Graham Holt outlines the recent amendments made to nine International Financial Reporting Standards
First published in the March 2014 UK edition of Accounting and Business magazine.
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In December 2013, the International Accounting Standards Board (IASB) issued two tranches of 'annual improvements' to International Financial Reporting Standards (IFRS). The improvements process is how the IASB adjusts IFRS in areas where the standards are unclear. Although these amendments generally do not significantly change the application of the standards, it is important for entities to determine any potential impact by reviewing their accounting policies. The recent amendments contain 11 changes to nine standards.
"It is important for entities to determine any potential impact."
IFRS 3 business combinations
IFRS 3 currently says that contingent consideration must be measured at fair value at the time of the business combination. If the amount of contingent consideration changes as a result of a post-acquisition event, the accounting for the change depends on whether the additional consideration is classified as an equity instrument, an asset or liability. Currently, if the additional consideration is classified as an asset or liability that is a financial instrument, gains and losses are recognised in either profit or loss or other comprehensive income.
The amendment states that changes in the fair value of contingent consideration that is classified as an asset or liability irrespective of whether it is a financial instrument are recognised in profit or loss.
Thus contingent consideration cannot be measured at fair value through other comprehensive income. This applies only to business combinations.
IFRS 3 has also been amended to clarify that both joint arrangements and joint ventures are outside its scope. This applies only to the accounting in the financial statements of the joint arrangement. IFRS 11, Joint Arrangements, introduced joint arrangements to replace the concept of joint ventures, which is a type of joint arrangement within IFRS 11.
IFRS 3 is basically updated to reflect the change.
Joint arrangements are either joint operations or joint ventures. A joint operation is a joint arrangement where the parties that have joint control have rights to the assets and liabilities; a joint venture is a joint arrangement where the parties that have joint control have rights to the net assets of the arrangement.
IFRS 11 requires the use of the equity method of accounting for interests in joint ventures thereby eliminating the proportionate consolidation method.
The decision regarding whether a joint arrangement is a joint operation or a joint venture is based on the parties' rights and obligations.
IAS 40 investment property and IFRS 3
A further amendment, which is linked to IFRS 3, relates to IAS 40. Its aim is to clarify that judgment is needed to determine whether the acquisition of investment property is the acquisition of an asset or is a business combination within the scope of IFRS 3. The judgment is based on the guidance offered in IFRS 3.
The IFRS Interpretations Committee had reported that some practitioners considered both standards to be mutually exclusive while others felt that an entity acquiring investment property had to determine whether it met both definitions.
IFRS 3 and IAS 40 are deemed not to be mutually exclusive and IAS 40 is amended to state explicitly that judgment is needed to determine whether the transaction is solely the acquisition of an investment property or whether it is the acquisition of a group of assets or a business combination within the scope of IFRS 3 that includes an investment property.
The judgment is not based on IAS 40 but on the guidance in IFRS 3. The amendment does not help to determine whether an acquisition is a purchase of a business or an asset as judgment is still required.
"IFRS 3 and IAS 40 are deemed not to be mutually exclusive."
IFRS 2 share-based payment
Vesting conditions are conditions imposed under a share-based payment arrangement that the counterparty (an employee or third party) must satisfy to be entitled to receive cash, other assets or equity instruments of the entity.
A 2008 amendment to IFRS 2 clarified that vesting conditions determine whether the entity receives the services that result in the counterparty's entitlement and restricted the definition of vesting conditions to include only service and performance conditions. All features of a share-based payment arrangement other than service and performance conditions are considered to be non-vesting conditions.
The improvement amends the definitions of vesting condition and market condition and adds separate definitions for performance condition and service condition.
A performance target can be based on the activities of the entity, or another entity in the same group, and can relate to the performance of the whole or part of the entity. A performance condition must contain a service condition and be met while the counterparty renders the service.
