Welcome to the IASB Update
The IASB met in public from 18-20 February 2015 at the IASB offices in London, UK.
The topics for discussion were:
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27-30 April 2015
18 to 22 May 2015
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Comprehensive review of the IFRS for SMEs (Agenda Paper 5)
Rate-regulated Activities (Agenda Paper 9)
The IASB met on 18 February to discuss the procedures surrounding future reviews of the IFRS for SMEs.
Agenda Paper 5: Future reviews of the IFRS for SMEs
The IASB considered the comments made by respondents to the Exposure Draft Proposed amendments to the IFRS for SMEs, on the process for future reviews of the IFRS for SMEs.
The IASB tentatively decided that:
Twelve out of fourteen IASB members agreed.
- comprehensive reviews of the IFRS for SMEs should commence approximately two years after the effective date of amendments to the IFRS for SMEs resulting from a previous comprehensive review. Comprehensive reviews should generally begin with the issuance of a Request for Information.
- between comprehensive reviews, the IASB, with input from the SME Implementation Group, would consider whether there is a need for an interim review to address any new and revised IFRSs not yet incorporated or urgent amendments.
- this process would mean that amendments to the IFRS for SMEs would be no more frequent than approximately once every three years
The amendments to the IFRS for SMEs from the initial comprehensive review are expected to be issued in the first half of 2015.
Revenue from Contracts with Customers—Issues emerging from TRG discussions (Agenda Paper 7)
The IASB met on 18 February 2015 to discuss a summary of the comments received in response to the Discussion Paper Reporting the Financial Effects of Rate Regulation (the Discussion Paper).
Agenda Paper 9: Initial analysis of responses to the Discussion Paper
The IASB reviewed the main messages received through outreach and comment letters, namely:
No decisions were made at this meeting. However, the IASB highlighted the following issues for the staff to explore further:
- Most respondents agree that the Discussion Paper provides a good description of the distinguishing features of rate regulation. Many suggest that the scope of any future guidance should focus more on the rights and obligations and how they relate to the rate-setting mechanism, with other features being considered more as supporting features.
- Many respondents suggest that the combination of rights and obligations created by defined rate regulation may not always be faithfully represented in IFRS financial statements and that the project should lead to the recognition of at least some regulatory deferral account balances in IFRS financial statements.
- Many respondents agree that IFRS 14 Regulatory Deferral Accounts is a good starting point for disclosure requirements.
- Of the four approaches outlined in the Discussion Paper, there was the most support for the recognition of the financial effects of rate regulation through specific IFRS requirements.
- how to define the scope for the proposed Standard, based on the description of rate regulation;
- the meaning and use of ‘the customer base’, in particular within the context of the three-way relationship between a rate-regulated entity, the rate regulator and the end customer;
- the consistency of the approach taken in this project compared with approaches used in other Standards and ongoing projects in accounting for the net effect of the rights and obligations;
- the interaction of this project with the Conceptual Framework project and its definitions of assets and liabilities; and
- how the principles of IFRS 15, in particular relating to the identification of performance obligations, could be adapted to rate-regulated activities.
The Rate-regulated Activities Consultative Group will meet in early March. The staff will consider the matters discussed at that meeting before developing recommendations for the IASB to consider about specific topics.
Insurance Contracts (Agenda Paper 2)
Agenda Paper 7A: Implications of amending IFRS 15 before the mandatory effective date
The IASB met on 18 February 2015 to discuss the factors that the IASB would need to consider in deciding whether, and how, to address the issues relating to IFRS 15 Revenue from Contracts with Customers emerging from the discussions of the IASB|FASB joint Transition Resource Group for Revenue Recognition (TRG).
The IASB was informed that the TRG’s discussion on the majority of the 32 submissions considered to date indicate that stakeholders should be able to understand and apply the Standard. However, some of those topics have been referred to the IASB and FASB for further consideration. Two of those issues relate to licensing and identifying performance obligations, which were discussed jointly with the FASB at this meeting.
No decisions were reached at this meeting. However, individual IASB members expressed views about their considerations in addressing the specific issues emerging from the TRG discussion, in particular with respect to balancing the need to provide any clarifications judged necessary for stakeholders in a way that minimises disruption to the implementation process and the desire to maintain convergence between IFRS 15 and Topic 606 Revenue from Contracts with Customers.
