More annual improvements in the pipeline

The International Accounting Standards Board (IASB) recently published Exposure Draft 2017/1 Annual Improvements to IFRSs 2015 – 2017 Cycle (ED 276 in Australia) which proposes limited amendments to three Accounting Standards.

Standard Proposed changes

AASB 112 Income Taxes

Clarifies that the requirement to recognise the tax consequences of dividends in profit or loss (current paragraph 52B) applies when the dividend is being paid out of profits recognised in the income statement
Therefore, tax consequences of other dividends should be recognised in:

  • Other comprehensive income (OCI) to the extent that the dividend is being paid out of net gains originally recognised in other comprehensive income, or
  • Equity to the extent the dividend is being paid from reserves arising from transactions originally recognised directly in equity.

Therefore, entities in jurisdictions where paying a dividend has an income tax consequence will need a system or policy for determining the transactions which gave rise to the reserve(s) from which a dividend has been paid.

Retrospective restatement

AASB 123 Borrowing Costs

When an entity borrows funds generally to obtain a qualifying asset, we need to determine the amount of borrowing costs eligible for capitalisation. To avoid double counting, these ‘general borrowings’ would exclude borrowings made specifically for the purpose of obtaining a qualifying asset (‘specific borrowings’).

These amendments clarify that ‘specific borrowings’ are to be included in the pool of ‘general borrowings’ for the purposes of calculating the capitalisation rate once the qualifying asset to which the ‘specific borrowing’ relates, is ready for its intended use. 

Prospective restatement

AASB 128 Investments in Associates and Joint Ventures

Clarifies that AASB 9 Financial Instruments is to be applied with respect to impairment testing of long-term interests in an associate or joint venture to which the equity method is not applied (e.g. loans to associates and joint ventures). This will result in the ‘expected loss model’ needing to be applied to these loans.

This is despite such long-term loans being included as part of the net investment for determining the amount of equity accounted losses to be recognised.

It would therefore be inappropriate to conclude that no impairment provision needs to be recognised on a loan to an investee because the carrying amount of that loan and the investment in shares are in aggregate less than the aggregate recoverable amount of the interests in the investee.

Proposed effective date: Annual periods beginning on or after 1 January 2018 (in line with application date for AASB 9)

Retrospective restatement

However, where an entity is applying the cumulative catch-up approach when it first applies AASB 9, and is therefore not restating comparative information, it would be permitted to apply the requirements of AASB 139 Financial Instruments: Recognition and Measurement to comparatives when determining the impairment provision for long term interests in associates and joint ventures (i.e. no ‘expected loss model’ would be required for impairment testing).

Comments close

The deadline for comments for this Exposure Draft is 8 March 2017 to the Australian Accounting Standards Board and 12 April 2017 to the IASB.