Just when you didn’t think IFRS could get any better…it does!

The IASB recently issued Annual Improvements to IFRS Standards 2018-2020.

There are only four items (proving once again that it was almost perfect already). Here they are.

Financial instruments IFRS 9 regards an exchange of debt instruments with substantially different terms between an existing borrower and a lender as an extinguishment of the original financial liability and the recognition of a new one. B.3.3.6 of the application guidance says that for purposes of identifying this situation “the terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10 per cent different from the discounted present value of the remaining cash flows of the original financial liability.”

The Board had received a request to clarify which fees paid and received should be included in this test, and has now addressed this by adding the following: “In determining those fees paid net of fees received, a borrower includes only fees paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other’s behalf..” As the basis for conclusions explains: “The clarification aligns with the objective of the test, which is to quantitatively assess the significance of any difference between the old and new contractual terms on the basis of the changes in the contractual cash flows between the borrower and lender.”

Leasing IFRS 16 stipulates that the cost of a right-of-use asset comprises, among other things, the amount of the initial measurement of the lease liability, and “any lease payments made at or before the commencement date, less any lease incentives received.” The standard defines lease incentives as “payments made by a lessor to a lessee associated with a lease, or the reimbursement or assumption by a lessor of costs of a lessee.”

Priot to the new amendment, one of the illustrative examples accompanying IFRS 16 (example 13) included a comment that “(the lessee) accounts for the reimbursement of leasehold improvements from (the lessor) applying other relevant Standards and not as a lease incentive applying IFRS 16. This is because costs incurred on leasehold improvements by (the lessee) are not included within the cost of the right-of-use asset.” The comment was intended only to apply to the fact pattern in this particular illustration – because for instance, it assumes that the payments were made to reimburse the lessee for improvements it made to the lessor’s asset – but the imprecision of the wording may have hinted at broader application. The IASB has now removed leasehold improvements from the example, commenting succinctly: “The Board concluded that little would be lost by deleting it.”

Biological assets In discussing the measurement of biological assets at fair value less costs to sell, IAS 41 currently says: “An entity does not include any cash flows for financing the assets, taxation, or re-establishing biological assets after harvest (for example, the cost of replanting trees in a plantation forest after harvest).” The limitation on including tax-related cash flows is inconsistent with IFRS 13, which “neither prescribes the use of a single present value technique nor limits the use of present value techniques to measure fair value to only those discussed in that Standard.” IFRS 13 does, however, require assumptions about cash flows and discount rates to be internally consistent. “Depending on the particular facts and circumstances, applying IFRS 13, an entity applying a present value technique might measure fair value by discounting after-tax cash flows (using an after-tax discount rate) or pre-tax cash flows (at a rate consistent with those cash flows).” The IASB therefore removed the reference to taxation from IAS 41.

First-time adoption Finally, IFRS 1 provides a first-time adoption exemption relating to a subsidiary that becomes a first‑time adopter later than its parent, allowing it the option of measuring its assets and liabilities at the carrying amounts that would be included in the parent’s consolidated financial statements, and therefore eliminating the risk of having to maintain two sets of accounting records based on different dates of transition to IFRS. The IASB has now extended this option to cover cumulative translation differences as well. As it points out, IFRS 1 already contains a broader exemption relating to such translation differences, so it’s unlikely that allowing this particular concession could be detrimental to users.

At the same time, the IASB also finalized the amendments to IAS 37 relating to onerous contracts that we discussed here at the time of the exposure draft. As proposed, the amendments specify that “the cost of fulfilling a contract comprises the costs that relate directly to the contract.” The main change from the version exposed for comment is to remove a list of examples of such costs, in part to avoid unintended consequences of slight differences from the wording of examples in different IFRS Standards. The IASB believes that the more general description now included “provides a framework within which an entity can judge whether a particular cost relates directly to a contract.”

Sheer perfection!

The opinions expressed are solely those of the author

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