6 IASB General Update

16 November 2023 Agenda Paper 6

Executive Summary

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 monitors 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 (ASAF).

Summary of the Issue

Topics discussed by the IASB at its October 2023 meeting were:

Topics for discussion:

• Primary Financial Statements
• Rate-regulated Activities

In addition, although not discussed by the IASB at its October 2023 meeting, this paper includes an update on the Climate-related and Other Uncertainties in the Financial Statements project, as that is on the agenda for ASAF in December 2023.

Topics for noting:

• Subsidiaries without Public Accountability: Disclosures
• Equity Method
• Amendments to IFRS 9 - Classification & Measurement
• Interpretations Committee Update

Questions for the Board

The Board is not asked to make decisions on any of the topics presented in this paper. However, the Board is asked for its views on the following questions:

Items for discussion:

• Primary Financial Statements (Agenda Paper 6: Appendix A)
• The IASB's communications strategy:

1. Does the Board have any comments on the IASB's proposed communications strategy?
2. Does the Board agree the three areas in paragraph A8 should be given more focus in the IASB's implementation support? Does the Board have any comment on which other areas should be prioritised in the IASB's plan?
3. Does the Board have any examples of best practice that the IASB should consider in developing the plans to support the implementation and consistent application of IFRS 18?

General update:

1. Do Board members have any comments on the Primary Financial Statements update?

Rate-regulated Activities (Agenda Paper 6: Appendix B)

1. Do Board members have any questions or comments on the Rate-regulated Activities update?

Climate-related and Other Uncertainties in the Financial Statements (Agenda Paper 6: Appendix C)

1. Do Board members have any comments in response to the ASAF questions?

Items for noting:

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

Recommendation

N/A

Appendices

• Appendix A: Primary Financial Statements
• Appendix B: Rate-regulated Activities
• Appendix C: Climate-related and Other Uncertainties in the Financial Statements
• Appendix D: Subsidiaries without Public Accountability: Disclosures
• Appendix E: Equity Method
• Appendix F: Amendments to IFRS 9 – Classification & Measurement
• Appendix G: Interpretations Committee Update
• Appendix H: List of IASB Projects

Appendix A: Primary Financial Statements

Topic for Discussion

Purpose of this update

A1In our last update we informed the Board that the IASB had tentatively decided to start the balloting process of the forthcoming IFRS Accounting Standard 18 Presentation and Disclosure in Financial Statements (IFRS 18). A high-level summary of all the tentative decisions made by the IASB (since the ED was published) can be accessed here.

A2In this paper:

a) we ask the Board for the input on the questions for ASAF members; and b) we present a summary of the outcome of the IASB's discussions at the October 2023 IASB meeting.

ASAF December 2023 meeting

A3The IASB is seeking input and advice from ASAF members on steps after publication of IFRS 18 to support its implementation and consistent application.

A4The agenda paper¹ includes:

a) a project update including the IASB's communications strategy coupled with specific examples; and b) a high-level overview of the purpose, timing and tools the IASB plans to use to support the implementation and consistent application of IFRS 18.

Annex A of this paper includes the extract of the ASAF paper that illustrates the IASB's proposed focus and timing of the implementation support for IFRS 18.

Questions for ASAF members

A5The specific questions for ASAF members are reproduced below.

Questions for ASAF members (page 3 of ASAF agenda paper 2²)

Project update, including communications strategy

1. Do you have any comments on the high-level messages the IASB plans to use in the communications strategy?

The IASB's support to implementation and consistent application

1. Given that our resources and the resources of our stakeholders are limited, what areas should we strategically focus on to provide the most effective support for implementation and consistent application?

2. Are there any examples of best practice that we should consider in developing our plans to support implementation and consistent application?

Secretariat's view

Project update, including communications strategy

A6Based on our preliminary review, we consider that the high-level summary of the project update is aligned with our understanding on the project².

The IASB's support to implementation and consistent application

A7We think that the main focus for this ASAF session should be the IASB's approach to supporting the implementation and consistent application of IFRS 18, specifically which area(s) to focus on and how.

