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 entity’s 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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A vesting condition is either a service condition or a performance condition. with earlier adoption permitted. A performance target is defined by reference to the entity’s own operations (or activities) or the price (or value) of its equity instruments (including shares and share options). the counterparty has failed to satisfy the condition. 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. If the counterparty. 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. which is for annual periods beginning on or after 1 January 2014. 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. under a share-based payment arrangement. A performance condition might include a market condition. ceases to provide service during the vesting period. Service condition: A vesting condition that requires the counterparty to complete a specified period of service. A service condition does not require a performance target to be met. other assets or equity instruments of the entity. 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 Copyright 2012 Global Accountant . 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. and specified performance targets to be met while the counterparty is rendering the service required in (a). This will therefore have a direct consequential effect to IFRS 9 Financial Instruments.globalaccountantweb. In its current form. regardless of the reason. 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 have also amended paragraphs 15 and 19 to IFRS 2 and Appendix A ‘Defined terms’.com . such as a division or an individual employee.the addition of paragraph 63B which refers to the effective date. A performance target might relate either to the performance of the entity as a whole or to some part of the entity.http://www. IFRS 3 – Business Combinations The impact of this proposed amendment is twofold.

’ 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. though earlier adoption is permitted. In recognition of this issue. In the revised IFRS 9. Where earlier adoption is taken. and at the same time the revised IFRS 9 will also be applied. 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. disclosure of the fact that the revised standard has been adopted earlier shall be made in the financial statements. Paragraph 4.http://www. Copyright 2012 Global Accountant . The proposal here is to delete ‘or other applicable IFRSs’ that is currently sat in paragraph 40 to IFRS 3. 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. the financial statements must disclose this fact and the revised IFRS 3 must be applied.contingent consideration as a financial liability or as an equity instrument. 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. paragraph 4.1(e) will also be included which says: ‘contingent consideration in a business combination (see IFRS 3 Business Combinations). In addition. Where earlier adoption is taken up.2.com .7.8 as if they had been designated at fair value through profit or loss at initial recognition. Paragraph 58 to IFRS 3 currently does require subsequent measurement of contingent consideration at fair value.1.2 (c) will be included which says: The asset is not a contingent consideration to which IFRS 3 Business Combinations applies. 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.7-5. 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. 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 entity’s 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. 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.7.globalaccountantweb.

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. 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. IAS 23 Copyright 2012 Global Accountant .http://www. This is not consistent with the requirements in paragraphs 32 and 33.4. 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 entity’s statement of financial position (balance sheet). both of which require interest paid to be classified only as an operating. or financing. for at least 12 months after the reporting date. It is to be noted that this amendment will not need to be applied to comparative information.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. The intention of the Board was not to change the way in which short-term receivables and payables are measured in the financial statements. Also. with earlier adoption permitted. with earlier adoption permitted.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. 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 proposal will amend paragraph 73 currently in IAS 1 by including the text ‘with the same lender. on the same or similar terms. The provisions in IFRS 13 removed paragraphs B5. 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. on the same or similar terms’. 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). 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).globalaccountantweb.com .4. cash flow. 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. 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 paragraph also confirms the Board’s conclusion that paragraph B5. when the effect of not discounting to present day values is immaterial.12 in IFRS 9 Financial Instruments and paragraph AG79 of IAS 39 Financial Instruments: Recognition and Measurement. This paragraph emphasises that it was not the Board’s 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.

It states that when legislation imposes no such restrictions. where tax law does place a restriction on the utilisation of losses to deduction against certain specified income.http://www.com . 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. Copyright 2012 Global Accountant . Consequently. 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. Conversely. a deductible temporary difference is assessed in combination only with other deductible temporary differences of the appropriate type. IAS 12 – Income Taxes IAS 12 is proposed to be amended in respect of the recognition of deferred tax assets for unrealised losses. The additional paragraph 58 states that the amendment will be applied for annual periods commencing on or after 1 January 2014. • A tax planning opportunity will only occur if the opportunity creates or increases taxable profit. 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. specifies where in the statement of cash flows such capitalised interest should be classified. Simply reversing existing deductible temporary differences is not a tax planning opportunity in itself. the reporting entity assesses a deductible temporary difference in combination with all its other deductible temporary differences.Borrowing Costs requires that interest paid that is capitalised should be reflected within the entity’s statement of cash flows. Finally. 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 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. with earlier adoption permitted.globalaccountantweb. To achieve the proposals. 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. 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. nor IAS 23. • Taxable profit (which the reporting entity assesses a deferred tax asset for recognition) is the amount prior to any reversal of deductible temporary differences. 30A and 98C and add examples after paragraphs 29 and 30A to IAS 12. The confusion surrounds the fact that neither IAS 7. Paragraph 30 to IAS 12 is planned for amendment to refer to taxable ‘profit’ as opposed to taxable ‘income’. add paragraphs 27A. the Board is amending paragraphs 29 and 30 to IAS 12. with earlier adoption permitted.

Key management personnel compensation provided to an entity’s 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). when the residual value. with earlier adoption permitted. IAS 36 – Impairment of Assets The disclosure requirements contained in IAS 36 are proposed for amendment. and Accumulated depreciation is calculated as the difference between the gross and net carrying amounts. 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). • Paragraph 28B will be included within the revised IAS 24 which will specify the ‘effective from’ date.com . 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). with earlier adoption permitted. or the depreciation method has been re-estimated prior to revaluation. with earlier adoption permitted. the useful economic life. Specifically the Board wishes to clarify that: • • Determining accumulated depreciation will not depend on the valuation technique selected. the restatement of the accumulated depreciation is not proportionate to the change in the gross carrying amount of the asset. As a consequence.IAS 16 – Property. Paragraph 130H again states that the amended IAS 38 will be applied for accounting periods commencing on or after 1 January 2014. 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 Copyright 2012 Global Accountant . Plant and Equipment and IAS 38 Intangible Assets In both IAS 16 and IAS 38. or reversal of a previously recognised impairment loss. Paragraph 81G stipulates that the amended IAS 16 and IAS 38 will be applied for accounting periods commencing on or after 1 January 2014. Paragraph 80 to IAS 38 will be amended and paragraph 130H will be added. the Board is proposing to amend paragraph 35 to IAS 16 and add paragraph 81G. 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. in the period. This paragraph states that an entity shall apply the amended IAS 24 for annual periods commencing on or after 1 January 2014. To incorporate this amendment. IAS 24 – Related Party Disclosures Amendments to IAS 24 are proposed in relation to ‘key management personnel’. 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.globalaccountantweb.http://www.

with earlier adoption permitted. The amended paragraph 130(f) does not require an entity to provide the disclosures required by IFRS 13.com . Copyright 2012 Global Accountant .http://www. 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’. 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.globalaccountantweb.current measurement and previous measurement (if any). 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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