October 2019 - Latest agenda decisions of the IFRS Interpretations Committee

IFRS Interpretations Committee (the Committee) agenda decisions are those issues that the Committee decided not to take onto its agenda. Although not authoritative guidance, in practice they are regarded as being highly persuasive, and all entities reporting under IFRS should be aware of these decisions because they could impact the way particular transactions and balances are accounted for.

At its September 2019 meeting, the IFRS Interpretations Committee (Committee) issued five final agenda decisions dealing with the following issues which are discussed in more detail below:

  • Compensation for delays or cancellations by airlines – IAS 37 warranties or variable consideration under IFRS 15
  • How to determine the lessee’s incremental borrowing rate (IFRS 16)
  • Presentation of liabilities or assets related to uncertain tax positions (IAS 1 and IFRIC 23)
  • Disclosure of changes in liabilities arising from financing activities (IAS 7)
  • Costs related to biological transformation (subsequent expenditure) of biological assets (IAS 41).

The Committee also issued an agenda decision about whether foreign currency risk can be a separately identifiable and reliably measurable risk component of a non-financial asset held for consumption that an entity can designate as the hedged item in a fair value hedge accounting relationship. For further discussion on this agenda decision, please refer to the full text of the September 2019 IFRIC Update.

Issue 1: Compensation for delays or cancellations by airlines – IAS 37 warranties or variable consideration under IFRS 15

Fact pattern

Flight passengers have the right to be compensated under legislation for flight delays and cancellations by airlines.

The legislation stipulates the amount of compensation required, and this is unrelated to the amount the customer pays for the fight. It forms part of the terms of the contract between the airline and its customers.

Under IFRS 15 Revenue from Contracts with Customers, the airline identifies that it has only one performance obligation, being its promise to fly Passenger A from Location X to Location Y. Ticket price is $300 and compensation for delays or cancellation is set by legislation at $50 per passenger.

Question:

Does the airline account for its obligation to compensate Passenger A as:

  • Variable consideration under IFRS 15, or
  • A provision under IAS 37 Provisions, Contingent Liabilities and Contingent Assets?

Rationale for agenda decision:

IAS 37

  • The ‘warranty’ requirements in IFRS 15, paragraphs B28-B33 do not apply to the compensation provided to customers for cancelled or delayed flights.
  • Warranties generally fall into two types:
    • Assurance-type warranties – provide customers with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications, and
    • Service warranties – provide customers with a service in addition to the assurance-type warranty.
  • Assurance-type warranties are not treated as separate performance obligations, but accounted for as a provision under IAS 37.
  • Service warranties are accounted for as separate performance obligation under IFRS 15.
  • Where legislation requires an entity to compensate customers if its products cause harm or damage, IFRS 15, paragraph B33 further notes that these are treated as assurance-type warranties under IAS 37.
  • The Committee concluded that compensation provided to customers for cancellation or delays is not an assurance warranty because it does not provide the customer with assurance regarding the workability of a product, nor does it compensate for harm or damage caused by using a product. Therefore no provision is required under IAS 37.

See further rationale below under IFRS 15 discussion.

IFRS 15  

  • Paragraph 47 notes with respect to the ‘transaction price’:
    • An entity must consider the terms of the contract and its customary business practices to determine the transaction price, and
    • The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer.
  • Paragraph 51 then lists examples of common types of variable consideration such as discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses and penalties.
  • In the fact pattern above, the Committee noted:
    • The airline promises to transport Passenger A from Location X to Location Y within a specified time frame after the scheduled flight time
    • If the airline fails to do so, Passenger A is entitled to compensation of $50 (similar to a refund or penalty for inadequate level of service provision)
    • This compensation forms part of the amount the airline expects to be entitled to in exchange for providing the flight services (it is not compensation for harm or damage)
  • Even though the compensation is set by legislation and not the contract with the customer, it would still impact the airline’s assessment of the ‘transaction price’ it expects to receive
  • The compensation is therefore ‘variable consideration’ in the same way that penalties for delayed transfer of an asset give rise to variable consideration (refer Illustrative Example 20 accompanying IFRS 15).
  • In this case, revenue would be recognised when Passenger A arrives at their destination, Location Y. At this point, the constrained $250 transaction price, plus the variable consideration of $50, would both be recognised.
  • The Committee concluded that the principles and requirements in IFRS 15 provide an adequate basis for determining accounting for obligations to compensate customers for delays or cancellations, and consequently did not add the matter to its standard-setting agenda.

Conclusion:

Compensation for delays or cancellation by airlines are variable consideration and the requirements of IFRS 15, paragraphs 50-59 would apply.

Issue 2: How to determine the lessee’s incremental borrowing rate (IFRS 16)

Fact pattern

Lessee enters into a lease for office premises.

