentative conclusion*
Observation

*This provides a summary only, please review the IFRS Website for the full details.

Agenda decisions ratified by IASB

| | Multi-currency Groups of Insurance Contracts | Special purpose acquisition companies (SPAC): accounting for warrants at acquisition | Multi-currency Groups of Insurance Contracts | Special purpose acquisition companies (SPAC): accounting for warrants at acquisition | 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---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------IASB has not yet made decisions on this. Practical considerations may then identify instances where it would be more appropriate for certain BCUCC to use a book-value method.

At the time of writing, we do not know what specific questions will be asked at the December ASAF meeting. The current agenda refers to seeking ASAF members' advice on how to respond to feedback on selecting the measurement method(s) to apply. It is possible that questions will focus on proposals such as the non-controlling shareholder and related party exemptions. Broadly, under these proposals:

  1. a book value method would be permitted if the receiving entity's shares were privately held and none of its non-controlling shareholders objected;
  2. a book value method would be required if all the receiving entity's non-controlling shareholders were related parties to the entity.

On balance the UKEB supported these proposals subject to certain further recommendations. Further detail is provided in Appendix B. The summary of feedback in the IASB June board papers noted that some stakeholders had requested that an exemption be provided to allow use of the book value method if non-controlling shareholders were insignificant, or if the objections received to use of the book value method were from insignificant non-controlling shareholders. The term insignificant was not defined.

Questions for the Board

2Does the Board wish to highlight to the December ASAF meeting any particular points on the practical exemptions from the acquisition method?

3Does the Board have any other comments or questions on BCUCC?

Equity Method

UKEB Project Status: Active Monitoring
IASB Next Milestone: Decide Project Direction

Project direction

22At its October meeting, the IASB reviewed the progress of the Equity Method research project.

23The objective of the project is:

To assess whether application problems with the equity method, as set out in IAS 28 Investments in Associates and Joint Ventures, can be addressed in consolidated and individual financial statements by identifying and explaining the principles of IAS 28. [^4]

24Whilst most IASB members including the Chair agreed to continue the project with its current objective and approach, a few IASB members expressed some concerns.

25Those supporting the objective and approach of the project mentioned:

  1. answering the application questions that are being considered would support the consistent application of IAS 28; and
  2. divergent accounting practices in the application of the equity method do not provide users with comparable information.

26Other IASB members expressed the following concerns:

  1. One IASB member who did not support the continuation of the project explained that users focus on the valuation of equity accounted investments rather than on the information from the equity method. He also mentioned that identifying missing principles could lead to knock-on effects. Overall, whilst there are merits in addressing the application questions in terms of reducing cost for preparers, this is at the expense of other projects that the IASB could undertake.
  2. Developing solutions to the application questions has taken longer than anticipated.
  3. In developing solutions, the staff has more often had to use the process of identifying the missing principles. This approach contradicts the objective of the project i.e. it is not a narrow scope project as intended and is defining principles that are not currently in IAS 28.
  4. The IASB should instead undertake a fundamental review of the equity method.

Question to be raised at December 2022 ASAF meeting

27At its September meeting the IASB discussed four possible alternatives to answer the application question:

How should an investor recognise gains and losses that arise from the sale of a subsidiary to its associate applying the requirements of IFRS 10 and IAS 28?

28The application question will be discussed at the ASAF meeting on 8 - 9 December 2022. Board views on the alternatives would help inform the UKEB's feedback.

29The application question arises because there is an acknowledged inconsistency between the requirements of IFRS 10 Consolidated Financial Statements and IAS 28 for the sale of a subsidiary to an investor's associate:

  1. paragraphs 25 and B97–B99 of IFRS 10 require an investor to recognise in full the gain or loss on the loss of control of a subsidiary, remeasuring any retained interest at fair value; whereas
  2. paragraphs 28 and 30 of IAS 28 require an investor to restrict the gain or loss recognised to the extent of the unrelated investors' interests in an associate, that is an investor eliminates the gain on its related interest.

30IFRS Accounting Standards do not identify whether the equity method is a one-line consolidation method or a measurement method. If the equity method is applied as a one-line consolidation method, it follows that gains and losses on upstream and downstream transactions are eliminated. Whereas if the equity method is applied as a measurement method, it is more challenging to identify why gains and losses are eliminated.

31As the objective of elimination entries when applying the equity method is unclear and the associate is not part of the group, there is no clear basis to require the elimination of gains or losses for the investor's related interest.

32As a result of the inconsistency in IFRS Accounting Standards, most audit firm accounting manuals state that the entity has an accounting policy choice of applying consistently either IFRS 10 or IAS 28 (although IFRS Accounting Standards do not present it as an accounting policy choice). Not all audit firm accounting manuals make a distinction based on whether the subsidiary constitutes a business or not (see alternative 4 in the table below).