(Joint session with FASB)
The IASB and the FASB (the Boards) met to discuss issues emerging from the discussions of TRG. The IASB and the FASB each decided to propose some improvements in order to clarify the guidance in IFRS 15 and Topic 606 (collectively, the new revenue Standard) with respect to the following topics:
Agenda Paper 7B: Licences of intellectual property
- Licences of intellectual property
- Identifying performance obligations
The Boards discussed each of the application issues for licences outlined below.
Determining the nature of the entity’s promise in granting a licence
The Boards decided to improve the operability and understandability of the Application Guidance in the new revenue Standard. To do so, the Boards propose clarifying that the entity’s promise to the customer in granting a licence is to provide a right to access the entity’s intellectual property (which is satisfied over time) when the contract requires or the customer reasonably expects the entity to undertake activities (that do not transfer a good or service to the customer) that significantly affect the utility of the intellectual property to which the customer has rights. The utility of the intellectual property to which the customer has rights is significantly affected when either:
In addition, the Boards clarified that when intellectual property has significant standalone functionality (that is, the ability to process a transaction, perform a function or task, or be played or aired), such as software or media content, a substantial portion of its utility is derived from that functionality and is unaffected by activities of the entity that do not change that functionality (such as promotional activities). All FASB and eleven IASB members agreed.
- the expected activities of the entity are expected to change the form (for example, the design) or the functionality (for example, the ability to perform a function or task) of the intellectual property to which the customer has rights; or
- the value of the intellectual property to the customer is substantially derived from, or dependent upon, the expected activities of the entity. For example, the value of a brand or logo is typically derived from, and dependent upon, the entity’s ongoing activities that support or maintain the intellectual property.
The FASB further decided to clarify in the guidance that when an entity grants a licence to symbolic intellectual property (that is, intellectual property that does not have significant standalone functionality, such as brands, team or trade names, or logos), it is presumed that the entity’s promise to the customer in granting a licence includes undertaking activities that significantly affect the utility of the intellectual property to which the customer has rights. Four FASB members agreed.
Determining when an entity should assess the nature of a licence
The FASB decided to clarify in Topic 606 that, in some cases, an entity would need to determine the nature of a licence that is not a separate performance obligation in order to appropriately apply the general guidance on whether a performance obligation is satisfied over time or at a point in time and/or to determine the appropriate measure of progress for a combined performance obligation that includes a licence. Five FASB members agreed.
The IASB decided that a clarification to the application guidance in IFRS 15 with respect to this issue was not necessary because there is adequate guidance in IFRS 15 and the accompanying Basis for Conclusions. In reaching this conclusion the IASB noted the analysis in paragraphs 59–64 of Agenda Paper 7B. All IASB members agreed.
Sales-based or usage-based royalties
The Boards decided to clarify the scope and applicability of the Application Guidance on sales-based or usage-based royalties promised in exchange for a licence of intellectual property as follows:
All FASB and thirteen IASB members agreed.
- an entity should not split a single royalty into a portion subject to the sales-based or usage-based royalties exception and a portion that is not subject to the royalties constraint (and, therefore, would be subject to the general guidance on variable consideration, including the constraint on variable consideration); and
- the sales-based or usage-based royalties exception should apply whenever the predominant item to which the royalty relates is a licence of intellectual property.
Contractual restrictions in licence arrangements
The FASB decided to clarify in Topic 606 that contractual restrictions of the nature described in paragraph 606-10-55-64 [B62 of IFRS 15] are attributes of the licence; and therefore, do not affect the identification of the promised goods or services in the contract. For example, an entity would not identify a different number of promised licences in a contract that grants a customer unlimited rights to use specified intellectual property for a defined period of time than it would in a contract that grants a licence that restricts how often the intellectual property may be used during the licence period. Five FASB members agreed.
The IASB decided that a clarification to the Application Guidance in IFRS 15 with respect to this issue was not necessary because there is adequate guidance in IFRS 15 and the accompanying Basis for Conclusions. In reaching this conclusion, the IASB noted the analysis in paragraphs 68–73 of Agenda Paper 7B. All IASB members agreed.
