From the IFRS Institute – June 3, 2022
The IFRS Interpretations Committee (IC) Agenda Decisions play a key part in forming accounting positions under IFRS® Standards. Companies need to apply them timely. So far in 2022, the IFRS IC has discussed obligations for low emission vehicle credits, government grants, insurance contracts, lessor accounting, SPACs, demand deposits, 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 Standards and helps improve financial reporting through the timely resolution of financial reporting issues. When standard setting is needed the IFRS IC issues an IFRIC interpretation or refers the matter to the IASB Board. Otherwise, the process concludes through Agenda Decisions, which provide key interpretive guidance for companies to use as they apply IFRS Standards.
What’s new in 2022?
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.
The current status of each 2022 agenda item is indicated in the following table.
|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 relevant guidance in IFRS 15, by:
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 Standards, conclusions in this area under US GAAP frequently involve significant judgment and are heavily dependent on the specific facts and circumstances.
|Lessor forgiveness of lease payments (IFRS 9, Financial Instruments and IFRS 16, Leases)||Tentative: March 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 tentatively concluded that, in the period 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 would generally result in a difference with US GAAP. Under US GAAP, we believe forgiving either type of lease payment should 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.
|Negative low emission vehicle credits (IAS 37, Provisions, Contingent Liabilities and Contingent Assets)||Tentative: February 2022||
Do measures to encourage reductions in vehicle carbon emissions give rise to obligations that meet the definition of a liability in IAS 37?
In the fact pattern discussed by the IFRS IC, companies receive positive or negative credits if in a calendar year they have produced or imported vehicles whose average fuel emissions are respectively lower or higher than the government target. Negative credits must be eliminated, either by purchasing or generating positive credits in the next year. If the company fails to eliminate its negative credits, the government can impose sanctions (e.g. restricting the company’s access to the market).
The IFRS IC tentatively concluded that a company with a negative credit balance has a legal obligation that meets the definition of a liability in IAS 37, unless accepting the sanctions that the government can impose is a realistic alternative to eliminating negative credits for that company. In this latter case, a constructive obligation may still exist.
We believe the same conclusion would generally be reached under US GAAP.
|Presentation of financial statements|
|Demand deposits with restrictions on use arising from a contract with a third party (IAS 7, Statement of Cash Flows)||Final: March 2022||
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, a company 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 company from accessing the amounts held; however, if the company uses the funds for a purpose other than specified, the company would breach its contractual obligation.
The IFRS IC concluded 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 company 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 company 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.
Under US GAAP, restricted cash (and restricted cash equivalents) balances are included in the total cash and cash equivalents in the statement of cash flows regardless of the balance sheet presentation. Cash and cash equivalents balances between the two statements need to be reconciled in the notes, with adequate disclosures about restrictions provided.
|Transfer of insurance coverage under a group of annuity contracts (IFRS 17, Insurance Contracts)||Tentative: March 2022||
In a group of annuity contracts, how is the amount of contractual service margin to be recognized in profit or loss in a period because of the transfer of insurance coverage for survival determined?
Under IFRS 17, this determination affects the amount of insurance revenue recognized in profit or loss each period.
The fact pattern discussed by the IFRS IC illustrates a group of annuity contacts under which each policyholder pays the premium upfront and has no right to cancel the contract or seek a refund, receives the period payment from the start of the annuity period for as long as the policyholder survives, and receives no other services under the contract. The annuity period can start immediately or be deferred.
The IFRS IC considered two alternative methods to determine the quantity of the benefits provided in a period:
Note that no contractual service margin is recognized in profit or loss over the deferral period in a deferred annuity contract under Method 1.
The IFRIC IC tentatively concluded that only Method 1 is appropriate in the circumstances.
Under US GAAP, for long duration insurance contracts, the concept of a contractual service margin does not exist, and the calculation of period-to-period profits is based on different concepts. Therefore, we believe that differences from IFRS Standards may arise in practice.
|Special purpose acquisition companies|
|Classification of public shares as financial liabilities or equity (IAS 32, Financial Instruments: Presentation)||Tentative: March 2022||
Does a special purpose acquisition company (SPAC) classify public shares it issues as a financial liability or equity?
A SPAC is a listed shell company formed to acquire a target operating company. See KPMG Perspectives article SPACs: What GAAP applies.
In the fact pattern discussed by the IFRS IC, a SPAC issues two classes of shares (A and B). Class B shareholders:
The IFRIC IC noted that IAS 32 is silent about how to classify the Class B shares and other instruments for which settlement in cash is at the discretion of the entity’s shareholders.
The IFRS IC did not formally conclude on this question and noted that the IASB Board will address such issues in its Financial Instruments with Characteristics of Equity (FICE) project. However, the IFRS IC noted the importance of financial statement disclosures around classification of public shares.
Like IFRS Standards, conclusions in this area under US GAAP frequently involve significant judgment and are heavily dependent on the specific facts and circumstances. However, given that the accounting requirements under IAS 32 and IFRS 9 significantly differ from the corresponding US GAAP requirements, potential differences are likely.
|Accounting for warrants at acquisition||Tentative: March 2022||
How does a company account for warrants on acquiring a SPAC?
In the fact pattern discussed by the IFRS IC, a SPAC with cash as its sole asset identifies a target operating company for acquisition. However, legally the operating company acquires the SPAC by issuing shares and warrants to the SPAC’s shareholders in exchange for the shares and warrants of the SPAC. The SPAC shareholders (i.e. founding shareholders and public investors) are not SPAC employees, nor will they provide services to the operating company after the acquisition. As such, they hold the warrants solely in their capacity as owners of the SPAC.
The IFRS IC tentatively concluded that the operating company is the accounting acquirer of the SPAC, thereby it acquires the SPAC’s cash and a stock exchange listing service and potentially also assumes the SPAC warrants as part of the acquisition. Noting that IAS 32 generally applies to the warrants at acquisition, whether assumed or not, the tentative Agenda Decision further explores how the stock exchange listing service and the replacement of the SPAC warrants should be accounted for.
We believe a similar conclusion could generally be reached under US GAAP. However, because IFRS Standards do not have such prescriptive guidance, differences may arise in practice.
|TLTRO III transactions (IFRS 9, Financial Instruments and IAS 20, Accounting for Government Grants and Disclosure of Government Assistance||Final: February 2022||
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. The IFRS IC concluded that a TLTRO tranche would contain a portion that is treated as a government grant if:
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 & referred the matter to the IASB 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.
Companies should periodically review the IFRS IC Updates and IFRS IC Compilation of Agenda Decisions, in which tentative and final Agenda Decisions are published, to consider the impact of those decisions on their accounting policies. The issues discussed by the IFRS IC are significant, and the impact on the financial statements could be material. Companies are expected to update their accounting policies timely to the extent that their accounting differs from that described in an Agenda Decision. Dual reporters should also consider the differences with US GAAP, if any, which might emerge through these updates.