33The following table below summarises the four alternatives discussed by the IASB[^5]:

Alternative Overview of the alternative Rationale
Alternative 1 Full gain would be recognised on all contributions/sales of assets or businesses, regardless of whether they are housed or not in a subsidiary. No elimination entries required. The role of the elimination entries in IAS 28 is questionable because this elimination is a consolidation procedure.
Alternative 2 Partial gain would be recognised on all contributions/sales of assets or businesses, regardless of whether they are housed or not in a subsidiary. Elimination entries required. The requirements of both IFRS 10 and IAS 28 could be applied using an 'overlay' approach[^6]. Reflects the relationship between the investor and its associate without compromising the rationale underlying IFRS 10 (loss of control of the subsidiary).
Alternative 3 Is a mixture of Alternative 1 and Alternative 2. Full gain would be recognised on transactions out of the scope of IFRS 15 Revenue from Contracts with Customers. Partial gain would be recognised on transactions in the scope of IFRS 15. No elimination entries' requirements apply for transactions out of scope of IFRS 15. Assumes users disregard gains or losses (or value them differently) on transactions that are not in the scope of IFRS 15 (i.e. not an output of an entity's ordinary activities) because those transactions are often non-recurring. Therefore, the gain or loss recognised would not be restricted in this case.
Alternative 4 Full gain would be recognised when a transaction involves a business. Partial gain would be recognised when a transaction involves an asset. No elimination entries' requirements apply when a transaction involves a business. IFRS 10's requirements arose from the Business Combinations project, i.e. apply to businesses. Group of assets that do not constitute a business were not part of that project, so there is no reason to change the accounting for such contributions.

Next steps

34The IASB staff are seeking input from members of the Global Preparers Forum (GPF) in November and ASAF in December on this application question and plan to bring a decision-making paper to the IASB in Q1 of 2023.

35The UKEB Secretariat will continue monitoring the IASB discussions.

Questions for the Board

4Do Board members have any comments on the ASAF question “how should an investor recognise gains and losses that arise from the sale of a subsidiary to its associate applying the requirements of IFRS 10 and IAS 28”?

5Do Board members have any other questions or comments on the Equity Method update?

Post-implementation Review of IFRS 15 Revenue from Contracts with Customers

UKEB Project Status: Active Monitoring
IASB Next Milestone: Request for Information H1 2023

36At its meeting on 3 November 2022, UKEB AFIAG members discussed the IASB's forthcoming Post-implementation Review of IFRS 15 Revenue from Contracts with Customers [^7] (the PIR).

37The IASB expects to publish its Request for Information for this project in H1 2023. In advance of this, the IASB is seeking advice from the December 2022 ASAF meeting on matters to be considered in the PIR.

38AFIAG members were asked if they were aware of any 'fatal flaws' in IFRS 15, and if so, what those ‘fatal flaws' were. The general consensus was that there were no 'fatal flaws' in IFRS 15. AFIAG members noted that the questions they received on the application of IFRS 15 related mainly to the following areas[^8]:

  1. principal / agent considerations, particularly in the gaming industry;
  2. the application of the concept of control to purchase transactions;
  3. the application of net and gross revenue recognition, due to a degree of divergence between US GAAP and IFRS 15 (although this divergence is generally accepted and understood); and
  4. the application of definitions of contract assets, receivables, contract liabilities and financial liabilities, particularly in relation to renewals accounting and modification of licences.

39AFIAG members were asked for their views on the implementation costs and ongoing audit costs for IFRS 15. They noted that there had been significant one-off costs on implementation but that these costs had now stabilised.

40AFIAG members also noted that IFRS 15 was a significant improvement on IAS 18 and that research[^9] had found that, in some cases, IFRS 15 had led to greater collaboration between finance and business functions.

Questions for the Board

6Do Board members have any advice on “matters to be considered in the Post-implementation Review of IFRS 15”?

7Do Board members have any other questions or comments on the Post-implementation Review of IFRS 15 Revenue from Contracts with Customers update?

Primary Financial Statements

UKEB Project Status: Active Monitoring UKEB project page
IASB Next Milestone: IFRS Accounting Standard UKEB Secretariat Comment Letter (Published September 2020)

41The IASB is undertaking targeted outreach on its Primary Financial Statements project during Q4 2022 [^10]. The targeted outreach is expected to be discussed at the December 2022 ASAF meeting. The purpose of the targeted outreach is to obtain stakeholder views on those tentative decisions made during the IASB's redeliberations that differ from the proposals in the Exposure Draft General Presentation and Disclosures (the ED).