UKEB Advisory Group

A8At the October 2023 Preparer Advisory Group (PAG) meeting and the November 2023 Accounting Firms & Institutes Advisory Group (AFIAG) meeting, the members identified the following areas as needing better communications:

a) Associates and joint ventures in investing category: Some PAG and AFIAG members considered there could be circumstances where joint ventures are within an entity's main business activity and therefore should be allocated to the operating category in the income statement. However, the line items related to joint ventures are required to be in the investing category in the income statement. The PAG and AFIAG members considered this could be confusing and not reflective of the actual operating profit. b) Management-defined performance measures (MPM): Some PAG and AFIAG members considered the boundary between Alternative Performance Measures (APM) and MPMs to be potentially confusing to stakeholders. Some PAG members envisaged challenges communicating MPMs internally and externally, particularly with regard to the scope of MPMs. c) Disclosure of specific expenses by nature: Some PAG and AFIAG members considered this disclosure could be confusing because the specified expenses, for example employee benefit, could be capitalised then depreciated or impaired and therefore go through different line items in the financial statements.

Questions for the Board—the IASB's communications strategy on IFRS 18 implementation and consistent application

1. Does the Board have any comments on the IASB's proposed communications strategy?

2. Does the Board agree the three areas in paragraph A8 should be given more focus in the IASB's implementation support? Does the Board have any comment on which other areas should be prioritised in the IASB's plan?

3. Does the Board have any examples of best practice that the IASB should consider in developing the plans to support the implementation and consistent application of IFRS 18?

October 2023 IASB meeting

A9In October 2023 the IASB discussed some sweep issues identified during the pre-balloting process for IFRS 18. At this meeting we provide an update of the IASB's tentative decisions in respect of the issues identified and invite the Board's input.³ The issues identified are:

a) Topic 1: The presentation of a line item for cost of sales and whether this line item should be separately presented from any other expenses classified by function in the statement of profit or loss. b) Topic 2: Whether the IASB should include in IFRS 18 a hierarchy of characteristics that an entity should consider for the aggregation/disaggregation of assets, liabilities and equity and for the presentation of line items in the statement of financial position. c) Topic 3: Whether the IASB should provide transitional relief from retrospective application of IFRS 18 for any earlier periods than the annual period immediately preceding the initial period of application.

Update on tentative IASB decisions in October 2023

A10The tables in the next page provide context around those decisions.

Topic 1: Decision to require the separate presentation of cost of sales from other items by function

Topic 2: Decision to include a hierarchy of characteristics for the statement of financial position

Topic 3: Decision not to include transitional relief for additional comparative information7

Other 'minor' sweep issues

A11The IASB provided comments on other minor sweep issues that the IASB staff will be addressing in the drafting of IFRS 18⁹. In this section we are referring to only one of those issues, where there was extensive board discussion.

Disclosure of specified expenses by nature—scope of line items subject to the requirement

A12IFRS 18 includes a requirement to disclose the amount of specified expenses by nature (depreciation, amortisation, employee benefits, write-down of inventories and impairments) that have been included in each function line item in the income statement. However, it is unclear whether this decision meant that an entity would be required to disclose those specified expenses for any line item presented in the income statement (i.e. not just for line items included in the operating category). For example, is an entity required to disclose depreciation on an investment property classified in the investing category?

A13The IASB staff recommended the IASB require the disclosure for any line item presented in the income statement to provide a complete picture of the entity's specified expenses by nature. However, many IASB members disagreed with this proposal as they were of the view that it was going beyond what was originally intended.

A14Although some IASB members mentioned potential confusion could arise from the differences between the total amounts of the specified expenses in the operating category and the total amounts of these specified expenses in the income statement, other IASB members acknowledged that the disclosures of these specified expenses are already required by other existing IFRS Accounting Standards, for example, IAS 16 Property, Plant and Equipment or IAS 40 Investment Property.

A15The IASB decided to confirm that entities will be required to disclose in a single note the amounts for the specified expenses that are included in each line item in the operating category only. In addition, entities will be required to include in the same note the below disclosures for each specified expense:

a) the total for the specified expenses by nature that are already required in IFRS Accounting Standards; and b) an explanation of the difference between the total of the amounts included in the line items in the operating category and the total described in A8(a). This is aligned with a previous IASB decision where entities are required to explain how a disclosed class of items is included in the primary financial statement¹⁰.