A market condition is a form of performance condition but a share market index target is a non-vesting condition as it reflects the performance of other entities as well as those of the group. If the counterparty ceases to provide service during the vesting period, and so does not meet a service condition, then no expense is recognised for the services received and is reversed. If there is vesting of an award on cessation of employment, then this obviously does not apply.
IFRS 8 operating segments
IFRS 8 states that two or more operating segments may be aggregated into a single operating segment if aggregation is consistent with the core principles of the standard, and as long as the segments have similar economic characteristics and are similar in certain qualitative aspects.
The amendment requires disclosure of the judgments made by management in determining the aggregation criteria including the nature of the similar economic characteristics. The reconciliation of segment assets to total assets must be provided only if the reconciliation is regularly reported to the chief operating decision maker (CODM).
The amendment arose as a result of a submission by the European Securities and Markets Authority (ESMA) asking the IASB to consider the application of the aggregation criteria and also the identification of the CODM as ESMA feels that the definition of the CODM contains conflicting prerogatives (allocation of resources versus assessment of performance).
IFRS 13 fair value measurement
The IASB has clarified the position in IFRS 13 as regards short-term receivables and payables. There was confusion over whether the ability to measure these items at invoice amounts had been removed by IFRS 13 and amendments to IAS 39 and IFRS 9. It has been clarified that those elements that have no stated interest rates can be shown at invoice amounts when the effect of discounting is immaterial. Entities will need to assess what is meant by 'immaterial' in this context.
IAS 16 property, plant and equipment and IAS 38 intangible assets
IAS 16 and IAS 18 provide two different treatments for accumulated depreciation/amortisation at the date of a revaluation.
Accumulated depreciation/amortisation is either restated proportionately with the change in the gross carrying amount of the asset, so that the carrying amount of the asset after revaluation equals its revalued amount (the gross approach), or is eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset (the offset approach). Offset is often used for buildings and gross when an asset is revalued by means of applying an index.
The restatement of accumulated depreciation proportionate to the gross carrying amount is not possible when the residual value, the useful life or the depreciation method has been changed before a revaluation.
The amendment to IAS 16 and IAS 38 states that when an item is revalued, the accumulated depreciation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Alternatively, the gross carrying amount is restated consistent with the revaluation of the carrying amount. The accumulated depreciation is the difference between the gross and net carrying amounts. The gross carrying amount may be restated by reference to observable market data or proportionately to the change in the net carrying amount. The determination of the accumulated depreciation does not depend on the selection of the valuation technique.
IFRS 13 includes a scope exception for measuring the fair value of a group of financial assets and financial liabilities on a net basis. It was not clear whether this exception, known as the 'portfolio exception', included all contracts within the scope of IAS 39 or IFRS 9, which includes such things as commodity derivatives, which do not meet the definitions of financial assets or financial liabilities in IAS 32. The IASB's intention was to include such contracts in the portfolio exception.
The amendment clarifies that the portfolio exceptions can be applied to financial assets, financial liabilities and other contracts within IAS 39 or IFRS 9, and not just to those contracts that meet the definition of financial assets or liabilities.
IFRS 1 first-time adoption of international financial reporting standards
IFRS 1 sets out the procedures an entity must follow when it first adopts IFRS. The amendment allows an entity to apply either an existing effective IFRS or a new or revised IFRS that is not yet mandatory (provided that early application is permitted). However, the entity has to apply the same version of the IFRS throughout the periods covered by those first IFRS financial statements. This clarifies the meaning of 'effective IFRS' in IFRS 1.
"This clarifies the meaning of 'effective IFRS'."
IAS 24, Related Party Disclosures
Finally, IAS 24 is amended so that an entity that provides key management personnel services is a related party and subject to the related party disclosures.
Some of these amendments are retrospective, some are effective immediately and some prospectively from 1 July 2014. Earlier application is permitted without adopting all amendments.
Graham Holt is director of professional studies at the accounting, finance and economics department at Manchester Metropolitan University Business School