The IFRS Interpretations Committee (IC) Agenda Decisions play a key part in forming accounting positions under IFRS Standards. In 2021, the IFRS IC concluded its discussions on Agenda Decisions related to cloud computing arrangements, employee defined benefit plans, leases, financial instruments, inventories and going concern. In this article, we summarize these Agenda Decisions and shed light on how they compare to US GAAP.
What are IFRS IC Agenda Decisions?
The IFRS IC is the interpretative body of the International Accounting Standards Board (the IASB® Board). It supports the consistent application of IFRS Standards and helps improve financial reporting through the timely resolution of financial reporting issues. Agenda Decisions provide key interpretive guidance for companies to use as they apply IFRS Standards. See section below for further information explaining the requirement for companies to comply with Agenda Decisions of the IFRS IC.
What’s new in 2021?
The following table summarizes the agenda items discussed by the IFRS IC in 2021. The current status of each item is indicated in the table.
For a refresher on 2020 Agenda Decisions, read KPMG IFRS Perspectives article here.
|Configuration or customization costs in a cloud computing arrangement (IAS 38, Intangible Assets)||Final: March 2021||
In the fact pattern discussed by the IFRS IC, a customer enters into a Software as a Service (SaaS) arrangement with a supplier. The contract conveys to the customer a right to access the supplier's application software over the contract term (i.e. a service) but does not convey to the customer a software asset (e.g. a software license). The customer incurs costs for customizing and/or configuring the software (i.e. modifying or writing an additional code and/or defining values or parameters so the software functions in a specific manner).
Having concluded that the SaaS arrangement does not give rise to a software asset, the IFRS IC advised that the accounting for those costs generally hinges on whether:
US GAAP (ASC 350-40) has specific guidance for configuration, customization and other implementation costs incurred by customers in SaaS arrangements.
Companies will generally capitalize fewer SaaS implementation costs under IFRS Standards than US GAAP.
|Attributing benefit to periods of service (IAS 19, Employee Benefits)||Final: April 2021||
Over what periods of service should an entity attribute benefits under IAS 19?
In the fact pattern discussed by the IFRS IC, an entity sponsors a post-employment defined benefit plan for its employees. Under the terms of the plan, employees are entitled to a lump sum payment only when they reach a retirement age of 62, if they are still employed by the entity. The amount of retirement benefit is calculated as one month of final salary for each consecutive year of service before the retirement age, capped at 16 years of service.
IAS 19 requires an entity to attribute the benefit to periods of service under the plan’s benefit formula from the date when employee service first leads to benefits under the plan until the date when further employee service will lead to no material amount of further benefits under the plan. Further, an entity must attribute the benefit to periods in which the obligation to provide post-employment benefits arises (i.e. as employees render services). Employee service gives rise to a constructive obligation because, at each reporting date, the amount of future service an employee will have to render before becoming entitled to the benefit is reduced.
In the fact pattern presented, the IFRS IC concluded that an entity should attribute the retirement benefit to the last years of service subject to the cap (i.e. each year in which an employee rendered service from the age of 46 (or, if the employment commences on or after the age of 46, from the date the employee first renders service) to the age of 62.
We believe the same conclusion would be reached under US GAAP in this scenario.
|Costs necessary to sell inventories (IAS 2, Inventories)||Final: June 2021||
Are the estimated costs ‘necessary to make a sale’ limited to incremental costs when determining the net realizable value (NRV) of inventories?
IAS 2 states that the objective of writing inventories down to NRV is to avoid them from being carried ‘in excess of amounts expected to be realized from their sale’. The IFRS IC observed that including only incremental costs could fail to achieve this objective. Accordingly, when determining the NRV of inventories, an entity estimates the costs necessary to make the sale in the ordinary course of business and does not limit them to those that are incremental.
Unlike IFRS Standards, US GAAP does not specify if costs necessary to make the sale can be limited to those that are incremental, and differences may arise in practice. For further discussion, read KPMG IFRS Perspectives article, Inventory accounting: IFRS vs US GAAP.
|Principal vs agent: software reseller (IFRS 15, Revenue from Contracts with Customers)||Tentative: November 2021||
Is the reseller a principal or agent with respect to the standard software licenses provided to the customer?