Next steps

A16The IASB is expected to continue the discussion of sweep issues until the publication of IFRS 18 (expected to be in H1 2024). The UKEB Secretariat has commenced planning activities for the UKEB's endorsement assessment of the forthcoming standard and is planning to bring a Project Initiation Plan for the endorsement of IFRS 18 in Q1 2024.

Question for the Board

1. Does the Board have any comments on the updates in the paper?

Annex A: Extract of ASAF paper

Appendix B: Rate-regulated Activities

Background

B1The IASB is continuing its redeliberations following feedback on its Exposure Draft Regulatory Assets and Regulatory Liabilities¹ (RRA ED). At its October 2023 meeting, the IASB:

a) Redeliberated the proposals on the boundary of the regulatory agreement. b) Discussed the IASB staff's analysis and feedback from the survey on the direct (no direct) relationship concept relating to borrowing costs, inflation and other items included in the regulatory capital base.

B2The second part of the update gives a brief overview of the discussion at the IASB's Consultative Group for Rate Regulation meeting on 13 October 2023.

B3The 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 on the boundary of a regulatory agreement, made at its October 2023 meeting.

Accounting for regulatory returns on assets not in use

B4The IASB's survey on the direct (no direct) relationship concept highlighted an issue relating to accounting for regulatory returns on assets not yet available for use in an entity with a direct relationship between its Property, Plant and Equipment (PPE) and Regulatory Capital Base (RCB).

B5The IASB tentatively decided to include in the prospective Accounting Standard guidance on how to account for regulatory returns on an asset not yet available for use that compensates for borrowing costs an entity has capitalised. The guidance would illustrate how an entity accounts for such regulatory returns if:

a) the entity determines the capitalised borrowing costs at a higher level of aggregation than the capitalised individual asset level; or b) a regulator determines the regulatory returns on a real basis.

UKEB Secretariat view

B6As UK entities do not have a direct relationship, they will not be affected by this tentative decision.

IASB next steps

B7The IASB will continue its redeliberations on the feedback received on the ED at future meetings. Future redeliberations will focus on the following topics:

c) Unit of account. d) Discount rate. e) Items affecting regulated rates only when related cash is paid or received. f) Presentation and disclosure. g) Amendments to other IFRS Accounting Standards. h) Effective date and transition.

Feedback from IASB Consultative Group for Rate Regulation meeting

B8The IASB's Consultative Group for Rate Regulation held a meeting on 13 October 2023 to discuss the ED proposals on the discount rate. The views shared will assist IASB staff in gathering feedback to help the IASB with its redeliberations on this topic.

B9The ED proposes to measure regulatory assets and regulatory liabilities using a cash-flow-based measurement technique that involves:

a) estimating future cash flows and updating them at the end of each reporting period to reflect conditions existing at that date; and b) discounting those estimates of future cash flows.

B10IASB Consultative Group members were asked several questions regarding the discount rate and shared the following views with IASB staff.

Regulatory interest rate as the discount rate

B11The ED proposes to measure regulatory assets and regulatory liabilities using a cash-flow-based measurement technique that involves:

a) estimating future cash flows and updating them at the end of each reporting period to reflect conditions existing at that date; and b) discounting those estimates of future cash flows.

B12The ED defines the regulatory interest rate as the interest rate provided by a regulatory agreement to compensate an entity for the time lag until recovery of a regulatory asset or to charge the entity for the time lag until fulfilment of a regulatory liability.

B13Most members reported that in their jurisdictions regulatory agreements do not include regulatory interest rates to compensate an entity for the time lag until recovery of a regulatory asset or to charge the entity for the time lag until the fulfilment of a regulatory liability.

B14One member shared that the regulatory agreements in their jurisdiction provided for a Weighted Average Cost of Capital (WACC) to be used instead of a regulatory interest rate. This view was further supported by 2 other members, including a UK user member.

B15One member shared that for the gas and electricity sector in their jurisdiction, it is rare that a regulator does not provide a regulatory interest rate. The reason for this is because the regulator wants to compensate entities for its regulatory assets and for entities to also compensate customers where a regulatory liability exists.