Lessee cannot readily determine the interest rate implicit in the lease which IFRS 16, paragraph 26 requires for discounting the lease liability.

Lessee therefore needs to determine its ‘incremental borrowing rate’ to use instead.

Question:
Should the lessee’s incremental borrowing rate used to determine the lease liability reflect the interest rate in a loan with both a similar maturity to the lease, and a similar payment profile to the lease payments?

Rationale for agenda decision:

  • IFRS 16, Appendix B defines a lessee’s incremental borrowing rate as ‘the rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment’.
  • Consistent with the discussion in IFRS 16, Basis for Conclusions BC162, the Committee noted that this definition requires a lessee to determine its incremental borrowing rate for a particular lease, taking into account the terms and condition of the lease (i.e. a lease-specific rate).
  • BC162 also notes that a lessee may be able to refer to a rate that is readily observable as a starting point (for example, the rate a lessee has paid, or would pay, to borrow money to purchase the type of asset being leased, or the property yield when determining the discount rate applying to property leases). This rate would then be adjusted as needed to determine the incremental borrowing rate.
  • The incremental borrowing rate used by the lessee would therefore need to reflect the rate the lessee would be required to pay to borrow:
    • Over a similar term to the lease term
    • With a similar security to the security (collateral) in the lease
    • The amount needed to obtain an asset of a similar value to the right-of-use asset arising from the lease, and
    • In a similar economic environment.
  • The definition does not explicitly refer to a loan with a similar payment profile to the lease payments. However, the Committee noted that in applying judgement when determining the rate, it would be consistent with the Board’s objectives for the lessee to refer as a starting point to a readily observable rate for a loan with a similar payment profile to that of the lease.
  • The Committee concluded that the principles and requirements in IFRS 16 provide an adequate basis for a lessee to determine its incremental borrowing rate, and consequently did not add the matter to its standard-setting agenda.

Conclusion:

Yes, when determining its incremental borrowing rate for a specific lease, the lessee should refer, as a starting point, to a readily observable rate for a loan with a similar payment profile to that of the lease.

Since most lease payments comprise repayment of principal and interest, when determining the incremental borrowing rate, entities should start off with a borrowing rate of an amortising loan rather than a loan with a lump sum principal repayment at the end of its life.

Issue 3: Presentation of liabilities or assets related to uncertain tax positions (IAS 1 and IFRIC 23)

Fact pattern

Aus Co is a subsidiary of Global Co and has transfer pricing tax issues.

Aus Co recognises a current tax liability of $150,000 and deferred tax liabilities of $50,000 for the year ended 31 December 2019.

As a result of first-time adoption of IFRIC 23 Uncertainty over Income Tax Treatments, for the year ended 31 December 2019, Aus Co recognises additional liabilities for uncertain tax positions of $50,000 (for current tax) and $25,000 (for deferred tax).

Question:

In the statement of financial position, should uncertain tax liabilities be presented as:

  • Current or deferred tax liabilities, or
  • Within another line item such as ‘provisions’?

Rationale for agenda decision:

  • Uncertain tax liabilities (or assets) applying IFRIC 23 are current tax or deferred tax liabilities or assets under the definitions in IAS 12 Income Taxes.
  • However, neither IAS 12 nor IFRIC 23 contain presentation requirements for uncertain tax liabilities (or assets).
  • The presentation requirements in IAS 1 Presentation of Financial Statements would therefore apply. Specifically, IAS 1, paragraph 54(n) and 54(o) require separate line items in the statement of financial position for current and deferred tax liabilities.
  • Because uncertain tax liabilities are considered current or deferred tax liabilities under IAS 12, the Committee concluded that applying IAS 1, uncertain tax liabilities would be included with current tax liabilities (or assets) or deferred tax liabilities (or assets) in the statement of financial position.  
  • The Committee concluded that the principles and requirements in IFRS standards provide an adequate basis for an entity to determine the presentation of uncertain tax liabilities and assets, and consequently did not add the matter to its standard-setting agenda.

Conclusion:

Uncertain tax liabilities (or assets) are presented within the current and deferred tax asset or liability lines in the statement of financial position.

Issue 4: Disclosure of changes in liabilities arising from financing activities (IAS 7)

Fact pattern

Entity ABC has two sources of loan funding: one from Australian bank A (denominated in Australian dollars), and another from USA Bank B (denominated in USD). Both Loans are individually material.

Question:

Are the specific disclosure requirements in IAS 7 Statement of Cash Flows, paragraphs 44B-44E adequate to require an entity to provide disclosures that meet the objective in paragraph 44A?

In other words, are additional disclosures to those required in IAS 7, paragraphs 44B-44E required in order to meet the disclosure objective in paragraph 44A?

