From the IFRS Institute – December 2, 2022
IFRS Interpretations Committee (IC) Agenda Decisions play a key role in forming accounting positions under IFRS® Accounting Standards, and companies need to apply them on a timely basis. In 2022, the IFRS IC has discussed obligations for low emission vehicle credits, government grants, insurance contracts, lessor accounting, SPACs, demand deposits, financial instruments, and software revenue. 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 Accounting Standards and helps improve financial reporting through the timely resolution of financial reporting issues. When presented with an application issue, the IFRS IC often concludes that no standard-setting is needed. It then explains its rationale in Agenda Decisions, which provide key interpretive guidance for companies to use, as they apply IFRS Accounting Standards. Agenda Decisions are only finalized if the IASB Board does not object to them. This year, two issues considered by the IFRS IC were escalated to standard-setting. Read the related KPMG articles: Classification of debt with covenants as current or noncurrent, and Accounting for electronic payments.
The following agenda items were discussed by the IFRS IC in 2022. For a refresher on 2021 Agenda Decisions, read KPMG IFRS Perspectives article here.
|Principal vs agent: software reseller (IFRS 15, Revenue from Contracts with Customers)||Final: April 2022||
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:
The fact pattern provides additional relevant facts not reproduced here.
The IFRS IC issued an Agenda Decision explaining how to apply the relevant guidance in IFRS 15:
The IFRS IC did not conclude on whether, in the fact pattern submitted, the reseller is a principal or agent. It noted that generally its role does not include providing 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 Accounting Standards, conclusions in this area under US GAAP frequently involve significant judgment and depend heavily on the specific facts and circumstances.
|Lessor forgiveness of lease payments (IFRS 9, Financial Instruments and IFRS 16, Leases)||Final: September 2022||
How does a lessor account for a rent concession in an operating lease when it has an outstanding receivable?
In the fact pattern discussed by the IFRS IC, the lessor in an operating lease legally releases the lessee from its obligation to make specifically identified lease payments, some of which are amounts contractually due but not yet paid – i.e. the lessor has recognized an operating lease receivable – and some of which are amounts that are not yet contractually due. No other changes or negotiations are made.
The IFRS IC concluded that, before the rent concession is granted, the lessor applies IFRS 9. Under IFRS 9, the lessor measures expected credit losses on the operating lease receivable in a way that reflects an unbiased and probability-weighted amount determined by evaluating a range of possible outcomes, including considering its expectations of forgiving lease payments recognized as part of that receivable.
The lessor accounts for the rent concession by applying:
We believe this accounting would generally result in a difference from US GAAP. Under US GAAP, forgiving either type of lease payment would be accounted for as a lease modification, and all of the forgiven lease payments – whether or not recognized by the lessor as an operating lease receivable
- Would be treated similarly, as a lease incentive.
|Definition of a lease – Substitution rights (IFRS 16, Leases)||Tentative2 : November 2022||
How to assess whether a contract contains a lease when the supplier has particular substitution rights?
In the fact pattern discussed by the IFRS IC, the contract is for the use of multiple similar assets (e.g. 100 batteries used in electric buses) and the supplier has the practical ability to substitute alternative assets throughout the period of use. However, the supplier would not benefit economically from exercising its substitution right in the first three years of the contract.
The IFRS IC tentatively concluded that there is an identified asset in this fact pattern (which is one of the conditions for a lease to exist) since the supplier’s substitution right is not substantive throughout the period of use. Further, if a contract contains multiple independent assets, the supplier’s substitution right must be assessed individually for each asset.