B16Most members also agreed that the recovery periods of regulatory assets or regulatory liabilities are generally short and therefore not significant.

B17Generally, members were supportive of possible exemptions from discounting regulatory assets or regulatory liabilities where:

a) they were recovered or fulfilled within a period of less than 12 months as this would be consistent with other IFRS Accounting Standards; and b) items were not considered to be significant.

Minimum interest rate

B18The ED proposed that on initial recognition of a regulatory asset and then subsequently if the regulatory agreement changes the regulatory interest rate:

a) an entity assesses whether there is any indication that the regulatory interest rate for a regulatory asset may be insufficient to compensate the entity for the time value of money and for uncertainty in the amount and timing of the future cash flows arising from the regulatory asset; and b) if such an indication exists, the entity estimates the minimum interest rate that is sufficient to provide that compensation. In such cases, the entity would use, as the discount rate, the higher of the regulatory interest rate and that minimum interest rate.

B19Generally, the few members who commented on the proposals in the ED regarding were in favour of the proposals being removed as the feedback provided to the IASB on this issue does not seem to indicate challenges with this topic in the various jurisdictions.

Uneven regulatory interest rate

B20The ED explains that a regulatory agreement may specify at initial recognition of a regulatory asset or regulatory liability a series of different regulatory interest rates for successive periods over the life of that regulatory asset or regulatory liability. In such cases, the ED proposed that an entity:

a) translates those uneven regulatory interest rates into a single discount rate at initial recognition and uses that rate throughout the life of the regulatory asset or regulatory liability. b) continues to use the discount rate determined at initial recognition unless the regulatory agreement changes the regulatory interest rate.

B21One member shared that it was common in their jurisdiction that regulatory agreements specify a series of different regulatory interest rates for successive periods over the life of a regulatory asset or regulatory liability and recommended that in such cases, a single rate of interest should be used. Other members further suggested that more information on this topic be sought from jurisdictions where this issue is common.

B22The group will be meet again on 30 November 2023, to discuss the proposed disclosure requirements contained in the ED.

Question for the Board

1. Do Board members have any questions or comments on the Rate-regulated Activities update?

Appendix C: Climate-related and Other Uncertainties in the Financial Statements: Project direction

Topic for Discussion

Purpose of this update

C1In our October IASB update¹, we advised the Board that the IASB had tentatively decided the objective of the project would be to explore whether and, if so, how targeted actions could improve the reporting of financial information about climate-related and other uncertainties in the financial statements.

C2The IASB project team has requested feedback from the December 2023 meeting of Accounting Standards Advisory Forum (ASAF) regarding the potential development of illustrative examples for materiality and for other uncertainties to support the IASB project direction.

Materiality examples

C3The IASB is seeking feedback on whether new examples regarding the application of the definition of materiality may help address stakeholder concerns that information about climate-related and other uncertainties in the financial statements is insufficient or inconsistent (not connected) with information reported elsewhere.

C4The IASB presentation² notes that any examples developed would not add to or change the requirements in IFRS Accounting Standards. However, they could build on examples C and K in IFRS Practice Statement 2 Making Materiality Judgments³ and tailor them for climate-related scenarios. The presentation also outlines the pros, cons and timeframes of different options for disseminating these examples: as educational material, illustrative examples accompanying Accounting Standards, or incorporation in IFRS Accounting Standards.

C5Questions to ASAF members regarding materiality examples are:

a) Would materiality examples significantly improve how entities apply IFRS Accounting Standards in reporting the effects of climate-related and other uncertainties? b) What is your experience of the application of Examples C and K by preparers in practice? What are the challenges in applying the concepts illustrated in Examples C and K in your jurisdiction? c) What recommendations do you have about the possible content of the examples? d) If the IASB decided to develop new examples on materiality what would be your preference for how the examples are treated: educational material, illustrative examples accompanying Accounting Standards; or Accounting Standards.

Other uncertainty examples

C6The IASB is also exploring developing examples to illustrate how an entity would apply the requirements in IFRS Accounting Standards in reporting the effects of other uncertainties in its financial statements. The staff are seeking feedback on the scope, fact patterns, areas of accounting, types of examples and the implementation options.