Rationale for agenda decision:

  • The agenda decision highlights that the entity must be satisfied that the disclosures provided do indeed meet the disclosure objective set out in IAS 7, paragraph 44A. It is not sufficient to merely disclose the reconciliation as per IAS 7, paragraph 44D. The reconciliation provided does need to meet the disclosure objective in paragraph 44A.
An entity shall provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes.
IAS 7, paragraph 44A

 

  • The Committee observed that an entity applies judgement when determining the extent to which it disaggregates and explains the changes in liabilities arising from financing activities in the reconciliation prepared under IAS 7, paragraph 44D.
  • When preparing the reconciliation, the Committee noted that the types of changes outlined in IAS 7, paragraph 44B should be included (e.g. changes from financing cash flows, changes arising from gaining or losing control of a subsidiary, the effect of changes in foreign exchange rates, changes in fair values, etc.).

Disaggregating liabilities arising from financing activities

  • When determining the level of granularity of information included on the reconciliation (i.e. disaggregation of liabilities arising from financing activities, and the level of detail provided for cash and non-cash changes), the Committee also noted that the entity should not reduce the understandability of its financial statements by aggregating material items that have different natures or functions (IAS 1, paragraph 30A).
  • Therefore individually material items should be disclosed separately in the reconciliation, including material classes of financing liabilities, as well as material reconciling items (cash and non-cash changes).  
  • In the fact pattern above, this is likely to result in separate line items being disclosed in the reconciliation for the two loans.

Explaining movements in liabilities arising from financing activities

  • The Committee noted that the structure for the reconciliation (including the appropriate level of disaggregation as referred to above) is determined in accordance with IAS 7, paragraphs 44A-44E. Thereafter, the entity determines whether any additional information is required to meet the disclosure objective in IAS 7, paragraph 44A.
  • In this regard, IAS 1, paragraph 112(c) requires disclosure of information in the notes that is not presented elsewhere in the financial statements, but is relevant to an understanding of the financial statements.
  • The Committee concluded that the disclosure requirements in IAS 7, paragraphs 44A-44E, together with IAS 1, are adequate to require an entity to provide disclosures that meet the objective in IAS 7, paragraph 44A. Consequently, the Committee did not add this matter to its standard-setting agenda.

Conclusion:

Yes. The specific disclosure requirements in IAS 7 Statement of Cash Flows, paragraphs 44B-44E, as well as IAS 1, are adequate to require an entity to provide disclosures that meet the disclosure objective regarding changes in liabilities arising from financing activities in paragraph 44A.

Issue 5: Costs related to biological transformation (subsequent expenditure) of biological assets (IAS 41)

Fact pattern

Vineyard capitalises initial costs incurred to establish grape vines, which are measured at fair value less costs to sell (FVLCTS) under IAS 41 Agriculture.

Question:

Should subsequent expenditure on biological assets measured at FVLCTS applying IAS 41 be:

  • Capitalised (i.e. added to the carrying amount of the asset), or
  • Expensed when incurred?

Rationale for agenda decision:

  • IAS 41 does not specify the accounting for subsequent expenditure on biological assets measured at FVLCTS.
  • IAS 41, Basis for Conclusions, paragraph B62 explains that the Board did not expressly prescribe the accounting because it is unnecessary with a fair value approach. If capitalising, any fair value movement would be reduced, and if expensed, any fair value movement would increase.
  • There would be no impact on profit or loss, nor on FVLCTS at reporting date. Only presentation in profit or loss is affected.
  • The Committee observed that the presentation requirements in IAS 1, paragraphs 81-105 would apply, in particular:
    • Paragraph 85 – to present additional line items (including by disaggregating specific line items required by paragraph 82), headings and subtotals in the statement of profit or loss and other comprehensive income, and
    • Paragraph 99 – presenting an analysis of expenses by either nature or function, whichever provides information that is more reliable or relevant.
  • IAS 8 Accounting Policies, Changes in Accounting Policies and Errors, paragraph 13 requires an entity to apply its accounting policy (i.e. capitalise or expense) consistently to each group of biological assets and disclose such accounting policy under IAS 1, paragraphs 117-124.
  • The Committee has not obtained evidence to suggest that standard-setting on this matter would result in an improvement to financial reporting that would be sufficient to outweigh the costs. The Committee therefore decided not to add not add the matter to its standard-setting agenda.

Conclusion:

Entities need to choose an accounting policy and apply it consistently to each group of biological assets, and disclose such policy.

Subscribe to Accounting News

SUBSCRIBE

This publication has been carefully prepared, but is general commentary only. This publication is not legal or financial advice and should not be relied upon as such. The information in this publication is subject to change at any time and therefore we give no assurance or warranty that the information is current when read. The publication cannot be relied upon to cover any specific situation and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss these matters in the context of your particular circumstances.

BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not give any warranty as to the accuracy, reliability or completeness of information contained in this article nor do they accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it, except in so far as any liability under statute cannot be excluded. Read full Disclaimer.