Final agenda decisions

Recent final IFRS Interpretations Committee agenda decisions are summarised below.

This summary also includes matters where the IASB has decided to undertake standard setting with respect to the matter discussed by the IFRS Interpretations Committee.

Links to the full agenda decision (or the IASB’s decision to undertake standard setting) are provided below.

We encourage you to read the agenda decisions and consider whether and how these may affect your financial statements.

Contents

 

Final agenda decisions – no standard-setting activity


Costs Necessary to Sell Inventories (IAS 2 Inventories)

Date published: June 2021

IAS 2 defines the net realisable value of inventory as the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. The Committee was asked whether, when the ‘estimated costs necessary to make the sale’ include all costs necessary to make the sale, or only those that are incremental to the sale.

According to IAS 2, the objective of writing inventories down to net realisable value is to avoid inventories being carried “in excess of amounts expected to be realised from their sale”. The Committee noted that this objective may not be achieved if costs that must be incurred for making the sale but which are not incremental are excluding from the calculation of ‘estimated costs necessary to make the sale’.

The Committee concluded that, when determining the net realisable value of inventories, an entity estimates the costs necessary to make the sale in the ordinary course of business – which requires judgement and depends on the entity’s facts and circumstances.

The Committee concluded that no standard-setting activity is required and instead published a final Agenda Decision with explanatory guidance material.

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Preparation of Financial Statements when an Entity is No Longer a Going Concern (IAS 10 Events after the Reporting Period)

Date published: June 2021

The Committee received a request about the accounting applied by an entity that is no longer a going concern. The request asked whether such an entity:

  • can prepare financial statements for prior periods on a going concern basis, if it was a going concern in those periods and has not previously prepared financial statements for those periods; and
  • restates comparative information to reflect the basis of accounting used in preparing the current period’s financial statements, if it had previously issued financial statements for the comparative period on a going concern basis.

With respect to the first question, the Committee concluded that under the requirements on going concern in IAS 1 and IAS 10, an entity that is not a going concern cannot prepare financial statements on a going concern basis – including for prior periods where the financial statements have not yet been authorised for issue.

With respect to the second question on the restatement of comparatives, the Committee did not observe diversity in practice in this regard, and concluded that this matter does not have a widespread effect.

 The Committee concluded that no standard-setting activity is required and instead published a final Agenda Decision with explanatory guidance material.

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Hedging Variability in Cash Flows due to Real Interest Rates (IFRS 9 Financial Instruments)

Date published: May 2021

The Committee received a request about applying the hedge accounting requirements in IFRS 9 when the risk management objective is to ‘fix’ cash flows in real terms.

The request referred to an entity that has a floating rate instrument and enters into an ‘inflation swap’ – to swap the variable interest cash flows from a floating rate instrument for variable cash flows adjusted for inflation. The request asked whether the inflation swap can be designated in a cash flow hedging relationship, to hedge changes in the variable interest payments arising from changes in the real interest rate.

The variable payments on the floating rate instrument are based on a nominal market interest rate. The Committee observed that nominal interest rates (such as LIBOR) generally do not change as a direct result of changes in inflation or the real interest rate. That is, changes in the real interest rate are not an identifiable pricing element when setting the nominal interest rate.

The Committee therefore concluded that the real interest rate risk component in the proposed cash flow hedging relationship does not meet the requirements in IFRS 9 to be designated as an eligible hedged item.

The Committee concluded that no standard-setting activity is required and instead published a final Agenda Decision with explanatory guidance material.

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Attributing Benefit to Periods of Service (IAS 19 Employee Benefits)

Date published: May 2021

The Committee was asked how an entity attributes benefits to periods of service for a particular defined benefit plan. The plan has the following terms:

  • employees are entitled to a lump sum benefit payment when they reach a specified retirement age (for example, age 62), provided they are still employed by the entity; and
  • the retirement benefit amount that the employee is entitled to depends on the employee’s length of service with the entity before the retirement age – but it is capped at a specified number of years (for example, 16 years).

The Committee concluded that under the requirements of IAS 19, the entity would attribute retirement benefit to each year in which an employee renders service from the age of 46 to the age of 62 (due to the 16-year cap on the retirement benefit). Services rendered by the employee before the age of 46 (or after the age of 62) do not give rise to retirement benefits under the plan. If employment commenced on or after the age of 46, the entity attributes retirement benefit to each year from the date the employee first renders service to the age of 62.

The Committee concluded that no standard-setting activity is required and instead published a final Agenda Decision with explanatory guidance material.

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Configuration or Customisation Costs in a Cloud Computing Arrangement (IAS 38 Intangible Assets)

Date published: April 2021

The Committee considered how an entity should account for costs incurred in configuring and customising software in cloud-based software as a service arrangements – should these costs be capitalised or expensed?

This question related to a cloud-based software as a service arrangement (often referred to as SaaS), where an entity typically pays a fee to receive access to the supplier’s application software in the cloud over a contract term. In the type of arrangement considered by the Committee, the right to access the software does not provide the entity with a software asset.

The Committee observed that in this type of arrangement, the costs of configuring or customising the software would often not meet the requirements for capitalisation as an intangible asset. This is because the entity does not control the software being configured or customised, and the configuration or customisation do not create a resource controlled by the customer that is separate to the software. However, an entity may in certain circumstances be able to capitalise costs incurred configuring or customising the application software.

 The Committee concluded that no standard-setting activity is required and instead published a final Agenda Decision with explanatory guidance material.

Final Decision         XRB Staff Q&A's

Standard-setting projects arising from IFRS Interpretations Committee discussions


Classification of debts with covenants as current or non-current (IAS 1)

Date project added to IASB’s work plan: June 2021

The Committee recently considered questions concerning how to classify debt and other financial liabilities (i.e. loans) as current or non-current in particular circumstances.

Specifically, the Committee discussed how an entity determines whether it has the right to defer settlement of a liability for at least twelve months after the reporting period when:

  • the right to defer settlement is subject to the entity complying with specified conditions; and
  • compliance with the specified conditions is tested at a date after the end of the reporting period.

The Committee reached a tentative decision that in certain circumstances, the liability would be classified as current.

In April 2021, the Committee confirmed its agreement with the conclusion that it reached in its tentative agenda decision. However, the Committee agreed to report back to the IASB on the feedback it received, before finalising the Agenda Decision.

Given the feedback received by the Committee, in June 2021 the IASB decided to add to its work plan a project to propose amendments to IAS 1 Presentation of Financial Statements. The IASB tentatively decided to amend IAS 1 with respect to classification (as current or non-current), presentation and disclosures of liabilities for which an entity’s right to defer settlement for at least 12 months is subject to the entity complying with conditions after the reporting period.

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