C7Questions to ASAF members regarding other uncertainty examples are:

e) Would examples (other than on materiality) significantly improve how entities apply IFRS Accounting Standards in reporting the effects of climate-related and other uncertainties? f) What areas of IFRS Accounting Standards and fact patterns do you think should be illustrated through examples? Should the examples illustrate the application of specific requirements (stand-alone examples) or 'walk through' requirements across multiple Standards? g) What are your views regarding the best vehicle and timing for the examples?

UKEB Advisory and Working Group feedback

C8The Preparers Advisory Group (PAG) discussed the IASB tentative decisions on this project at its October 2023 meeting. A PAG member representing an organisation significantly affected by climate related risks expressed disappointment at the limited scope of proposed IASB standard-setting activity.

C9PAG members discussed the application of IAS 37 to climate-related commitments. A member questioned whether climate commitments were obligations or more often framed as ambitions. Two members considered that IAS 37 was generally working well in practice, and that the standard set a high bar to the recognition of liabilities. One member also cautioned that making even small changes to the standard could cause confusion for existing areas of application and make practice less consistent.

C10As part of the horizon scanning discussion, two members highlighted emerging issues facing their organisations relating to the generation of carbon credits, including difficulties associated with the measurement of those credits. Sustainability Working Group members had also previously highlighted challenges associated with measurement of rates of carbon sequestration for certain types of assets.

C11The Advisory groups are increasingly raising a broad spectrum of areas that have origins in climate related risks faced by companies and their responses to them. Ones highlighted at recent meetings include:

h) reporting of disposals of windfarms held in corporate wrappers, i) consistency of classification and presentation of emissions certificates held for compliance purposes.

C12In the Secretariat's view, the adoption of IFRS SI and S2, and their requirements to disclose the financial effects of climate related risks, may lead to additional pressure on information reported on such matters in the financial statements. Additionally, IFRS S1 and S2 are agnostic as to where these effects are disclosed in a sustainability report or in the financial statements themselves. With that in mind, the narrow scope of the IASB's current project may limit these emerging issues being addressed appropriately, consistently or on a timely basis.

Next steps

C13We will seek further feedback from UKEB Advisory and Working Group members ahead of the December 2023 ASAF meeting and continue engagement with the IASB project team as the project approach develops.

Question for the Board

1. Do Board members have any comments in response to the ASAF questions?

Appendix D: Subsidiaries without Public Accountability: Disclosures

Background

D1At its October 2022 meeting, the IASB tentatively decided to modify the approach to developing the proposed disclosure requirements in the Exposure Draft (ED) to ensure the language used in the forthcoming standard is the same as that used in IFRS Accounting Standards¹.

D2At its April 2023 meeting the IASB discussed how it would update the language in the forthcoming standard to be the same as in IFRS Accounting Standards².

D3At its October 2023 meeting, the IASB considered the more judgemental changes proposed to the disclosure requirements in the ED as a result of following this modified approach, as well as instances where the IASB staff recommend a departure from the language in full IFRS Accounting Standards.

Summary of changes

D4The tentative decisions made by the IASB at its October 2023 meeting are included in Annex 1 of this paper and fall into the following categories:

a) deleting disclosure requirements that have no equivalent in full IFRS Accounting Standards (Table 1); b) amending disclosure requirements to require additional or alternative information to match what is required in full IFRS Accounting Standards (Table 2); and c) not amending disclosure requirements, notwithstanding differences between the language used in the forthcoming standard and the equivalent full IFRS Accounting Standards (Table 3).

Next steps

D5The IASB expects to issue the Standard in the second quarter of 2024.

D6The UKEB Secretariat will continue to monitor the IASB discussions.

Annex 1: summary of changes

Appendix E: Equity Method

Background

E1At its September 2023 meeting¹, the IASB discussed the implications of applying its tentative decisions (for investments in associates) to investments in:

a) subsidiaries in separate financial statements; and b) joint ventures.

E2At the September 2023 ASAF meeting, the IASB staff asked ASAF members for their views on this topic².

E3At its October 2023 meeting, the IASB made tentative decisions on this topic.