42As part of the IASB's targeted outreach, an IASB project team presented at the following UKEB Advisory Group meetings:

  1. Investor Advisory Group (IAG) on 4 October 2022;
  2. Preparer Advisory Group (PAG) on 31 October 2022; and
  3. Accounting Firms and Institutes Advisory Group (AFIAG) on 3 November 2022.

43The following paragraphs summarise the tentative decisions on which the IASB project team presented and the feedback from the UKEB Advisory Groups.

Categories and subtotals

Tentative decision to require share of profit of equity accounted associates and joint ventures to be presented in the investing category

44The IASB has tentatively decided to require the share of profit of equity accounted associates and joint ventures to be presented in the investing category. This tentative decision is intended to improve comparability.

45Advisory group members were generally supportive of this tentative decision. However, one PAG member expressed concern because, in their view, share of profit of equity accounted associates and joint ventures should be categorised in the operating category when the investment in the associate or joint venture is a main business activity. We note that this concern is partially addressed by the IASB's decision to allow a new specified subtotal: 'Operating profit after share of profit of equity accounted investments.'

Tentative decision on classification of items in the financing category

46The IASB has tentatively decided to specify that the financing category will include:

  1. all income and expenses from liabilities that involve only the raising of finance [^11]; and
  2. interest expense and the effects of changes in interest rates from other liabilities.

47The IASB has also tentatively decided that:

  1. interest on cash and cash equivalents will be included in the investing category, even when there is a net expense.
  2. net interest on pensions will be included in the financing category, even when there is a net gain.

48The tentative decisions are intended to improve comparability by specifying what types of expense should be allocated to each category. They are also intended to improve understandability by requiring finance expense to be presented in the financing category, whilst interest income is required to be presented in the investing category (apart from the exceptions noted in the previous paragraph).

49Some IAG members noted that users are typically interested in net finance expense and questioned the rationale of the tentative decision to require presentation of gross figures in separate categories. Similarly, some members of the PAG noted that this tentative decision would prohibit presentation of net interest expense in the statement of profit or loss. In their view this prohibition would not reflect the substance of some treasury strategies, where cash and debt are linked. Previous UKEB Secretariat liaison with the IASB staff on this point has highlighted that disclosure of net finance expense in the notes is not prohibited.

50Some AFIAG members noted that some types of transaction which were financing in nature, such as supplier finance arrangements or commodity transactions, may not be captured in the financing category under the IASB's working definition of a financing transaction, because that definition is based on receipt and repayment of cash or equity instruments by an entity (see footnote [^11]). The IASB project team noted this point for further consideration.

51One AFIAG member asked whether rising interest rates and consequent increases in finance expense were likely to have changed stakeholder views on the proposals relating to finance expense in the two years since the consultation on the ED. The IASB project team acknowledged the possibility that stakeholder views may have changed and noted that the current targeted outreach provided the opportunity for stakeholders to voice any changes in their views.

Tentative decision to explore removing the accounting policy choice for income and expenses from cash and cash equivalents for entities that provide financing to customers as a main business activity

52The ED proposed an accounting policy choice for entities that provide financing to customers as a main business activity. The accounting policy choice was to allow such entities to include in the operating category:

  1. all finance income and expenses; or,
  2. only those items of finance income and expense which relate to the provision of financing to customers.

53The ED proposed that income and expenses from cash and cash equivalents were included in the financing category, so the proposed accounting policy choice included income and expenses from cash and cash equivalents within its scope.

54The IASB has tentatively decided to:

  1. retain the accounting policy choice for finance income and expenses and to confirm that the accounting policy choice does not include interest related to other liabilities (e.g. provisions) within its scope; and,
  2. explore removing the accounting policy choice for income and expenses from cash and cash equivalents, which it has tentatively decided to require to be included in the investing category.

55The rationale for exploring the removal of the accounting policy choice for income and expenses from cash and cash equivalents is that many entities that provide financing to customers also invest as a main business activity (e.g., banks). Those entities would therefore be required to include income and expenses from cash and cash equivalents in the operating category, because investing in cash and cash equivalents is a main business activity. It would not, therefore, be appropriate to retain an accounting policy choice.

56Some AFIAG members noted that not all entities that provide financing to customers invest as a main business activity (e.g., pay day loan entities), and that those entities would therefore not be required to classify income and expenses from cash and cash equivalents in the operating category. Such entities would therefore lose the option to present income and expenses from cash and cash equivalents in the operating category and would be required to present them in the investing category. This may not be a faithful representation because, whilst those entities may not invest as a main business activity, income and expenses from cash and cash equivalents do relate to their main business activity of providing finance to customers. The IASB project team noted this point for further consideration.

