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Recent agenda decisions by the IFRS Interpretations Committee - Employee benefits, financial instruments, EPS and agricultural produce on bearer plants

Who is the IFRS Interpretations Committee

The IFRS Interpretations Committee (Committee) is the interpretative body of the International Accounting Standards Board (IASB). Its role is to provide guidance on financial reporting issues which have not specifically been addressed in IFRS, or where unsatisfactory or conflicting interpretations either have developed, or appear likely to develop.

What are agenda decisions?

Where an issue is not added to its agenda, the Committee publishes agenda decisions. These do not represent authoritative guidance, however, they set out the Committee’s rationale for not taking an issue onto its agenda. In practice, it is expected that entities reporting in accordance with IFRS will take account of and follow the agenda decisions and this is the approach which is followed by securities regulators worldwide.

At its June 2017 meeting, the IFRS Interpretations Committee issued agenda decisions on the following accounting issues.

Relevant Accounting Standards

Question presented to the Committee

Summary of agenda decision

IAS 19 Employee Benefits
(AASB 119)

What discount rate should be used to discount employee benefit liabilities in a country that has adopted another country’s currency (e.g. Ecuador adopting USD) and there is no deep market for corporate bonds in that country?

The depth of the market for corporate bonds of a particular currency is not limited to the country in which the entity operates.

In the case of Ecuador, this means that USD corporate bonds issued in the USA, with similar terms to the Ecuadorian employee benefit liabilities, should be used if there is a deep market for corporate bonds in the USA.

This matter was not added to the Committee’s agenda as IAS 19 provides an adequate basis to determine the appropriate discount rate.

IAS 32 Financial Instruments: Presentation
(AASB 132)

How should centrally cleared derivative contracts be accounted for by a clearing member?

If a transaction results in contracts within the scope of IFRS 9 Financial Instruments or IAS 39 Financial Instruments: Recognition and Measurement, measurement should be in accordance with these standards.

Financial assets and liabilities are accounted for separately unless offsetting requirements of IAS 32 Financial Instruments: Presentation have been met.

The hierarchy for alternative policies in IAS 8 paragraphs 10-12 only applies if IFRS 9/IAS 39 do not apply.

IAS 33 Earnings Per Share
(AASB 133)

How should an entity determine profit attributable to ordinary shareholders when calculating EPS in the following scenario, i.e. how should the numerator be calculated?

  • An entity has two classes of equity instruments – ordinary and participating (according to a predetermined formula)
  • Both are classified as ‘equity’ under IAS 32 Financial Instruments: Presentation
  • Dividends are paid to participating equity holders only when paid to ordinary equity holders
  • Dividends on participating equity instruments are tax deductible.

IAS 33, paragraph A14 requires an entity to allocate profit or loss for the period to each class of share as if all the profit or loss for the period has been distributed (i.e. a hypothetical distribution).

Profit /loss attributable to ordinary shareholders is adjusted for the tax benefit resulting from a hypothetical distribution to the participating equity holders.

This matter was not added to the Committee’s agenda because IAS 33 principles and requirements provide an adequate basis for determining EPS for the specified fact pattern.

IAS 41 Agriculture
(AASB 141)

Can fruit growing on oil palms be measured at cost instead of fair value?

No - refer more detail below

Can fruit growing on oil palms be measured at cost instead of fair value?

Recent changes to accounting standards mean that ‘bearer plants’, including oil palms, grape vines and tea bushes are accounted for by applying IAS 16 Property, Plant and Equipment using the cost or revaluation model.

IAS 41 Agriculture still requires the produce from bearer plants (e.g. picked fruit off oil palms) to be accounted for at ‘fair value less costs to sell’, both on initial recognition and at the end of each reporting period. However, paragraph 30 allows such produce to be measured at cost if the fair value presumption can be rebutted on initial recognition, i.e. if:

  • Quoted market prices are not available, and
  • Alternative fair value measurements are determined to be ‘clearly unreliable’.

Question for Committee

Is fruit growing on oil palms an example of a biological asset for which an entity might rebut the fair value presumption by applying paragraph 30 of IAS 41?

Committee’s Conclusions

  • The IASB’s expectation was that fair value measurements might be ‘clearly unreliable’ only when an entity encounters ‘significant practical difficulties’. Basis for Conclusions to IAS 41, BC4C
  • The converse is not necessarily true, i.e. just because an entity encounters ‘significant practical difficulties’ does not necessarily mean that the fair value measurement is ‘clearly unreliable’
  • Possible differences in supportable assumptions, which might result in significantly different valuations is also not evidence of ‘significant practical difficulties’ and would also not automatically mean that fair value measurements are ‘clearly unreliable’. The impact of such estimations on the fair value for produce is disclosed in the financial statements as required by:
    • IAS 1 Presentation of Financial Statements – disclose information about assumptions and estimates for which there is a significant risk of a material adjustment to the carrying amount of assets and liabilities in the next financial year
    • IFRS 13 Fair Value Measurement - requires quantification of Level 3 inputs in the fair value hierarchy
  • The question asked related to a specific type of produce (fruit growing on oil palms) and the Committee’s role is not to conclude on very specific application questions, particularly where they relate to areas where judgement is required.