IASB discussion

E4IASB members expressed the view that, given the project's scope, the IASB should retain only one version of the equity method. A second version of the equity method for subsidiaries should, if needed, be considered in a separate project on the requirements for separate financial statements in IAS 27 Separate Financial Statements. With regard to applying the equity method for investments in joint ventures, some IASB members were concerned that introducing two versions of the equity method would require reconsidering the IASB's decisions when developing IFRS 11 Joint Arrangements.

E5The IASB staff paper reported the feedback from ASAF members on this topic. Overall, ASAF members supported continuing to apply the equity method as would be described in IAS 28 Investments in Associates and Joint Ventures when a parent elects to use the equity method to account for its investments in subsidiaries in its separate financial statements. In addition, ASAF members agreed with the IASB staff analysis that the rationale for the IASB's tentative decisions for investments in associates can be applied to investments in joint ventures. This is consistent with the UKEB position at the September 2023 ASAF meeting.

E6The IASB staff recommended the IASB apply its tentative decisions on application questions for investments in associates when parents elect to use the equity method for investments in subsidiaries in their separate financial statements, i.e. the equity method as would be described in IAS 28.

E7Furthermore, the IASB staff think that applying the IASB's tentative decisions on application questions for investments in associates to investments in joint ventures would not lead to unintended consequences (including inconsistencies) with the requirements in IAS 28, IFRS 11, IFRS 10 Consolidated Financial Statements and the Conceptual Framework for Financial Reporting (Conceptual Framework).

E8In the IASB staff's view, deviating from any of the IASB's tentative decisions would be problematic mainly because it would create two versions of the equity method and introduce unnecessary complexity.

IASB tentative decision

E9All IASB members agreed with the IASB staff recommendations and tentatively decided that its tentative decisions on application questions for investments in associates apply:

a) when a parent elects to use the equity method to account for its investments in subsidiaries in separate financial statements; and b) to investments in joint ventures.

Next steps

E10At a future IASB meeting, the staff will ask the IASB to:

a) discuss possible improvements to disclosure requirements for investments, other than those in associates, accounted for using the equity method; b) decide whether to publish an exposure draft of amendments to IAS 28 or an exposure draft of IAS 28 revised; and c) discuss transition requirements for the proposals to revise IAS 28.

E11The IASB work plan, at the time of writing, indicates that the Exposure Draft is expected in H2 2024.

E12The UKEB Secretariat will continue to monitor the IASB discussions.

Appendix F: Amendments to the Classification and Measurement of Financial Instruments

Background

F1At its September meeting, the IASB discussed the overall responses it had received from the public consultation on the Exposure Draft (ED) Amendments to the Classification and Measurement of Financial Instruments. It did not take any decisions.

F2In October, the IASB discussed¹ stakeholder feedback received specifically on Question 2 of the ED about contractual terms that are consistent with a basic lending arrangement. The IASB was not asked to make any decisions.

Summary of stakeholder feedback

F3Overall, respondents welcomed the IASB's intention to clarify the requirements in IFRS 9 Financial Instruments for assessing whether the contractual cash flows of financial assets are SPPI², specifically in the case of financial assets with ESG-linked features. The feedback appears broadly consistent with the UKEB comment letter³.

Concept of a basic lending arrangement

F4Most respondents welcomed the clarifications to the elements of interest that are consistent with a basic lending arrangement (ED paragraph B4.1.8A). However, some considered that it remained unclear why certain ESG-linked features could be seen to represent compensation for basic lending risks or costs.

F5Many respondents expressed concerns on the statement that "a change in contractual cash flows is inconsistent with a basic lending arrangement if it is not aligned with the direction and magnitude of the change in basic lending risks or costs". Respondent concerns included the following:

a) the apparent inconsistency of this statement with requirements elsewhere in IFRS 9 on whether or not a quantitative assessment of compensation is required; b) the lack of clarity on how such a requirement should be applied to ESG-linked features when the change in contractual cash flows cannot be linked directly to a change of basic lending risks or costs; and c) whether this statement would be better incorporated into guidance on contractual terms that change the timing or amount of contractual cash flows.

A number of respondents suggested alternative wording.