Agenda Paper 7C: Identifying performance obligations
The Boards decided to add some illustrative examples to the new revenue Standard to clarify how the Boards intend the guidance on identifying performance obligations to be applied. All FASB and IASB members agreed.
In addition, the FASB decided to incorporate further amendments in Topic 606 to address implementation issues about (1) identifying promised goods or services that would be subject to the separation guidance; (2) application of the distinct guidance; and (3) accounting for shipping and handling activities, as well as to make some technical corrections to Topic 606 in this area.
Promised goods or services
The FASB decided that an entity is not required to identify goods or services promised to the customer that are immaterial in the context of the contract. Optional goods or services should continue to be accounted for in accordance with paragraphs 606-10-55-41 through 55-45 (paragraphs B39–B43 of IFRS 15). An entity would not be required to accumulate goods or services assessed as immaterial to the contract and assess their significance at the financial statement level. Five FASB members agreed.
The IASB decided not to incorporate similar guidance into IFRS 15. Twelve IASB members agreed.
'Distinct within the context of the contract'
In addition to providing additional illustrative examples, the FASB decided to amend the guidance in Topic 606 about when an entity’s promise to transfer a good or service is separately identifiable (that is, distinct within the context of the contract) by both:
All FASB members agreed.
- expanding upon the articulation of the separately identifiable principle in the Codification; and
- enacting revisions to the factors in paragraph 606-10-25-21 [29 of IFRS 15] to more closely align those factors to the re-articulated separately identifiable principle.
The IASB decided not to amend this guidance in paragraphs 27 and 29 of IFRS 15. However, in addition to including illustrative examples (as noted above), the IASB also noted that the discussion and the analysis of the issues relating to ‘distinct within the context of the contract’ in paragraphs 34–43 of Agenda Paper 7C could help educate and inform practice.
Shipping and handling activities
The FASB decided to clarify the guidance in Topic 606 as it applies to shipping and handling activities. The revised guidance would clarify that shipping and handling activities that occur before the customer obtains control of the related good are fulfilment activities. In addition, the FASB decided to permit an entity, as an accounting policy election, to account for shipping and handling activities that occur after the customer has obtained control of a good as fulfilment activities. Five FASB members agreed.
The FASB decided to make some technical corrections to the guidance on identifying performance obligations in Topic 606. All FASB members agreed.
The FASB staff will begin drafting a proposed Update based on the tentative decisions reached.
The IASB decided that it would develop a single Exposure Draft of proposed clarifications to IFRS 15. This Exposure Draft will include the clarifications that the IASB tentatively decided to make at this meeting, together with any other clarifications that the IASB considers necessary in the light of the discussions at the TRG meetings in January 2015 and March 2015. The IASB expects to approve the clarifications to be included in the Exposure Draft at its meeting in June 2015.
Disclosure Initiative—Principles of Disclosure (Agenda Paper 11)
(IASB education session)
The IASB met on 19 February 2015 to continue its discussions on insurance contracts at an education session. The IASB discussed its tentative decisions on the level of aggregation and considered the application of those decisions to contracts with and without participation features.
Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging (Agenda Paper 4)
The IASB met on 19 February to discuss how the Principles of Disclosure Discussion Paper (the DP) should address non-IFRS information.
Agenda Paper 11B: Alternative performance measures
The IASB indicated that IFRS should not prohibit the disclosure of alternative performance measures (APMs) in the notes to financial statements. However, views differed on whether disclosure of APMs on the face of the financial statements should be permitted. The IASB also asked the staff to refine the definition of APMs and to develop some qualitative constraints on the use of APMs in the financial statements, based on those described in paragraph 32 of Agenda Paper 11B, for inclusion in the DP.
The IASB also decided that the DP should include preliminary views that:
Agenda Paper 11C: Other Non-IFRS information
- IFRS should include additional guidance on the depiction of non-recurring, unusual or infrequently occurring items in the statement of comprehensive income, consistent with the discussion in paragraph 46 of this paper; and
- the presentation of EBIT and EBITDA in the statement of profit or loss complies with IFRS, provided that the statement is presented ‘by nature’ and such subtotals are in accordance with paragraphs 85–85B of IAS 1 Presentation of Financial Statements.
