The IC has recently decided not to take on a number of issues to its agenda. Gabriela Mendez, Joanna Demetriou and Anna Schweizer from Accounting Consulting Services examine the practical implications.
A very small percentage of the issues discussed by the IC result in an interpretation (see our NIFRIC-series below and in previous editions of IFRS News). As there were so many issues rejected at the January IC meeting, we felt it was worthwhile having a closer look.
IFRS 5 Non-current assets held for sale and discontinued operations
To what extent can an impairment loss be allocated to non-current assets within a disposal group?
The IC confirmed that the amount of impairment that should be recognised for a disposal group would not be restricted by the fair value less costs of disposal or value in use of those non-current assets that are within the scope of the measurement of IFRS 5. Consequently, a non-current asset measured under IFRS 5 could be measured at a lower amount than its recoverable amount under IAS 36.
How to present intragroup transactions between continuing and discontinued operations
The IC clarified the requirement to eliminate intra-group transactions even between continuing and discontinuing operations, since IFRS 5 requirements do not override the consolidation requirements under IFRS 10. However, the IC observed that, depending on the particular facts and circumstances, an entity may have to provide additional disclosures in order to enable users to evaluate the financial effects of discontinued operations. In this light the IC suggested this to be considered in the wider context of a comprehensive review of IFRS 5.
Other various IFRS 5-related issues
The IC has received and discussed a number of issues relating to the application of IFRS, including scope, measurement and presentation. Because of the number and variety of unresolved issues the IC concluded that a broad-scope project on IFRS 5 might be warranted.
IFRS 9 Financial Instruments – Transition issues relating to hedging
Can an entity treat a hedging relationship as a continuing hedging relationship on transition from IAS 39 to IFRS 9 if the entity changes the hedged item in a hedging relationship from an entire nonfinancial item (as permitted by IAS 39) to a component of the non-financial item (as permitted by IFRS 9) in order to align the hedge with the entity’s risk management objective?
The IC noted that changes to the designated hedged item cannot be applied retrospectively. As a result, the original hedge relationship could not be treated as a continuing hedge relationship on transition to IFRS 9.
Can an entity continue with its original hedge designation of the entire nonfinancial item on transition to IFRS 9 when the entity’s risk management objective is to hedge only a component of the nonfinancial item?
The IC observed that hedge designations of an entire non-financial item could continue on transition to IFRS 9 as long as they meet the qualifying criteria in IFRS 9.
IFRS 11 Joint Arrangements – Remeasurement of previously held interests
The IC addressed the measurement requirements for previously held interests in joint operations that do not meet the definition of a business under IFRS 3 in two scenarios:
- when an entity that exercises joint control, or is party to a joint operation, obtains control; and
- when a party to a joint operation, that has rights to the assets and obligations for the liabilities relating to the joint operation, obtains joint control over the joint operations.
The IC clarified that the accounting for asset acquisitions follows a cost based approach and no remeasurement of previously held interests should be made.
IAS 12 Income taxes – Recognition of deferred taxes for the effect of exchange rate changes
When the tax base of a non-monetary asset or liability is determined in a currency that is different from the functional currency, temporary differences arise resulting in a deferred tax asset or liability. The IC confirmed that deferred tax charges or credits would be presented with other deferred taxes, instead of with foreign exchange gains or losses, in the statement of profit or loss. The IC also noted that when changes in the exchange rate are the cause of a major component of the deferred tax charge or credit, an explanation of this would help users understand the tax expense (income) for the period.
IAS 39 Financial Instruments: Recognition and Measurement – Separation of an embedded floor from a floating rate host contract
The IC received a request to clarify the application of the embedded derivative requirements of IAS 39.AG33(b) in a negative interest rate environment.
The IC observed that:
- AG33(b) should be applied consistently, in both, negative and positive interest rate environments;
- an entity should compare the overall interest rate floor(*) for the hybrid contract to the market rate of interest for a similar contract without the interest rate floor (i.e. the host contract); and
- in order to determine the appropriate market rate of interest for the host contract, an entity is required to consider the specific terms of the host contract and the relevant spreads (including credit spreads) appropriate for the transaction.
The IFRS IC also noted that the above treatment would be equally applicable to financial liabilities accounted for in accordance with IFRS 9.
(*) The overall interest rate floor is the contractual benchmark interest rate plus contractual spreads and any premiums, discounts or other elements that would be relevant to the calculation of the effective interest rate.
In January 2015 the IASB decided to postpone any further work on P*Q and defer this to the post implementation review (PIR) of IFRS 13.
The exposure draft was issued in September 2014. It proposed that the unit of account was the investment as a whole for a quoted investment in subsidiaries, joint ventures and associates. The fair value of that investment would be the share price multiplied by the quantity of shares held (P*Q).
A majority of the comment letters submitted did not agree with this approach. The respondents agreed that the unit of account was the investment. However, they did not support that P*Q was the most relevant measure. The fair value should be based on the unit, which is not the single share. User forums generally supported P*Q as it is a verifiable measure.
The Board redeliberated the feedback for over a year and decided this research would be better suited to the PIR, which we expect to commence at the end of 2016.
Diversity in practice has developed in this area whilst the Board has redeliberated. We expect this to continue until the PIR is finalised. Entities should disclose the fair value model they have used clearly in the financial statements. Significant implied premiums or discounts are likely to be scrutinised by regulators.