Considering the size of changes in contractual cash flows

F6Many respondents further observed an apparent contradiction in paragraph B4.1.8A, between the assessment of interest, which focuses "on what an entity is being compensated for, rather than how much compensation an entity receives" and a change in contractual cash flows being "inconsistent with a basic lending arrangement if it is not aligned with the direction and magnitude of the change in basic lending risks or costs".

F7Most respondents agreed with the first statement. However, some did not, observing that IFRS 9 can require an entity to consider how much compensation it receives for a particular element of interest, such as at paragraphs B4.1.9B to B4.1.9D.⁴

F8Most respondents did not disagree that changes in cash flows should be consistent in direction with changes in basic lending risks or costs, but many expressed concerns with the term 'magnitude', which is not defined or used elsewhere in IFRS 9, for example, in relation to the concept of leverage. Suggested enhancements included relying on the existing application guidance on leverage, rewording the requirement and including additional application guidance on applying the requirement.

Contractual terms that change the timing or amount of contractual cash flows

F9In paragraph B4.1.10A of the ED, the IASB propose that "For a change in contractual cash flows to be consistent with a basic lending arrangement, the occurrence (or non-occurrence) of the contingent event must be specific to the debtor". Many respondents suggested that this could result in contractual terms that are currently generally considered consistent with a basic lending arrangement no longer being considered to represent SPPI cash flows. Those respondents considered that these requirements could be understood to cover increased cost clauses, which permit lenders to increase the interest rate to reflect changes in tax laws or regulations.

Contingent events specific to the debtor

F10Many respondents observed that the wording 'specific to the debtor' appears to preclude changes in the cash flows of instruments with ESG-linked targets set in relation to an industry sector, to the entire reporting group or to a different group entity from being classified as consistent with a basic lending arrangement.

Investment in the debtor and performance of specified assets

F11Some respondents expressed concerns with the statement in paragraph B4.1.10A of the ED that the resulting cash flows must represent neither an investment in the debtor nor an exposure to the performance of specified assets. Stakeholders noted that the wording differs from paragraph B4.1.16 of IFRS 9 which refers to 'an investment in particular assets or cash flows' and that it is not clear what is meant by the term 'an investment in the debtor' in this context.

IASB staff analysis

Overall approach

F12The IASB staff consider that the relevant application guidance in IFRS 9 for the SPPI assessment should be considered holistically. As a result, no specific paragraph or requirement takes precedence or can be applied in isolation and neither does the order in which paragraphs are located in the Standard affect whether cash flows are SPPI or not.

F13The IASB staff is of the view that the proposed clarifications do not change the basic principles behind the assessment of contractual cash flows of financial assets. Nevertheless, the IASB staff acknowledged that the proposed clarifications to the application guidance could be further refined to respond more effectively to the issues raised during the PIR while limiting the risk of unintended consequences.

F14Refinements suggested by the IASB staff are presented in the following paragraphs.

Concept of a basic lending arrangement

F15The IASB staff acknowledged concerns raised by respondents about the statement in paragraph B4.1.8A of the ED that 'a change in contractual cash flows is inconsistent with a basic lending arrangement if it is not aligned with the direction and magnitude of the change in basic lending risks or costs'.

F16The IASB staff agreed with respondents that it is not helpful to include such an unconditional statement as part of the clarified description of what constitutes a basic lending arrangement and that the principles articulated in this statement should be considered together with the requirements relating to 'contractual terms that change the timing or amount of contractual cash flows' (see below).

Contractual terms that change the timing or amount of contractual cash flows

F17The IASB staff noted that the core principle articulated in paragraph B4.1.10 of IFRS 9 is that the cash flows before and after a change in contractual cash flows should represent SPPI. This paragraph further states that an entity 'may need to assess the nature of any contingent event' but that the 'nature of the contingent event in itself is not a determinative factor'.

F18The IASB had attempted to give more definitive guidance by proposing that the occurrence of a contingent event should be 'specific to the debtor' to be consistent with a basic lending arrangement. However, given shortcomings identified as part of stakeholder feedback analysis, the IASB staff think it is worth considering a different approach to clarifying those principles.