In the fact pattern discussed by the IFRS IC, the reseller has distribution agreements with a range of software manufacturers. Under each agreement, the reseller: (1) has the right to grant (sell) the manufacturer’s standard software licenses to customers; (2) must provide pre-sales advice to each customer to identify the type and number of software licenses that would meet the customer’s needs; (3) is liable for damages to the software manufacturer if, for example, the customer (acting on the reseller’s advice) purchases an insufficient number of software licenses; and (4) has discretion in pricing the software licenses for sale to customers.
The fact pattern provides additional relevant facts not reproduced here.
The IFRS IC agreed to issue a tentative Agenda Decision explaining how to apply relevant guidance in IFRS 15 but did not conclude on whether, in the fact pattern submitted, the reseller is a principal or agent. The IFRS IC noted that it is generally not its role to provide answers to highly specific fact patterns.
The principal versus agent guidance in IFRS 15 is converged with that in US GAAP (Topic 606). And like IFRS Standards, conclusions in this area under US GAAP frequently involve significant judgment and heavily depend on the specific facts and circumstances.
|Presentation of financial statements|
|Classification of debt with covenants as current or noncurrent (IAS 1, Presentation of Financial Statements)||
Referred to the Board:
How does an entity determine the current or noncurrent classification of debt with covenants under amended IAS 1 (not yet effective)2?
The IFRS IC discussed whether an entity has the right to defer settlement of a liability for at least 12 months after the reporting date – i.e. it can classify the liability as noncurrent, when: (1) the right to defer settlement is subject to the entity complying with specified conditions after the reporting date, but (2) the specified conditions would not be met at the reporting date if hypothetically tested at that date.
The IFRS IC referred this issue to the Board for standard setting. In November 2021, the IASB Board published the Exposure Draft, Non-current Liabilities with Covenants (proposed amendments to IAS 1), to improve the information companies provide about long-term debt with covenants.
|Preparation of financial statements when an entity is no longer a going concern (IAS 10, Events after the Reporting Period)||Final: June 2021||
In the fact pattern discussed by the IFRS IC, an entity was a going concern in 2017 through 2019 but is no longer one in 2020 when it prepares its 2019 financial statements. The 2019 financial statements are not prepared on a going concern basis.
Assuming the entity in the fact pattern has not previously prepared financial statements for prior periods (2017 and 2018), can it prepare financial statements for those periods on a going concern basis?
No. The IFRS IC concluded that an entity that is no longer a going concern cannot prepare financial statements on a going concern basis, including for prior periods that have not yet been authorized for issue.
Assuming the entity in the fact pattern has previously issued financial statements for 2018 on a going concern basis, should it restate the 2018 comparative information in the 2019 financial statements to reflect the non-going concern basis of accounting?
The IFRS IC did not formally conclude on this question, but its research showed that publicly listed IFRS reporters that prepare financial statements on a non-going concern basis do not restate comparative information to reflect that basis. The IFRS IC observed no diversity in the application of IFRS Standards with respect to this scenario and has not obtained evidence that it is a widespread issue.
Unlike IFRS Standards, US GAAP applies the liquidation basis of accounting only from the point that liquidation becomes imminent. The going concern basis of accounting applies up to that point regardless of when the financial statements are prepared. Subsequent events should however be considered.
|Demand deposits with restrictions on use (IAS 7, Statement of Cash Flows)||Tentative: September 2021||
Can demand deposits with contractual restrictions be classified as cash and cash equivalents in the statements of cash flows and financial position?
In the fact pattern discussed by the IFRS IC, an entity has a third-party contractual obligation to keep cash in a separate demand deposit account to use for specified purposes. The bank does not restrict the entity from accessing the amounts held; however, if the entity uses the funds for a purpose other than specified, the entity would breach its contractual obligation.
The IFRS IC issued a tentative agenda decision stating that restrictions on the use of demand deposits do not preclude these deposits from being cash and cash equivalents when they are available to the entity on demand. Therefore, they should be included in cash and cash equivalents in the statements of cash flows and financial position.
When relevant to understanding its financial position, the entity should disaggregate and present demand deposits subject to contractual restrictions as a separate line item. Further, adequate disclosure should be provided on significant cash and cash equivalents balances with restrictions on use.
