IASB Update July 2018

The International Accounting Standards Board (IASB) has issued its latest version of Update, which summarises matters discussed at the Board meeting held in July 2018

Rate-regulated Activities

Regarding the estimation of future cash flows the IASB tentatively decided that, for each regulatory asset recognised, an entity should:

• estimate future cash flows using either the ‘most likely amount’ method or the ‘expected value’ method, depending on which method the entity concludes would better predict the amount of the cash flows arising from a particular timing difference; and
• apply the same method consistently from the origination of the timing difference until its reversal.

Regarding the accounting for a significant financing component and discount rate, the IASB tentatively decided that if a regulatory agreement:

• does not include an explicit financing component, an entity should use judgement to determine whether the financing component of the timing difference is significant.
• includes an explicit financing component, an entity should measure the regulatory asset by discounting the estimated future cash flows using the interest rate or return rate established by the regulatory agreement for those cash flows.  However, that requirement would not apply where clear evidence shows that the regulatory interest rate or return rate is set at a level that provides an excess or deficit in compensation because of an identifiable event or decision.  In this circumstance, an entity should recognise the excess or deficit in compensation in the period in which the identifiable event or decision occurs.

Regarding changes in estimated cash flows, the IASB tentatively decided that:

• the effect of a change in estimated future cash flows should be recognised prospectively in profit or loss in:
  • the period of change, if the change affects only that period; or
  • the period of change and future periods, if the change affects both; and

• if the change gives rise to a change in a regulatory asset, the change should be recognised by adjusting the carrying amount of the related asset in the period of change.
• When a regulator changes the interest rate or return rate used to compensate an entity for the period between the origination and reversal of a timing difference, the entity should:
  • measure the outstanding regulatory asset balance using the revised interest rate or return rate to discount the estimated future cash flows; and
  • recognise any resulting change in the carrying amount of the regulatory asset in the period of change.

The IASB also tentatively decided that the measurement requirement for regulatory liabilities should be the same as regulatory assets.

Implementation Issues - Transactions Involving Commodities and Cryptocurrencies

The IASB decided:

• To ask the IFRS Interpretations Committee to provide further information about how an entity might apply existing IFRS Standards in determining its accounting for holdings of cryptocurrencies and Initial Coin Offerings (ICOs); and
• To consider at a future meeting the feasibility of a possible narrow-scope standard-setting project to address commodity loans.

Goodwill and Impairment

The IASB tentatively decided:

• not to pursue the objective of removing the differences between accounting requirements for internally generated intangible assets and those for intangible assets acquired in a business combination;
• to explore whether disclosures could be improved to enable investors to assess more effectively whether a business combination was a good investment decision and whether the acquired business is performing after the acquisition as was expected at the time of the acquisition;
• to pursue improving the calculation of value in use by removing from IAS 36 Impairment of Assets:
  • the restriction that excludes from the calculation cash flows that are expected to result from a future restructuring or from a future enhancement; and
  • the requirement to use pre-tax inputs in the calculation;
• to retain the existing model for impairment testing in IAS 36, instead of changing it to focus on assessing whether the carrying amount of acquired goodwill is recoverable.; and
• in pursuing the objective of simplifying the accounting for goodwill:
  • not to consider requiring an entity to write off goodwill immediately on initial recognition;
  • to explore whether to reintroduce amortisation of goodwill;
  • to pursue possible relief from the mandatory annual quantitative impairment testing of goodwill; and
• to issue a discussion paper as the research project’s next step.

Disclosure Initiative

The IASB tentatively decided that, when drafting disclosure objectives and requirements in future, the Board should:

• use prescriptive language (i.e. ‘shall’) to require entities to comply with disclosure objectives in the Standards;
• use less prescriptive language (e.g. ‘shall consider’) when referring to specific items of information for disclosure; and
• take the following steps to maximise the use of consistent language across disclosure requirements in the Standards:
  • consider defining terms and concepts introduced for the first time in the disclosure section of an IFRS Standard;
  • avoid using the same term in different ways across the Standards. If different meanings for the same term are unavoidable, consider drafting additional guidance to explain the different uses of the term and clearly link each use of the term to the relevant explanation;
  • state the intended location when using the terms ‘present’ and ‘disclose’ in disclosure requirements in IFRS Standards; and
  • seek advice, including from the IFRS Taxonomy team, at the drafting stage to help identify any inconsistencies between the way terms are described in the disclosure proposal(s) and in other places in the Standards.

On the use of formatting and presentation, the Board tentatively decided that, when drafting disclosure objectives and requirements, it should:

• if appropriate, present ‘catch-all’ objectives at the end of each disclosure section;
• present specific disclosure objectives in bold type; and
• organise disclosure sections in the Standards based on similar information needs that disclosure objectives and requirements are intended to satisfy. In many cases, it is expected that this approach would result in disclosure sections that are organised in groups of similar or related disclosure objectives.

The Board tentatively decided that, when drafting disclosure objectives and requirements in future, it should:

• seek advice, including from the IFRS Taxonomy team, to identify relationships between the disclosure proposal(s) and requirements in IFRS Standards or guidance in other Board publications (at both the development and drafting stages);
• minimise duplication across disclosure requirements when drafting IFRS Standards. Where more than one Standard has similar disclosure requirements, the requirements should be linked, to the extent possible, instead of duplicated; and
• make no reference to materiality in the disclosure sections of individual IFRS Standards.

The full version of the July 2018 edition of IASB Update is available from the IASB’s web site here.