IFRS: Changes on the way

by Steve Collings

On 3 May 2012, the International Accounting Standards Board (IASB) published for public comment an exposure draft of proposed amendments to 11 IFRSs which it will undertake as part of its annual improvements project. Comments are to be received by the IASB by 5 September 2012. Throughout the course of this article you will note that the effective from date for all the amendments is for annual periods commencing on or after 1 January 2014, with the exception of the amendments to IFRS 3 Business Combinations and the consequential amendment to IFRS 9 which are planned for annual periods commencing on or after 1 January 2015. However, earlier adoption is permissible for all the amendments, but disclosure of the fact that the amendments have been adopted earlier than scheduled should be made in the financial statements. A summary of the project is as follows: IFRS IFRS 2 Share-based Payment IFRS 3 Business Combinations Subject of amendment Definition of vesting condition Accounting for contingent consideration in a business combination Aggregation of operating segments. Reconciliation of the total of the reportable segments assets to the entitys assets Short-term receivables and payables Current/non-current classification of liabilities Recognition of deferred tax assets for unrealised losses Interest paid that is capitalised Revaluation method proportionate restatement of accumulated depreciation Key management personnel Harmonisation of disclosures for value in use and fair value less costs of disposal

IFRS 8 Operating Segments IFRS 13 Fair Value Measurement IAS 1 Presentation of Financial Statements IAS 12 Income Taxes IAS 7 Statement of Cash Flows IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets IAS 24 Related Party Disclosures IAS 36 Impairment of Assets

IFRS 2 Share-based Payment The amendments to this standard are proposed because currently IFRS 2 does not separately define a performance condition or a service condition; rather IFRS 2 currently describes the two concepts within the definition of vesting conditions. The amendment to IFRS 2 will be achieved by

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the addition of paragraph 63B which refers to the effective date, which is for annual periods beginning on or after 1 January 2014, with earlier adoption permitted. The Board have also amended paragraphs 15 and 19 to IFRS 2 and Appendix A Defined terms. The proposals are to separately define a performance condition and a service condition which are as follows: Performance condition: A vesting condition that requires: (a) (b) the counterparty to complete a specified period of service; and specified performance targets to be met while the counterparty is rendering the service required in (a).

A performance target is defined by reference to the entitys own operations (or activities) or the price (or value) of its equity instruments (including shares and share options). A performance target might relate either to the performance of the entity as a whole or to some part of the entity, such as a division or an individual employee. Service condition: A vesting condition that requires the counterparty to complete a specified period of service. If the counterparty, regardless of the reason, ceases to provide service during the vesting period, the counterparty has failed to satisfy the condition. A service condition does not require a performance target to be met. The term vesting condition has also been amended and in Appendix A is proposed to be defined as: Vesting conditions: A condition that determines whether the entity receives the services that entitle the counterparty to receive cash, other assets or equity instruments of the entity, under a share-based payment arrangement. A vesting condition is either a service condition or a performance condition. A performance condition might include a market condition. IFRS 3 Business Combinations The impact of this proposed amendment is twofold. Firstly the Board are proposing to amend IFRS 3 in respect of contingent consideration that falls to be treated as a liability or an equity instrument when the contingent consideration is a financial instrument. This will therefore have a direct consequential effect to IFRS 9 Financial Instruments. The Board is proposing to clarify that contingent consideration is assessed to be classified as either a liability or equity instrument only on the basis of the provisions contained in IAS 32 Financial Instruments: Presentation. In its current form, IFRS 3 refers to IAS 32 and other applicable IFRSs when it comes to determining whether contingent consideration is to be classified as a liability or as an equity instrument. The Board wishes to clear up this ambiguity by deleting the term other applicable IFRSs as it acknowledges that current classification requirements are unclear as to when (if ever) any other applicable IFRSs would need to be used in order to determine the classification of

