DECA - Endorsement of May 2020 Amendments

| Aspect | Content ``` What has Changed? The Amendments to IFRS 1 added new paragraph D13A to extend the exemption in paragraph D16(a) to the measurement of CTD. Instead of applying paragraph D12 or paragraph D13 of IFRS 1 to measure CTD, a subsidiary that uses the exemption in paragraph D16(a) may elect, in its financial statements, to measure CTD for all foreign operations at the carrying amount that would be included in the parent's consolidated financial statements, based on the parent's date of transition to IFRSs (if no adjustments were made for consolidation procedures and for the effects of the business combination in which the parent acquired the subsidiary). This election is available to an associate or joint venture that uses the exemption in paragraph D16(a). Transition No transition requirements. Origin In 2017 the IFRS Interpretations Committee discussed a request about the accounting applied by a subsidiary that becomes a first-time adopter of IFRS Standards later than its parent. The subsidiary has foreign operations, on which it accumulates translation differences in a separate component of equity. The request asked whether the exemption in paragraph D16(a) of IFRS 1 for measuring the assets and liabilities of a subsidiary that becomes a first-time adopter later than its parent, could be applied (by analogy) to measure cumulative translation differences (CTD) at the amount that would be included in the parent's consolidated financial statements, based on the parent's date of transition to IFRSs. This was despite of: * the exemption in paragraph D16(a) of IFRS 1 not being applicable to the measurement of equity components; * paragraph 18 of IFRS 1 prohibiting the application of exemptions by analogy; and * IFRS 1 already including an exemption in paragraphs D12-D13 of IFRS 1 to measure CTD either at zero or on a retrospective basis at its date of transition to IFRSs. Relevance, The Amendments to IFRS 1 lead to relevant, reliable and understandable information, Reliability and because they allow a subsidiary entity to measure CTD at an amount that is already Understandability recognised in the consolidated financial statements of the parent based on the parent's transition to international accounting standards. Comparability The Amendments to IFRS 1 have the potential to impair comparability, because a first- time adopter that applies the exemption in paragraph D16(a) of IFRS 1 can elect to measure CTD using either the exemption in paragraph D13, or the new exemption in paragraph D13A. Nevertheless, a potential lack of comparability could be potentially mitigated by: * providing sufficient disclosures that would enable users understand the reasons for applying the exemptions in IFRS 1 and how applying those exemptions would impact the entity's financial position and financial performance. * focusing on the benefits resulting from the Amendments to IFRS 1 – consistency with the requirements for first-time adopters that elect to apply paragraph D16(a) of IFRS 1 as well as cost-savings for preparers. Initial conclusion Overall, we initially conclude that the May 2020 Amendments to IFRS 1 meet the criteria of relevance, reliability, comparability and understandability required of the financial information needed for making economic decisions and assessing the stewardship of management, as required by SI 2019/685. Does the The Amendments to IFRS 1 improve financial reporting as they simplify and ease the amendment transition to international accounting standards for a subsidiary that uses the improve financial exemption in paragraph D16(a) and that that elects to apply D13A of IFRS 1. reporting? The Amendments to IFRS 1 allow the measurement of CTD at an amount that is already recognised in the consolidated financial statements of the parent and are consistent with the rationale underlying an existing exemption in IFRS 1 of eliminating the requirement to keep two parallel sets of accounting records. Costs and Preparers: The Amendments to IFRS 1 are likely to reduce the administrative burden of benefits for a subsidiary that uses the exemption in paragraph D16(a) and that elects to apply D13A preparers and of IFRS 1, as they avoid keeping two parallel sets of accounting records for CTD based users on different dates of transition to IFRSs–one to prepare the subsidiary's own financial statements and another when the subsidiary reports information for the preparation of the parent's consolidated financial statements. Users: The proposed relief is also likely to provide more consistent information for users as the Amendments to IFRS 1 allow the measurement of CTD at an amount that is already recognised in the consolidated financial statements of the parent. Initial conclusion The May 2020 Amendments to IFRS 1 are limited in scope and will generally bring improved financial reporting when compared to current guidance. The UKEB has not, so far, identified that these amendments could have any adverse effect to the UK economy, including on economic growth. As such, the endorsement is likely to be conducive to the UK long term public good in that improved financial reporting improves transparency and assists in the assessment of management stewardship. Overall initial Having considered all relevant aspects, including the trade-off between the costs and conclusion benefits of implementing the May 2020 Amendments to IFRS 1, the UKEB initially concludes that they are likely to be conducive to the long term public good in the UK as required by SI 2019/685. This initial conclusion will be finalised having reviewed the comments received from the consultation. | | What has Changed? | The Amendments to IFRS 1 added new paragraph D13A to extend the exemption in paragraph D16(a) to the measurement of CTD. Instead of applying paragraph D12 or paragraph D13 of IFRS 1 to measure CTD, a subsidiary that uses the exemption in paragraph D16(a) may elect, in its financial statements, to measure CTD for all foreign operations at the carrying amount that would be included in the parent's consolidated financial statements, based on the parent's date of transition to IFRSs (if no adjustments were made for consolidation procedures and for the effects of the business combination in which the parent acquired the subsidiary). This election is available to an associate or joint venture that uses the exemption in paragraph D16(a). | | Transition | No transition requirements. |