We believe the same conclusion would be reached under US GAAP.
|Economic benefits from use of a windfarm (IFRS 16)||Final: November 20213||
Does an electricity retailer (retailer) account for a power purchase agreement in a gross pool electricity market under IFRS 16?
In the fact pattern discussed by the IFRS IC, a windfarm generator (Supplier) enters into a contract with retailer. Both parties are registered participants in an electricity market. The contract: (1) identifies Supplier’s windfarm; (2) covers notionally all of the electricity the windfarm will supply to the electricity grid over a 20-year period; (3) allows Supplier to receive a fixed price per megawatt for electricity supplied to the grid, for which retailer net settles with Supplier the difference between the fixed price and the spot price per megawatt for that volume of electricity; and (4) transfers to retailer all renewable energy credits that accrue from use of the windfarm.
The IFRS IC concluded that the agreement is not a lease. This is because it does not give retailer the right to obtain any of the electricity the windfarm produces and supplies to the grid. Accordingly, retailer does not have the right to obtain substantially all the economic benefits from use of the windfarm.
We believe the same conclusion would be reached under US GAAP.
|Non-refundable value added tax on lease payments (IFRS 16)||Final: September 2021||
Does a lessee include non-refundable value-added tax (VAT) payments as part of the ‘lease payments’ under IFRS 16?
The IFRS IC considered outreach indicating that the issue was not material to most lessees and that there may be little diversity in the matter. The IFRS IC did not consider a technical analysis of the question.
We believe that if VAT is a tax that is levied on the lessee and collected by the lessor, who is acting as an agent for the tax authority, then the VAT is not a lease payment or a payment for a non-lease component regardless of whether it is recoverable or non-recoverable. This is because the payment is not made in exchange for the right to use an underlying asset, or a good or a service provided to the lessee. Instead, we believe a lessee should account for this VAT as a levy under IFRIC 21. Conversely, lessee’s payment of VAT that is levied on the lessor is a lease payment. See section 6.4 in KPMG Handbook Real estate leases.
Under US GAAP, we believe the accounting for non-refundable VAT by a lessee depends on (1) which party (the lessee or the lessor) is the primary obligor for the tax and (2) whether the tax is incurred at or before lease commencement or over the lease term. See Question 4.2.70 in KPMG Handbook, Leases.
|Hedging variability in cash flows due to real interest rates (IFRS 9, Financial Instruments)||Final: April 2021||
Can a hedge of the variability in cash flows arising from changes in the real interest rate, rather than the nominal interest rate, be accounted for as a cash flow hedge?
In the fact pattern discussed by the IFRS IC, an entity wants to hedge a floating rate (LIBOR) debt with an inflation swap – which would swap the variable interest cash flows of the floating rate debt for variable cash flows based on an inflation index – in a cash flow hedge.
The IFRS IC’s analysis focused on whether, in accordance with IFRS 9, the floating rate instrument had exposure to variability in cash flows attributable to the real interest rate risk component, and whether that risk component was separately identifiable and reliably measurable.
The market structure needs to support the eligibility of a real interest rate component as a non-contractually specified risk component. As such, the real interest rate must represent an identifiable pricing element in setting the floating benchmark interest rate.
Additionally, nominal interest rates do not change as a direct result of changes in inflation or the real interest rate – i.e. they are not identifiable pricing elements in setting nominal rates. Therefore, there is no exposure to variability in cash flows that is attributable to changes in the real interest rate in the cash flow hedging relationship.
As a result, the IFRS IC concluded that the real interest rate risk component would not meet the requirements in IFRS 9 to be designated as an eligible hedged item.
Unlike IFRS Standards, only contractually specified interest rates (and not an inflation index or a real interest rate risk component) are eligible to be designated in a cash flow hedge of interest rate risk related to variable rate financial instruments under US GAAP. Therefore, we believe the same conclusion would be reached under US GAAP.
|TLTRO III transactions (IFRS 9 and IAS 204)||Tentative: June 20213||
How does an entity account for targeted longer-term refinancing operations (TLTROs)?
The third program of the TLTROs of the European Central Bank (ECB) links the amount a participating bank can borrow and the interest rate the bank pays on each tranche of the operation, to the volume and amount of loans it makes to nonfinancial corporations and households.