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contingent consideration as a financial liability or as an equity instrument. The proposal here is to delete or other applicable IFRSs that is currently sat in paragraph 40 to IFRS 3. The Board also proposes to clarify that any contingent consideration which does not fall to be classified as an equity instrument is subsequently measured at fair value and any changes in fair value being recognised in either profit or loss or other comprehensive income in accordance with IFRS 9 requirements. Paragraph 58 to IFRS 3 currently does require subsequent measurement of contingent consideration at fair value, but in its present form the current IFRS 3 is causing an element of contradiction by referring to other IFRSs in which fair value is not necessarily the subsequent measurement basis. In recognition of this issue, the Board is proposing to iron out this contradiction by deleting reference to IAS 37 and other IFRSs as appropriate and amending IFRS 9 so as to clarify that contingent consideration which is a financial asset or a financial liability can only be measured at fair value and any changes to fair value are to be recognised in either profit or loss or other comprehensive income depending on IFRS 9 requirements. IFRS 3 will also have paragraph 64G included which refers to the effective from date and the revised IFRS 3 is proposed to take effect for business combinations in which the acquisition date is on or after 1 January 2015, though earlier adoption is permitted. Where earlier adoption is taken, disclosure of the fact that the revised standard has been adopted earlier shall be made in the financial statements, and at the same time the revised IFRS 9 will also be applied. In the revised IFRS 9, paragraph 4.1.2 (c) will be included which says: The asset is not a contingent consideration to which IFRS 3 Business Combinations applies. Paragraph 4.2.1(e) will also be included which says: contingent consideration in a business combination (see IFRS 3 Business Combinations). Such financial liabilities shall be subsequently measured at fair value with changes in the fair value of the financial liabilities being presented in accordance with paragraphs 5.7.7-5.7.8 as if they had been designated at fair value through profit or loss at initial recognition. The effective date of the revised IFRS 9 is consistent with the revised IFRS 3 which is for business combinations for which the acquisition date is on or after 1 January 2015 (note this effective date is one year later than the other planned amendments) with earlier adoption permitted. Where earlier adoption is taken up, the financial statements must disclose this fact and the revised IFRS 3 must be applied. IFRS 8 Operating Segments The Board is proposing to amend paragraph 22 to IFRS 8 and the effect of this amendment will be to require reporting entities to disclose the factors which are used to identify their reportable segments when operating segments have been aggregated. In addition, the Board is also planning to amend paragraph 28(c) in order to clarify that a reconciliation of the total of the reportable segments assets to the entitys assets should be disclosed when that amount is regularly provided to the chief operating decision maker so as to be consistent with the requirements of paragraph 23 to IFRS 8.

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There will also be the introduction of paragraph 36C which states that an entity must apply the revised IFRS 8 for annual periods commencing on or after 1 January 2014, with earlier adoption permitted. IFRS 13 Fair Value Measurement The Board wishes to make amendments to IFRS 13 Basis for Conclusions in respect of short-term receivables (debtors) and payables (creditors). The provisions in IFRS 13 removed paragraphs B5.4.12 in IFRS 9 Financial Instruments and paragraph AG79 of IAS 39 Financial Instruments: Recognition and Measurement. The Board became aware that the deletion of these two paragraphs could well be interpreted as removing the ability for an entity to measure short-term receivables and payables with no stated interest rate at invoice amounts without discounting to present date values, when the effect of not discounting to present day values is immaterial. The intention of the Board was not to change the way in which short-term receivables and payables are measured in the financial statements. The Board is therefore proposing to amend their Basis for Conclusions in IFRS 13 by the inclusion of a heading Short-term receivables and payables which will be at paragraph BC138A. This paragraph emphasises that it was not the Boards intention to remove the ability to measure short-term receivables and payables with no stated interest rate at invoice amounts without discounting when the effects of discounting is immaterial. The paragraph also confirms the Boards conclusion that paragraph B5.4.12 in IFRS9 and paragraph AG79 in IAS 39 were not needed and cites two reasons relating to the contents in IFRS 13 and present value techniques and IAS 8 provisions relating to materiality issues. IAS 1 Presentation of Financial Statements When an entity has an obligation to refinance or roll over an obligation for at least 12 months after the reporting date, the Board proposes to amend IAS 1 to clarify that such a liability is to be classified as non-current if the entity expects (and has the discretion) to refinance or roll over such an obligation with the same lender, on the same or similar terms, for at least 12 months after the reporting date. This proposal will amend paragraph 73 currently in IAS 1 by including the text with the same lender, on the same or similar terms. Paragraph 139L will be added to IAS 1 which will contain the effective from date which is for annual periods commencing on or after 1 January 2014, with earlier adoption permitted. It is to be noted that this amendment will not need to be applied to comparative information. IAS 7 Statement of Cash Flows The amendments to IAS 7 relate to interest paid which is capitalised as part of the cost of an asset in the statement of financial position (balance sheet). There appears to be confusion in the application of paragraph 16 to IAS 7 which is being interpreted by some as classifying paid interest that has been capitalised in the statement of financial position (balance sheet) as an investing cash flow in the statement of cash flows. This is not consistent with the requirements in paragraphs 32 and 33, both of which require interest paid to be classified only as an operating, or financing, cash flow. The Board wishes to clarify that interest paid that is capitalised as part of the cost of an asset should be classified as an investing activity (as per paragraph 16) because it clearly results in an asset that has been recognised in an entitys statement of financial position (balance sheet). Also, IAS 23