| Aspect | Content | Aspect | Content

The## Introduction

Purpose

1The purpose of this [draft] Endorsement Criteria Assessment (DECA) is to determine whether the UK's statutory requirements for endorsement and adoption are met for a set of six amendments to international accounting standards[^1] published by the International Accounting Standards Board's (IASB) in May 2020 (with an effective date of 1 January 2022 with earlier application permitted).

2The amendments covered in this assessment were published by the IASB before the UK's Exit from the EU and were not incorporated into Domestic UK law as UK-adopted international accounting standards at the end of the Transition Period on 31 December 2020. This is because the European Union's process for adoption of these amendments had not been completed before the UK's Exit from the EU[^2].

3The UK Endorsement Board (UKEB) was not able to directly influence the development of the IASB's proposals as the amendments were finalised and published before the creation of the UKEB. However, the amendments have been subject to public consultation and comments from UK stakeholders were submitted directly to the IASB and/or to the European Financial Reporting Advisory Group (EFRAG) and were fully considered by the IASB when finalising those amendments.

Background to the amendments

4The IASB issues amendments to international accounting standards as part of its continuous effort to maintain and improve maintain IFRS Standards and to support consistent application. Five of the six amendments came from questions submitted by external stakeholders to the IFRS Interpretations Committee.

5The amendments considered in this assessment consist of:

1. three 'Annual Improvements' amendments from the Annual Improvements to IFRS® Standards 2018–2020 (Annual Improvements); and
2. three 'Narrow-Scope' amendments issued separately.

6'Annual Improvements' are amendments that are sufficiently minor or narrow in scope and are bundled together in a single Exposure Draft (ED) document (even though amendments are unrelated). These amendments meet the criteria in paragraphs 6.10–6.13 of the IASB's Due Process Handbook[^3] and are limited to changes that clarify the wording in the standards, or correct relatively minor unintended consequences, oversights or conflicts between existing requirements.

7'Narrow-scope' amendments do not meet the criteria for annual improvements but meet the criteria in paragraph 5.16 of the IASB's Due Process Handbook[^3] and are considered 'narrow' in scope. Narrow-scope amendments address concerns about a specific aspect of a standard without causing major or significant changes in practice. They are issued and exposed for public comment (separately from annual improvements) when the IASB determines that the narrow-scope amendment merits separate consultation and outreach.

Structure of the assessment

8We have split our analysis into the following sections:

1. Section A: describes UK Statutory requirements for endorsement and adoption;
2. Appendix 1: discusses how the Annual Improvements meet the criteria in section A; and
3. Appendix 2: discusses how the Narrow-Scope Amendments meet the criteria in section A.

9For each amendment described in the appendices we provide:

1. a description and rationale, what has changed and overview of UK views on the ED's proposals;
2. a technical criteria assessment (refer to paragraph 10(c));
3. is not contrary to the true and fair view requirement (refer to paragraph 10(a)); and
4. an assessment of whether the Amendments would be conducive to the UK long term public good (refer to paragraph 10(b) and 11(b).)

