A summary of 2023 IFRIC activity and comparison to US GAAP.
From the IFRS Institute – December 8, 2023
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 2023, the IFRS IC has discussed a number of issues in relation to insurance contracts, employee benefits, business combinations, climate-related commitments, segment reporting, separate financial statements, and guarantees over derivative contracts. In this article, we summarize related 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 (IASB). It supports consistent application of IFRS Accounting Standards and improves 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 does not object to them.
The following topics have been discussed by the IFRS IC in 2023. For a refresher on 2022 Agenda Decisions, read KPMG IFRS Perspectives article here:
Issue | Status1 | Discussion |
| Payments contingent on continued employment during handover periods (IFRS 3, Business Combinations) | Tentative: September 2023 | How does an entity account for payments to the sellers of an acquired business when those payments are contingent on sellers’ continued employment during a post-acquisition handover period? In the fact pattern discussed by the IFRS IC, an entity acquires a business and requires the sellers to continue as employees of the acquired business for a period of time to ensure the transfer of knowledge to the new management team. The sellers are compensated for their services at a level comparable to other management executives. Additional payments will be made to the sellers contingent on both the future performance of the acquired business and their continued employment. The sellers are entitled to receive the additional payments if employment is terminated in specific circumstances – e.g. death or disability – or with the entity’s agreement; they forfeit the additional payments if employment is terminated for any other reason. The IFRS IC observed that in these fact patterns, entities apply the accounting described in their 20132 agenda decision and account for the payments as compensation for post-combination services, not additional consideration for the acquisition, unless the service condition is not substantive. The IFRS IC therefore decided not to address this question because it does not have widespread effect. Under US GAAP, a contingent consideration arrangement in which payments are automatically forfeited if employment terminates is compensation for post-combination services. The characterization of arrangements in which the payments are not affected by employment termination requires an evaluation of additional indicators. |
| Issue | Status1 | Discussion |
| Guarantee over a derivative contract (IFRS 9, Financial Instruments) | Final : September 2023 | Is a guarantee written over a derivative contract accounted for as a financial guarantee contract or a derivative? In the fact pattern discussed by the IFRS IC, an entity provides a guarantee over a derivative contract between two third parties by promising to reimburse the holder of the guarantee for the actual loss, up to the close-out amount, suffered in the event of a default by the other party. The close-out amount is determined based on a valuation of the remaining contractual cash flows of the derivative prior to default. The IFRS IC decided not to address this question because it has neither widespread effects nor a material effect on those affected. In our view, under IFRS Accounting Standards, a guarantee written over a derivative contract can be accounted for as a derivative. It can also be accounted for as a financial guarantee contract if it compensates the holder solely for losses arising from the debtor’s failure to make a payment when it is due and not for losses arising from market risk. Under US GAAP, a guarantee written over a derivative contract is accounted for as a derivative because it does not meet the financial guarantee contracts scope exception. |
| Issue | Status1 | Discussion |
| Premiums receivable from an intermediary (IFRS 17, Insurance Contracts, and IFRS 9) | Final : September 2023 | Does an insurer apply the requirements in IFRS 17 or IFRS 9 to premiums receivable from an intermediary? In the fact pattern discussed by the IFRS IC, an intermediary acts as a link between an insurer and a policyholder to arrange an insurance contract between them. The policyholder has paid in cash the premiums to the intermediary, but the insurer has not yet received in cash the premiums from the intermediary. The intermediary is allowed to pay the premiums to the insurer at a later date. Once the policyholder paid in cash the premiums to the intermediary, the policyholder discharged its obligation to pay premiums and the insurer is obliged to provide insurance contract services . If the intermediary fails to pay the premiums to the insurer, the insurer does not have the right to recover the premiums from the policyholder or to cancel the insurance contract. Under IFRS 17, an insurer includes in the measurement of a group of insurance contracts an estimate of all the future cash flows within the boundary of each contract in the group, including premiums receivable. However, IFRS 17 is silent on whether future cash flows within the boundary of an insurance contract are removed from the measurement of a group of insurance contracts only when these cash flows are recovered or settled in cash. The IFRS IC concluded that for this fact pattern, an insurer develops an accounting policy in accordance with IAS 83 to determine when to remove the premiums from the measurement of a group of insurance contracts. The insurer could determine that cash flows are removed when:
Information about the credit risk that arises from the premiums receivable from an intermediary should be disclosed under the applicable standard. Under US GAAP, there is no equivalent to the IFRS 17 measurement model for insurance contracts. Therefore, differences from IFRS Accounting Standards may arise in practice. |
| Issue | Status1 | Discussion |
| Homes and home loans provided to employees (IAS 19, Employee Benefits, and IFRS 9) | Final : September 2023 | How does an entity account for employee home ownership plans and employee home loans ? The IFRS IC considered two fact patterns. 1. An entity provides its employee with a house that the entity owns. The employee pays for the house through salary deductions until the agreed price of the house has been fully repaid. The employee would forfeit the house and recover the salary deductions if they leave employment within the first five years of the arrangement. After five years, the employee may choose to either forfeit the house and recover the salary deduction or keep the house and pay the outstanding balance. 2. An entity provides its employee with a loan to buy a house that the entity does not own. The loan is at a below-market rate of interest; typically interest free, and repaid by the employee through salary deductions. If the employee leaves employment at any point, the outstanding balance of the loan becomes repayable. The IFRS IC decided not to address this question because it does not have widespread effect . Under US GAAP, an entity evaluates the facts and circumstances to determine if there are compensatory elements that require recognition. |