The IFRS IC discussed the overall application of IFRS 9 to these transactions, from measurement to disclosures. If the participating bank determines that: the ECB meets the definition of government, the fair value of a TLTRO III tranche at initial recognition differs from its transaction price because of a below-market interest rate, and the transaction is distinguishable from the participating bank’s normal trading transactions, then the difference represents a government grant from the ECB. When this is the case, the requirements in IAS 20 should be followed.
The IFRS IC did not conclude on determining the effective interest rate and reported the matter to the Board to consider as part of the post-implementation review of IFRS 9.
Unlike IFRS Standards, US GAAP does not allow interest on low-interest or interest free loans from a government to be imputed.
|Cash received via electronic transfer as settlement for a financial asset (IFRS 9)||Tentative: September 2021||
Should an entity derecognize trade receivables and recognize cash on the date the cash transfer is initiated or the date it is settled?
In the fact pattern discussed by IFRS IC, an entity receives a cash transfer via an electronic transfer system that takes three working days to settle. As an example, an entity recognizes a trade receivable on November 30, 20X0 for a sale to a customer, and on December 31, 20X0 (entity’s reporting date), the customer notifies the entity that a payment has been initiated. On January 2, 20X1, the entity receives the cash to settle the trade receivable.
The IFRS IC issued a tentative agenda decision stating that the entity should derecognize the trade receivable on the date on which its contractual rights to the cash flows from the trade receivable expire. On the same date, it should also recognize the cash (or other financial asset – e.g. a right to receive cash from the customer’s bank) received as settlement for that trade receivable. The entity should consider applicable laws and regulations and the specific facts and circumstances to determine the timing of when its contractual rights expire.
We believe the same conclusion would generally be reached under US GAAP. However, it is unclear at this stage if this tentative Agenda Decision, if finalized as drafted, could affect long-standing practices for presenting cash in transit, such as undrawn checks, or credit card receivables, and create differences with US GAAP in this area.
|Accounting for warrants that are classified as financial liabilities on initial recognition (IAS 32, Financial Instruments: Presentation)||Final: September 2021||
Does an issuer reclassify an issued warrant from derivative financial liability to equity after initial recognition under IAS 32?
In the fact pattern discussed by the IFRS IC, an issuer classifies a warrant at initial recognition as a financial liability because at that date the warrant exercise price is unknown and the amount of cash the issuer will receive in exchange for shares is not fixed. The IFRS IC considered whether the issuer reclassifies the warrant as equity when the exercise price subsequently becomes known, and the ‘fixed-for-fixed’ condition in IAS 32 is met.
The IFRS IC did not formally conclude on this question, but observed that IAS 32 has no general guidance for reclassifying financial liabilities and equity instruments after initial recognition when the instrument’s contractual terms are unchanged. Instead, it referred the matter to the Board to consider as part of the Board’s broader discussions on the Financial Instruments with Characteristics of Equity Project.
Like IFRS Standards, under US GAAP, classification of an instrument as either a financial liability or equity is made on initial recognition. However, unlike IFRS Standards, classification of a contract that is indexed to, and potentially settled in, an entity’s own stock is reassessed at each reporting date, and any change in classification is accounted for prospectively.
Companies should periodically review the IFRS IC Updates and IFRS IC Compilation of Agenda Decisions, in which draft and final Agenda Decisions are published, to consider the effect of those decisions on their accounting policies. The issues discussed by the IFRS IC are significant, and their impact on the financial statements could be material. Companies are expected to update their accounting policies to the extent that their accounting differs from that described in the Agenda Decision. Dual reporters should also consider the differences with US GAAP, if any, which might emerge through these updates.
- The date indicated under ‘status’ refers to when an agenda item was published in IFRIC Update, which may differ from when it was approved by the IASB Board.
- Classification of Liabilities as Current or Non-current (Amendments to IAS 1, Presentation of Financial Statements) are currently effective for annual periods beginning on or after January 1, 2023, but effective date is expected to be postponed.
- Decisions finalized by the IFRS IC in November 2021 are subject to approval by the IASB Board in December 2021.
- IAS 20, Accounting for Government Grants and Disclosure of Government Assistance