Section A: UK Statutory requirements for endorsement and adoption

10Paragraph 1 of Regulation 7 of The International Accounting Standards and European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019 No. 685 requires that an international accounting standard only be adopted if:

1. "the standard is not contrary to either of the following principles-
   1. an undertaking's accounts must give a true and fair view of the undertaking's assets, liabilities, financial position and profit or loss;
   2. consolidated accounts must give a true and fair view of the assets, liabilities, financial position and profit or loss of the undertakings included in the accounts taken as a whole, so far as concerns members of the undertaking;
2. the use of the standard is likely to be conducive to the long term public good in the United Kingdom; and
3. the standard meets the criteria of understandability, relevance, reliability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management.”

11This document assesses the criteria above in the following order:

1. Technical criteria assessment:
   1. Whether the standard meets the criteria of relevance, reliability, comparability and understandability required of the financial information needed for making economic decisions and assessing the stewardship of management (Regulation 7(1)(c)); and
   2. Whether the standard is not contrary to the principle that an entity's accounts must give a true and fair view (Regulation 7(1)(a)).
2. Whether use of the standard is likely to be conducive to the long term public good in the UK (Regulation 7(1)(b)). Regulation 7(2) of SI 2019/685 includes specific areas to consider for this assessment. They are:
   1. whether each amendment is likely to improve the quality of financial reporting;
   2. the costs and benefits that are likely to result from each amendment; and
   3. whether the amendments are likely to have an adverse effect on the economy of the UK, including on economic growth.

Relevance, Reliability, Comparability and Understandability[^4]

12Information is relevant if it is capable of making a difference in the decision-making of users or in their assessment of the stewardship of management. The information may aid predictions of the future, confirm or change evaluations of the past or both.

13Financial information is reliable if, within the bounds of materiality, it:

1. can be depended on by users to represent faithfully what it either purports to represent or could reasonably be expected to represent;
2. is complete; and
3. is free from material error and bias.

14Information is comparable if it enables users to identify and understand similarities in, and differences among, items. Information about an entity should be comparable with similar information about other entities and with similar information about the same entity for another period.

15Financial information should be readily understandable by users with a reasonable knowledge of business and economic activities and accounting, and a willingness to study the information with reasonable diligence.

Amendment is not contrary to the true and fair view requirement for individual financial statements and consolidated financial statements

16Accounting standards provide for recognition, measurement, presentation and disclosure for transactions and events so that the financial statements fairly reflect the economic substance of those underlying transactions and events. The assessment therefore considers whether a standard or an amendment to a standard is not contrary to:

1. the individual financial statements reflecting the economic substance of transactions and events such that the financial statements give a true and fair view of the undertaking's assets, liabilities, financial position and profit or loss; or
2. the consolidated financial statements reflecting the economic substance of transactions and events such that the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the undertakings included in the accounts taken as a whole, so far as concerns members of the undertaking.

Appendix 1: Endorsement and adoption of annual improvements (issued 2020)

The IASB issued, on 14 May 2020, four amendments in its Annual Improvements to IFRS® Standards 2018–2020. An Exposure Draft of the Amendments was issued on 21 May 2019 (and open for comment until 20 August 2019). The Annual Improvements amendments covered in this assessment are:

1. Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards—Subsidiary as a First-time Adopter.
2. Amendments to IFRS 9 Financial Instruments—Fees in the '10 per cent' Test for Derecognition of Financial Liabilities.
3. Amendments to IAS 41 Agriculture—Taxation in Fair Value Measurements.

This draft Endorsement Criteria Assessment excludes the amendment that changed an Illustrative Example in IFRS 16 Leases. Illustrative Examples are non-mandatory guidance accompanying a standard[^5],[^6]. The endorsement and adoption process applies only to the mandatory sections of standards that, if adopted, will become “UK-adopted international accounting standards".

I. Amendments to IFRS 1—Subsidiary as a First-time Adopter