The International Accounting Standards Board (IASB) has published its July 2017 edition of Update, which highlights preliminary decisions made at its July 2017 meeting
Amendments to IAS 12—Income tax consequences of payments on financial instruments classified as equity
The Board discussed feedback on the proposed amendments to IAS 12 Income Taxes set out in the Exposure Draft Annual Improvements to IFRS Standards 2015–2017 Cycle. The amendments would clarify that the requirements in paragraph 52B of IAS 12 apply to all income tax consequences of dividends, and not only to the circumstances described in paragraph 52A of IAS 12.
The Board tentatively decided:
- to finalise the proposed amendments with no substantive changes; and
- to require an entity to apply the amendments to income tax consequences of dividends recognised on or after the beginning of the earliest reporting period presented.
Amendments to IAS 23—Borrowing costs on completed qualifying assets
The Board discussed the Committee’s recommendations on the proposed amendments to IAS 23 Borrowing Costs set out in the Exposure Draft Annual Improvements to IFRS Standards 2015–2017 Cycle. The amendments would clarify that when a qualifying asset is ready for its intended use or sale, an entity treats any outstanding borrowing made specifically to obtain that qualifying asset as part of general borrowings.
The Board tentatively decided:
- to finalise the proposed amendments with no substantive changes; and
- to clarify that an entity also includes funds borrowed specifically to obtain an asset other than a qualifying asset as part of its general borrowings.
Materiality Practice Statement
The Board tentatively decided:
- to retain in the final Practice Statement the guidance about how to assess the materiality of information related to covenants; and
- to remove from the final Practice Statement the guidance about the impact of covenants on materiality judgements about other information; and
- to state in the final Practice Statement that information about a covenant is not material if the likelihood of a breach of covenant is remote.
Prepayment Features with Negative Compensation
The Board discussed the proposals in the Exposure Draft Prepayment Features with Negative Compensation, which proposed that particular financial assets with prepayment features that may result in negative compensation would be eligible to be measured at amortised cost or at fair value through other comprehensive income if two conditions are met: The Board decided to:
- confirm the first eligibility condition, namely that the prepayment amount is inconsistent with the SPPI test only because the party that chooses to terminate the contract early (or otherwise causes the early termination to occur) may
- remove the second eligibility condition so that an entity would not be required to assess the fair value of the prepayment feature at initial recognition as a condition for applying the amendments;
Regarding transition, the Board tentatively decided:
- to set the mandatory effective date of the amendments as annual periods beginning on or after 1 January 2019 (with earlier application permitted);
- to require retrospective application of the amendments using the relevant transition provisions in IFRS 9;
- not to require restatement of prior periods to reflect the amendments; and
- to require particular transition disclosures when an entity first applies the amendments.
Modification of Financial Liabilities
Previously the Interpretations Committee tentatively concluded that an entity should recalculate the amortised cost of a modified financial liability that does not result in derecognition by discounting the modified contractual cash flows using the original effective interest rate. Further, that the entity recognises any adjustment to the amortised cost of the financial liability in profit or loss as income or expense at the date of the modification or exchange. However, the Interpretations Committee did not finalise the decision because of the concerns raised by respondents that this would result in a change in accounting for many entities despite the requirements of IFRS 9 being substantively unchanged from those in IAS 39.
The Interpretations Committee therefore referred the matter back to the Board, with the Board deciding in its July meeting to highlight in the Basis for Conclusions to IFRS 9 that the requirements in IFRS 9 already provide an adequate basis for an entity to account for modifications and exchanges of financial liabilities and that further standard-setting is not required. This therefore effectively confirms the Board’s agreement with the tentative agenda decision reached by the Interpretations Committee.
Companies will need to be mindful, therefore, that adoption of IFRS 9 is likely to require a change in accounting policy previously applied to modifications of financial liabilities, which will need to be applied retrospectively.
The full version of IASB Update can be downloaded from the IASB’s web site here and a podcast of the July meeting here.