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Borrowing Costs requires that interest paid that is capitalised should be reflected within the entitys statement of cash flows. The confusion surrounds the fact that neither IAS 7, nor IAS 23, specifies where in the statement of cash flows such capitalised interest should be classified. Consequently, the Board is proposing to amend paragraphs 16(a) and 33 and also proposes an additional paragraph (33A) to clarify that the classification of paid interest that an entity capitalises in the statement of financial position (balance sheet) will follow the same classification as the underlying asset into which the payments were capitalised. The additional paragraph 58 states that the amendment will be applied for annual periods commencing on or after 1 January 2014, with earlier adoption permitted. IAS 12 Income Taxes IAS 12 is proposed to be amended in respect of the recognition of deferred tax assets for unrealised losses. The Board is proposing to clarify that: Entities assess whether to recognise the tax effect of a deductible temporary difference as a deferred tax asset in combination with other deferred tax assets. Taxable profit (which the reporting entity assesses a deferred tax asset for recognition) is the amount prior to any reversal of deductible temporary differences. A tax planning opportunity will only occur if the opportunity creates or increases taxable profit. Simply reversing existing deductible temporary differences is not a tax planning opportunity in itself. To achieve the proposals, the Board is amending paragraphs 29 and 30 to IAS 12, add paragraphs 27A, 30A and 98C and add examples after paragraphs 29 and 30A to IAS 12. Paragraph 27A requires an entity to consider whether tax legislation restricts the sources of taxable profit which the entity can use to make deductions on the reversal of that deductible temporary difference. It states that when legislation imposes no such restrictions, the reporting entity assesses a deductible temporary difference in combination with all its other deductible temporary differences. Conversely, where tax law does place a restriction on the utilisation of losses to deduction against certain specified income, a deductible temporary difference is assessed in combination only with other deductible temporary differences of the appropriate type. Paragraph 29 is proposed to be amended at (a) (i) to require an entity to compare the deductible temporary differences with future taxable profit before deducting the amounts resulting from the reversal of those deductible temporary differences. The objective of this comparison is to show the extent to which future taxable profits are sufficient in order that the reporting entity will be able to deduct the amounts resulting from the reversal of those deductible temporary differences. Paragraph 30 to IAS 12 is planned for amendment to refer to taxable profit as opposed to taxable income, and paragraph 30A is proposed for inclusion in IAS 12 to clarify that a tax planning opportunity does not arise if the action does not create or increase taxable profit. Finally, paragraph 98C is proposed to be included which states that an entity must apply the amended IAS 12 for annual periods commencing on or after 1 January 2014, with earlier adoption permitted.

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IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets In both IAS 16 and IAS 38, the Board wishes to clarify the current requirements in relation to the revaluation method to alleviate concerns regarding the calculation of accumulated depreciation at the date the revaluation occurs. Specifically the Board wishes to clarify that: Determining accumulated depreciation will not depend on the valuation technique selected; and Accumulated depreciation is calculated as the difference between the gross and net carrying amounts. As a consequence, when the residual value, the useful economic life, or the depreciation method has been re-estimated prior to revaluation, the restatement of the accumulated depreciation is not proportionate to the change in the gross carrying amount of the asset.

To incorporate this amendment, the Board is proposing to amend paragraph 35 to IAS 16 and add paragraph 81G. Paragraph 81G stipulates that the amended IAS 16 and IAS 38 will be applied for accounting periods commencing on or after 1 January 2014, with earlier adoption permitted. Paragraph 80 to IAS 38 will be amended and paragraph 130H will be added. Paragraph 130H again states that the amended IAS 38 will be applied for accounting periods commencing on or after 1 January 2014, with earlier adoption permitted. IAS 24 Related Party Disclosures Amendments to IAS 24 are proposed in relation to key management personnel. The Board is proposing to make changes as follows: The definition of a related party will be extended so as to include management entities (this will be achieved by amending paragraph 9 to extend the scope); Key management personnel compensation provided to an entitys own employees by a management entity is excluded from the disclosure requirements contained in paragraph 17 so as to avoid duplication (this will be achieved by the inclusion of paragraph 17A); and Paragraph 18 which refers to the disclosure requirements in IAS 24 will be extended to require separate disclosure of transactions for the provisions of key management personnel services (this will be achieved by the addition of paragraph 18A).

Paragraph 28B will be included within the revised IAS 24 which will specify the effective from date. This paragraph states that an entity shall apply the amended IAS 24 for annual periods commencing on or after 1 January 2014, with earlier adoption permitted. IAS 36 Impairment of Assets The disclosure requirements contained in IAS 36 are proposed for amendment. The Board wishes to clarify that the disclosure requirements relating to value in use are also applicable to fair value less costs of disposal in instances where there has been a material impairment loss, or reversal of a previously recognised impairment loss, in the period. This amendment will be achieved by extending paragraph 130(f) to require the discount rate(s) to be disclosed if fair value less costs to sell are measured using a present value method both in the

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current measurement and previous measurement (if any). The amended paragraph 130(f) does not require an entity to provide the disclosures required by IFRS 13. Paragraph 140J is proposed to be added which says that the revised IAS 36 is to be applied for annual periods commencing on or after 1 January 2014, with earlier adoption permitted.

Steve Collings is the audit and technical partner at Leavitt Walmsley Associates Ltd and the author of Interpretation and Application of International Standards on Auditing. He is also the author of IFRS For Dummies and was named Accounting Technician of the Year at the 2011 British Accountancy Awards.

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