Disaggregation

Tentative decision to explore three potential approaches for disclosure of operating expenses by nature

57The ED proposed an analysis of all operating expenses by nature in the notes to the financial statements when presented by function in the statement of profit or loss. The IASB has tentatively decided to explore three potential approaches for the disclosure of operating expenses by nature where an entity presents operating expenses by function in the statement of profit or loss. The three potential approaches are:

  1. To require disclosure of an analysis by functional category of depreciation, amortisation and employee costs.
  2. In addition to (a), to require disclosure of an analysis by functional category of impairments and inventory write-downs.
  3. In addition to (b), to require disclosure of an analysis by functional category of any other expense separately disclosed in the notes to the financial statements.

58The tentative decision is intended to provide the opportunity to explore whether any of the three options would provide a better balance between cost and benefit than the proposal in the ED.

59The UKEB Secretariat comment letter highlighted the cost of the proposal in the ED for UK preparers and recommended further consideration of the costs and benefits of the proposal.

60The IAG voiced muted support for the tentative decision. It was noted that analysis of other expenses (for example, advertising) could be more useful, and that the usefulness of the information would vary by sector and entity.

61The PAG noted that the tentative decisions are significantly different from those in the ED and recommended full field-testing and re-exposure before reaching a final decision. One PAG member noted that option c) could have the unintended consequence of reducing disclosure of other expenses in the notes to the financial statements.

62The AFIAG was generally supportive of the IASB's tentative decision.

Management Performance Measures (MPMs)

Tentative decision to change the definition of an MPM

63The IASB has tentatively decided to change the definition of an MPM [^12] to “a subtotal of income and expenses not specified by IFRS Accounting Standards that is used in public communications outside financial statements."

64The IASB has also tentatively decided to include a rebuttable presumption that a subtotal used in public communications represents management's view of an aspect of an entity's financial performance.

65The tentative decision is intended to prevent subtotals of income and expense used in public communications outside financial statements from falling outside of the definition of an MPM on the basis of an argument that they do not represent management's view of an entity's financial performance.

66Advisory group members were generally supportive of the tentative decision.

Tentative decision to allow a simplified approach to calculating the tax impact of reconciling items between MPMs and the closest IFRS subtotal

67The IASB has tentatively decided to allow a simplified calculation of the tax impact of reconciling items between MPMs and the nearest IFRS subtotal. The tentative decision is intended to balance cost and benefit.

68IAG members generally viewed the tentative decision as a pragmatic solution. One PAG member noted that they currently voluntarily disclose a similar reconciliation in response to investor requests.

69IAG and AFIAG members noted that it would be important to clarify whether the simplified approach was an accounting policy choice or whether it could be used selectively. The IASB project team confirmed that this point will be included in future IASB discussions.

Questions for the Board

8At this time we do not know what (if any) questions on the IASB's targeted outreach on Primary Financial Statements will be asked at the December 2022 ASAF meeting. Are there any particular points on the targeted outreach that the Board wishes to highlight to the forthcoming ASAF meeting?

9Does the Board have any other questions on Primary Financial Statements?

Provisions—Targeted Improvements

UKEB Project Status: Active Monitoring
IASB Next Milestone: Decide Project Direction

70At present, IAS 37 Provisions, Contingent Liabilities and Contingent Assets does not specify whether the rate a company uses to discount a provision for the time value of money should reflect the entity's own credit risk. As a result, the IASB has identified that there is diversity in practice and that the effects can be significant on the amounts reported by entities with large long-term provisions – for example, provisions for asset decommissioning or environmental rehabilitation costs recognised by power generation, oil and gas, mining and telecoms companies.

71The IASB is considering whether to develop proposals to specify in IAS 37 whether or not the discount rate should reflect the entity's own credit risk. To help develop the IASB proposals, they have asked ASAF members for input on:

  1. whether discount rates for provisions should reflect the entity's own credit risk, and if so, in what circumstances; and
  2. whether financial statements currently disclose enough information about the rates companies use to discount provisions, and if not, what information is lacking and how should IAS 37 be amended.

72The following table summarises the key measurement inputs to discount rates in the main IFRS Accounting Standards that use present value measurement. For more detail see the IASB's project summary from its discount rates project [^13]:

Category IAS 37[^14] IFRS 13[^15] IAS 36[^16] IAS 19[^17]
Measurement basis Amount to settle or transfer Fair value Value in use Present value of estimated ultimate cost
Measurement Includes:
Time value of money Yes Yes Yes Yes
Risk premium[^18] Implicit (mixed practice) Yes Yes No
Liquidity Unclear Yes Yes Implicit
Own Credit Risk Unclear (mixed practice) Yes N/A