The IASB decided that the DP should include its preliminary views that:
- IFRS should not prohibit the placement of information that an entity has identified as non-IFRS in its financial statements; and
- IFRS should provide guidance about the presentation of information identified as non-IFRS in an entity’s financial statements in a new disclosure Standard. That guidance should reflect the discussion in paragraph 20 of this paper.
At its March meeting the IASB plans to discuss the following:
- further topics as part of its Principles of Disclosure project, including the role of the financial statements, excluding the notes; and
- as part of the Materiality project, the content of an Exposure Draft of a Practice Statement on materiality.
Leases (Agenda Paper 3)
The IASB discussed summaries of the comments received in response to the Discussion Paper Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging.
No decisions were made by the IASB.
The staff will present a comment letter analysis on the remaining sections of the Discussion Paper in March 2015.
IFRS Implementation Issues—Due process documents (Agenda Paper 12)
The IASB met on 19 February 2015 to continue redeliberating the proposals in the May 2013 Exposure Draft Leases (the 2013 ED), specifically discussing:
Agenda Paper 3A: Transition—Leases Previously Classified as Operating Leases
- leases of small assets; and
- subleases discount rate (sweep issue).
The IASB tentatively decided to permit a lessee to choose either a fully retrospective approach or a modified retrospective approach on transition, to be applied consistently across its entire portfolio of former operating leases. Fourteen IASB members agreed.
With respect to the modified retrospective approach, the IASB tentatively decided that a lessee should:
Twelve IASB members agreed with these decisions and two disagreed.
- not restate comparative information. Consequently, the date of initial application is the first day of the annual reporting period in which a lessee first applies the requirements of the new Leases Standard;
- be required, at the date of initial application of the new Leases Standard, to recognise the cumulative effect of initial application as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate);
- be required to measure the lease liability at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate at the date of initial application;
- choose, on a lease-by-lease basis, between two measurement approaches for the right of use (ROU) asset on transition, as follows:
- by measuring the ROU asset as if the new Leases Standard had always been applied, but using a discount rate based on the lessee’s incremental borrowing rate at the date of initial application; or
- by measuring the ROU asset at an amount equal to the lease liability, adjusted by the amount of any previously recognised prepaid or accrued lease payments;
- be permitted to apply a single discount rate to a portfolio of leases with reasonably similar characteristics;
- be permitted to adjust the ROU asset on transition by the amount of any previously recognised onerous lease provision, as an alternative to performing an impairment review;
- be permitted to apply an explicit recognition and measurement exemption for leases for which the term ends within 12 months or less of the date of initial application. A lessee would instead:
- account for these leases in the same way as short-term leases; and
- be required to include the cost associated with these leases within the disclosure of short-term lease expense in the annual reporting period of initial application;
- not be required to include initial direct costs in the measurement of the ROU asset; and
- be permitted to use hindsight in applying the new Leases Standard, for example, in determining the lease term if the contract contains options to extend or terminate the lease.
The IASB also discussed the disclosure requirements for lessees in the annual reporting period in which the Standard is first applied. The IASB plan to discuss this topic further as a sweep issue at a future IASB meeting.
The IASB tentatively decided to require a lessor to continue to apply its existing accounting for any leases that are ongoing at the date of initial application, except for intermediate lessors in a sublease (see Agenda Paper 3C Transition—Subleases). All fourteen IASB members agreed.
The IASB tentatively decided to permit a first-time adopter of IFRS to apply the same modified retrospective approach that would apply to entities applying the new Leases Standard for the first time. However:
Thirteen IASB members agreed with these decisions and one disagreed.
- for a first-time adopter, the date of initial application should be regarded as the date of transition to IFRSs in accordance with IFRS 1 First-Time Adoption of International Financial Reporting Standards; and
- a first time adopter should not be permitted to apply the explicit recognition and measurement exemption for leases for which the term ends within 12 months of the date of initial application.
Agenda Paper 3B: Transition—Sale and Leaseback Transactions
The IASB tentatively decided that:
All fourteen IASB members agreed.