| Issue | Status1 | Discussion |
| Merger between a parent and its subsidiary in separate financial statements (IAS 27, Separate Financial Statements) | Final : November 2023 | Does a parent entity that prepares separate financial statements account for a merger with its subsidiary under IFRS3? In the fact pattern discussed by the IFRS IC, a parent entity merges with its subsidiary, resulting in the subsidiary’s business becoming part of the parent (merger transaction). The IFRS IC observed that there is little diversity in practice and parent entities generally do not apply the requirements in IFRS 3 for a business combination. The IFRS IC decided not to address this question because it does not have widespread effect. Under US GAAP, this issue generally does not arise because a parent company presents consolidated financial statements, rather than separate financial statements. In the consolidated financial statements, an up-stream merger does not change the basis of the net assets, i.e. assets and liabilities of the parent and subsidiary are combined at their historical carrying amounts. |
| Issue | Status1 | Discussion |
| Climate-related commitments (IAS 37 Provisions, Contingent Liabilities and Contingent Assets) | Tentative: November 2023 | Should an entity recognize a provision for its commitment to reduce or offset its greenhouse gas emissions and, if a provision is recognized, whether the expenditure is treated as an asset or expense? In the fact pattern discussed by the IFRS IC, an entity publicly states its commitment to reduce its current greenhouse gas emissions by at least 60% by 20X9, and to offset its remaining emissions in 20X9 and thereafter, by buying carbon credits and retiring them from the carbon market. The entity’s public statement includes a detailed plan on how it intends to achieve its commitment. The IFRS IC observed that whether an entity’s statement of its commitment to reduce or offset its emissions creates a constructive obligation will depend on the facts of the commitment and circumstances surrounding it. If an entity’s statement has created a constructive obligation, its commitment to reduce emissions by at least 60% by 20X9 is not a present obligation as a result of past events and hence a provision is not recognized. As an entity makes emissions in 20X9 and thereafter, it will have a present obligation to retire the carbon credits required to offset its past emissions. If it has not already bought the carbon credits needed to offset its past emissions and a reliable estimate can be made of the amount of the obligation, the entity recognizes a provision. When the provision is recognized that expenditure is recognized as an expense, rather than as an asset, unless it gives rise to—or forms part of the cost of—an item that qualifies for recognition as an asset in accordance with an IFRS Accounting Standard. The IFRS IC tentatively decided not to add a standard-setting project to the work plan since IAS 37 provides an adequate basis for entities to evaluate its climate-related commitments. Under US GAAP, constructive obligation is more narrowly defined than IFRS Accounting Standards and will only be recognized if required by a specific Topic or Subtopic. Further, a provision is recognized if it is probable that a liability has been incurred and the amount is reasonably estimable. ‘Probable’ for US GAAP is a higher threshold than probable (more likely than not) for IFRS Accounting Standards. |
| Issue | Status1 | Discussion |
| Disclosure of revenues and expenses for reportable segments (IFRS 8, Operating Segments) | Tentative: November 2023 | How does an entity apply disclosure and materiality requirements under paragraph 23 of IFRS 8 for each reportable segment? The IFRS IC noted that paragraph 23 of IFRS 8 requires an entity to disclose specified amounts for each reportable segment if those specified amounts are either included in the measure of the segment profit or loss reviewed by the chief operating decision maker (CODM), even if they are not separately reviewed by the CODM, or otherwise regularly provided to the CODM, even if not included in that measure of segment profit or loss. Therefore, an entity is required to disclose the specified amounts not only when those specified amounts are separately reviewed by the CODM. In applying paragraph 23(f) of IFRS 8, which refers to material items of income and expense disclosed in accordance with paragraph 97 of IAS 1, entities apply materiality in the context of the financial statements taken as a whole, apply the requirements in paragraphs 30-31 of IAS 1 in considering how to aggregate information and consider both quantitative and qualitative factors when assessing whether an item of income and expense is material. The IFRS IC observed that an entity considers an item for disclosure without regard to whether that item is presented or disclosed applying a requirement other than paragraph 97 of IAS 1. The IFRS IC decided that the principles and requirements in IFRS Accounting Standards provide an adequate basis for an entity to apply the disclosure requirements and consequently decided not to add a standard-setting project to the work plan. Under US GAAP, like IFRS 8, disclosure of specified amounts for reportable segments are required if they are regularly provided to the CODM or included in the measure of segment profit or loss reviewed by the CODM. Unlike IFRS 8, specified amounts include unusal items, rather than material items; further, there is no requirement under US GAAP to disclose information about liabilities by reportable segment. |
Companies should periodically review IFRS IC Updates and the IFRS IC Compilation of Agenda Decisions, in which tentative and final Agenda Decisions are published, to consider how those decisions may affect 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 in a timely manner to the extent that their accounting differs from that described in an Agenda Decision. Dual reporters should also consider any differences with US GAAP that might emerge through these Agenda Decisions.
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