Annual improvements 2015-2017 cycle - changes to IFRS 3 Business Combinations, IFRS 11 Joint Arrangements, IAS 12 Income Taxes and IAS 23 Borrowing Costs

On 12 December 2017, the International Accounting Standards Board (IASB) issued its annual improvements to IFRS Standards 2015-2017 Cycle (AASB 2018-1 in Australia) which makes narrow-scope amendments to four standards and may be adopted prior to the effective dates listed below.

Annual improvements are part of the IASB’s process for maintaining IFRS standards and contain interpretations that are minor or narrow in scope. Amendments made as part of this process either clarify the wording in an IFRS standard or correct relatively minor oversights or conflicts between existing requirements of IFRS standards.

Standard Affected Summary of amendment Effective date

IFRS 3

Business Combinations

Situation

A party to a joint arrangement obtains control of a joint operation that is a business.

Clarification

This is a business combination achieved in stages.

Implications

Acquirer to remeasure previously held interests at acquisition date fair values as per IFRS 3.42 (as if entity had disposed of interest and re-acquired it at fair value).

Business combinations for which the acquisition date is on or after the beginning of first annual reporting period beginning on or after 1 January 2019.

IFRS 11

Joint Arrangements

Situation

A party to a joint arrangement that is a joint operation does not have joint control of the joint operation. It subsequently obtains joint control.

Clarification

When party subsequently obtains joint control, it must not remeasure its previously held interest.

This treatment aligns with accounting when an associate becomes a joint venture and vice versa.

Transactions where joint control obtained on or after the beginning of the first annual reporting period beginning on or after 1 January 2019.

IAS 12

Income Taxes

Situation

In some jurisdictions, income taxes are payable at a higher or lower rate if part or all of the net profit or retained earnings is paid out as a dividend to shareholders. There is therefore an adjustment to tax payable when the distribution is made.

Clarification

Such income tax consequences must be recognised:
  • At the same time as the liability to pay those dividends is recognised, and
  • In profit or loss, other comprehensive income (OCI), or the statement of changes in equity (SOCIE), depending on where the entity originally recognised the past transactions or events that generated the distributable profits from which the dividends are being paid.

Implications

In practice, linking dividend payments to past transactions in order to determine where the income tax consequences (if any) should be recognised may require judgement. For example, entities may pay dividends by reference to liquidity tests rather than by reference to accounting reserves.

Also, unless affected entities currently separate reserves into those generated from transactions recognised in the profit or loss, OCI or the SOCIE, systems may be need to be implemented to keep track of cumulative distributions made from each.

Annual reporting periods beginning on or after 1 January 2019.

The amendment applies to income tax consequences of dividends recognised on or after the beginning of the earliest comparative period presented.

IAS 23

Borrowing Costs

Situation

When an entity uses funds borrowed generally for the purposes of constructing a qualifying asset, paragraph 14 of IAS 23 requires it to apply a capitalisation rate to the expenditure on that qualifying asset. This capitalisation rate is the weighted average of the entity’s borrowings that are outstanding during the period, excluding borrowings made specifically for the purpose of constructing that, or any other, qualifying asset.

Clarification

Once a qualifying asset funded through specific borrowings becomes ready for its intended use or sale, those borrowings become part of the pool of general borrowings.

From that date, the rate applied on those borrowings are included in the determination of the capitalisation rate applied to general borrowings for the purposes of paragraph 14.

Annual reporting periods beginning on or after 1 January 2019.

The amendment applies to borrowing costs incurred on or after the beginning of the annual reporting period in which the amendment is first applied (prospective application).