F19The IASB staff consider that the requirements in paragraph B4.1.10 of IFRS 9 can be supplemented by clarifying that if a financial asset, that would otherwise have cash flows that are SPPI, contains a contractual feature that would change the timing or amount of contractual cash flows based on the occurrence of a contingent event and the nature of this contingent event does not clearly indicate that the contractual cash flows over the life of the financial asset are SPPI, the instrument could nevertheless have SPPI cash flows if:

a) the contractually specified changes in cash flows following the occurrence (or non-occurrence) of any contingent event would give rise to cash flows that are SPPI when considered in isolation; and b) the fair value of this contractual feature at initial recognition is insignificant.

F20Nevertheless, the entity will still need to make a holistic assessment of whether the contractual cash flows of the financial asset represent SPPI by taking into account the other requirements in IFRS 9, including that the resulting cash flows should not represent an investment in particular assets or cash flows.

F21In addition, considering the intention of the IASB and the concerns raised by respondents on the terminology used in the proposals, the staff are of the view that aligning the wording of the refined clarification with that which is used in paragraph B4.1.16 of IFRS 9, that is, that the resulting cash flows should not represent 'an investment in particular assets or cash flows' would resolve most of the concerns. Furthermore, since the IASB proposed in paragraph B4.1.8A of the ED that a share of revenue or profits of the debtor is an example of a risk not typically considered a basic lending risk or cost, the staff do not believe that further application guidance is needed in this context.

Next steps

F22The IASB will continue its discussions on this topic. According to the IASB work plan, the IASB expects to finalise the amendments in H1 2024. The UKEB Secretariat will continue to monitor the IASB discussions.

Appendix G: Interpretations Committee Update

Background

G1The UKEB's 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:

a) 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); b) disagreement with the Interpretation Committee's analysis; or c) usefulness of the explanations and clarifications included in the tentative agenda decision.

G2The Interpretations Committee's next meeting is scheduled for 28 – 29 November 2023. At the time of drafting this paper no agenda or papers for that meeting have been published. We will provide an update to the Board at its next meeting.

Pipeline matters

G3One new matter has been added to the Interpretations Committee pipeline: "Provisions for climate-related commitments (IAS 37)¹".

G4This submission (which runs to 14 pages) requests that the Interpretations Committee consider whether:

a) "A Net Zero Transition Commitment meets the definition of a constructive obligation under IAS 37 paragraphs 10 and 20, and b) A Net Zero Transition Commitment should be recognised as a provision according to the principles of paragraphs 11–26 of IAS 37, and c) Starting with recognising a provision, the principles and accounting for asset decommissioning should be applied to a strategy and investment program designed to meet a Net Zero Transition Commitment—using the analogy that an entity is committing to decommission its carbon-emitting infrastructure."

G5If this submission is brought to the November 2023 Interpretations Committee meeting, the Secretariat will provide further information at the Board's December 2023 meeting to enable the Board to decide whether it will respond to any tentative agenda decision.

IASB ratification of agenda decisions

G6At its October 2023 meeting, the IASB was asked whether it objected to three Interpretations Committee agenda decisions²:

a) Premiums Receivable from an Intermediary (IFRS 7 and IFRS 9). b) Homes and Home Loans Provided to Employees. c) Guarantee over a Derivative Contract (IFRS 9).

G7No IASB member objected to any of these agenda decisions so they are now finalised.

Appendix H: List of IASB projects

This Appendix provides a list of all IASB projects¹, including links to the IASB project page and, where relevant, to the UKEB project page and any UKEB reports or comment letters. Items highlighted in grey are changed from the last report.

List of IASB projects

Amendments to the Classification and Measurement of Financial Instruments

Annual Improvements (Amendments to IFRS Accounting Standards: IAS 7, IFRS 1, IFRS 7, IFRS 9, IFRS 10)

Business Combinations under Common Control

Business Combinations—Disclosures, Goodwill and Impairment

Climate-related and Other Uncertainties in the Financial Statements

Disclosure Initiative—Subsidiaries without Public Accountability: Disclosures

Dynamic Risk Management

Equity Method

Extractive Activities

Financial Instruments with Characteristics of Equity

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

Post-implementation Review of IFRS 9—Impairment

Primary Financial Statements

Provisions—Targeted Improvements

Rate-regulated Activities

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Footnotes