2022 IFRS® Interpretations Committee Agenda Decisions

— Revenue

— Leases

— Provisions

—Presentation of financial statements

—Insurance contracts 

— Special purpose acquisition companies

— Financial instruments

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:

• has the right to grant (sell) the manufacturer’s standard software licenses to customers;
• must provide pre-sales advice to each customer to identify the type and number of software licenses that would meet the customer’s needs;
• 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 
• has discretion in pricing the software licenses for sale to customers.

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:

• first, identifying the specified goods or services to be provided to the customer; and
• second, assessing whether the reseller controls each specified good or service before that good or service is transferred to the customer.

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.

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:

• The derecognition requirements in IFRS 9 to those forgiven lease payments recorded as an operating lease receivable on the date of the rent concession; and
• The lease modification requirements in IFRS 16 to forgiven lease payments not yet contractually due (and therefore not included in the lessor’s operating lease receivable).

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.

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.

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.

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:

• Method 1, based on the amount the policyholder is able to validly claim in each period; and
• Method 2, based on the total of the amount the policyholder is able to validly claim in each period and the present value of expected future annuity payments.

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.

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:

• individually have the contractual right to demand redemption for cash of their shares if the SPAC’s shareholders approve the acquisition of a target company,
• are reimbursed if the SPAC is liquidated, and
• along with Class A shareholders, have the contractual right to extend the SPAC’s specified life if no target company is acquired.

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.

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.

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:

• the participating bank determines that the ECB meets the definition of government; and
• either: 
  • the fair value of a TLTRO III tranche at initial recognition differs from its transaction price because of a below-market interest rate; or
  • the loan is a forgivable loan.

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.