Trivial pursuit

International Accounting Standards Board issues minor changes to IFRS Standards announces a recent IASB news release.

Some may see in this another candidate for the line-up of underwhelming IASB news releases I satirized here. But I guess they felt they had to let us know, minor or not.

The line-up includes this year’s batch of annual improvements. One of these clarifies the following existing requirement in IAS 28: “When an investment in an associate or a joint venture is held by, or is held indirectly through, an entity that is a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect to measure investments in those associates and joint ventures at fair value through profit or loss in accordance with IFRS 9.” In the revised version, it’s clear that: “An entity shall make this election separately for each associate or joint venture, at initial recognition of the associate or joint venture.” The intention there is self-evident.

In a similar vein, prior to the amendments, IAS 28 states: “if an entity that is not itself an investment entity has an interest in an associate or joint venture that is an investment entity, the entity may, when applying the equity method, elect to retain the fair value measurement applied by that investment entity associate or joint venture to the investment entity associate’s or joint venture’s interests in subsidiaries.” The revised version specifies: “This election is made separately for each investment entity associate or joint venture, at the later of the date on which (a) the investment entity associate or joint venture is initially recognized; (b) the associate or joint venture becomes an investment entity; and (c) the investment entity associate or joint venture first becomes a parent.”

The only other significant annual improvement relates to the scope of IFRS 12. It’s been clear that an entity isn’t required to disclose summarized financial information for interests classified as held for sale, but it was unclear whether all other requirements in IFRS 12 apply to them. To that end, the standard now specifies that they do.

The new IFRIC 22 Foreign Currency Transactions and Advance Consideration addresses the following issue:

  • Paragraph 21 of IAS 21 The Effects of Changes in Foreign Exchange Rates requires an entity to record a foreign currency transaction, on initial recognition in its functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency (the exchange rate) at the date of the transaction. Paragraph 22 of IAS 21 states that the date of the transaction is the date on which the transaction first qualifies for recognition in accordance with IFRS Standards…
  • When an entity pays or receives consideration in advance in a foreign currency, it generally recognizes a non-monetary asset or non-monetary liability before the recognition of the related asset, expense or income. The related asset, expense or income (or part of it) is the amount recognized applying relevant Standards, which results in the derecognition of the non-monetary asset or non-monetary liability arising from the advance consideration.
  • The IFRS Interpretations Committee…initially received a question asking how to determine ‘the date of the transaction’ applying paragraphs 21–22 of IAS 21 when recognizing revenue. The question specifically addressed circumstances in which an entity recognizes a non-monetary liability arising from the receipt of advance consideration before it recognizes the related revenue.

Basically, the new interpretation says: “the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration.  If there are multiple payments or receipts in advance, the entity shall determine a date of the transaction for each payment or receipt of advance consideration.”

The draft contains a few illustrative examples to clarify how it would work in practice. Apparently the main beneficiaries of this interpretation will be the construction industry, reflecting the prolonged and multi-stage nature of contracts there. But of course it could also affect any one-off situation (a purchase of plant or equipment for instance) where for whatever reason the payment pattern runs ahead of the transaction stream.

The remaining minor item relates to IAS 40. IAS 40.57 currently lists some circumstances in which an entity makes transfers to or from investment property when there’s a change in use, but this leaves room for various interpretation questions. The amendment specifies: “A change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. In isolation, a change in management’s intentions for the use of a property does not provide evidence of a change in use.” So there you go…

The opinions expressed are solely those of the author

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