- an entity should not reassess historic sale and leaseback transactions to determine whether a sale occurred in accordance with IFRS 15 Revenue from Contracts with Customers;
- a seller-lessee should not perform any retrospective accounting specific to sale and leaseback transactions that were classified as finance leases under IAS 17 Leases. Instead, a seller-lessee should:
- account for the sale and leaseback on transition in the same way as for any other finance lease that is ongoing at the date of initial application; and
- continue amortising any gain on sale in accordance with IAS 17;
- a seller-lessee should not perform any retrospective accounting specific to sale and leaseback transactions that were classified as operating leases under IAS 17. Instead, a seller-lessee should:
- account for the leaseback on transition in the same way as for any other operating lease that is ongoing at the date of initial application; and
- account for any deferred gains or losses that relate to off-market terms as an adjustment to the leaseback ROU asset.
The IASB also tentatively decided to require a seller-lessee to apply the sale and leaseback partial-gain recognition approach only to sale and leaseback transactions entered into after the date of initial application of the new Leases Standard. Thirteen IASB members agreed with this decision and one disagreed.
Agenda Paper 3C: Transition—Subleases
The IASB tentatively decided:
All fourteen IASB members agreed with these decisions.
- to require an intermediate lessor to reassess each ongoing operating sublease at the date of initial application to determine whether the new Leases Standard would classify it as an operating lease or a finance lease. The intermediate lessor would base this reassessment on the remaining contractual terms of the head lease and the sublease; and
- that, for subleases that were classified as operating leases under IAS 17 but finance leases under the new Leases Standard, an intermediate lessor is required to account for the sublease as a new finance lease entered into on the date of initial application.
Agenda Paper 3D: Transition—Definition of a Lease
The IASB tentatively decided to permit an entity to grandfather the definition of a lease for all contracts that are ongoing at the date of initial application of the new Leases Standard. An entity that chooses to grandfather the definition of a lease should do so for all contracts that are ongoing at the date of initial application. The entity should disclose that fact.
All fourteen IASB members agreed.
Agenda Paper 3E: Leases of Small Assets
The IASB tentatively decided:
Agenda Paper 3F: Subleases Discount Rate (Sweep Issue)
- to reaffirm its tentative decision to permit a recognition and measurement exemption for leases of small assets. Eleven IASB members agreed and three disagreed;
- to specify that leased assets that are dependent on, or highly interrelated with, other leased assets do not qualify as small assets. Thirteen IASB members agreed and one disagreed; and
- to include in the Basis for Conclusions a discussion of the order of magnitude that the IASB had in mind when deliberating the exemption. Twelve IASB members agreed and two disagreed.
The IASB tentatively decided to permit an intermediate lessor to account for a sublease using the discount rate used for the head lease, if the sublease is classified as a finance lease and the rate implicit in the sublease cannot be readily determined. All fourteen IASB members agreed.
The IASB expects to review the due process on the leases project, and discuss the effective date and any sweep issues that arise at a future IASB meeting.
Post-implementation review of IFRS 3 Business Combinations (Agenda Paper 13)
At its meeting on 20 February 2015, the IASB reviewed the due process steps that had been taken to date in preparation for the publication of two forthcoming Exposure Drafts:
All IASB members confirmed that they are satisfied that the IASB has complied with the necessary due process steps to date and therefore instructed the staff to begin the balloting process for both documents. One IASB member indicated that he would dissent from the Exposure Draft described in (b) above. No IASB members indicated their intention to dissent from the publication of the Exposure Draft described in paragraph (a) above.
- Remeasurement at a plan amendment, curtailment and settlement/Availability of a refund of a surplus from a defined benefit plan (Proposed amendments to IAS 19 Employee Benefits and IFRIC 14 IAS19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction); and
- Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Proposed Amendments to IFRS 10 and IAS 28 (2015)), formerly Elimination of Gains or Losses arising from Transactions between an Entity and its Associate or Joint Venture.
The staff will start the balloting processes for the forthcoming Exposure Drafts.
Work plan—projected targets as at 24 February 2015
The IASB met on 20 February to discuss the follow-up work needed for the Post-implementation Review of IFRS 3 Business Combinations.
The IASB decided to add the following issues to its research agenda:
Nine IASB members agreed with this decision and five disagreed.
- how to improve the impairment test in IAS 36 Impairment of Assets;
- how to clarify the definition of a business;
- the subsequent accounting for goodwill (including the relative merits of an impairment-only approach and an amortisation and impairment approach); and
- the identification and measurement of intangible assets such as customer relationships and brand names.
The IASB expects to publish the Feedback Statement on the Implementation of IFRS 3 in Q2 of 2015.
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