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IFRS news – August 2016 1
Tax accounting and the researchagenda– all quiet on the westernfront?The IASB discussed the research project on income taxes and decided to delete itfrom the work plan. Anna Schweizer from Accounting Consulting Services looksinto the finer details of the issues around IAS 12 Income Taxes, which news we canexpect in the near future and which not.
Accounting for income taxes has been onand off the IASB agenda over the last tenyears. The IASB rejected a proposedreplacement for IAS 12 following theunsuccessful convergence project with theFASB. Income taxes was then added as alonger-term research project to the workplan. Following some initial work on thisproject, the IASB held an educationalsession at their May meeting and decidedto remove the project from its researchpipeline as well.
We explore the potential areas to watch outfor, and summarise what changes theremay be in accounting for income taxes inthe near future.
Main causes for practise issuesarising in applying IAS 12
Some constituents question the conceptualmerits of the current income taxaccounting model because it does notmeasure taxes on a discounted or cash flowbasis. Many others say the model is toocomplex and results in accounting that isdifficult to understand and costly toproduce. The IASB staff summarised arange of deficiencies on both a conceptuallevel and an application level.
Concerns with the existing model
Investors and other users of financialstatements place importance on theeffective tax rate reported. They are alsointerested in understanding entities’ tax-related cash flows and expectations. Thismay include cash tax rates and risks relatedto future income tax cash flows and theeconomic value of expected income taxobligations or benefits.
Today’s standard (or ‘model’) does notreadily convey this information and oftenresults in detailed disclosures that are noteasily understood. This causes investors toignore much of what is reported or tosearch for alternative information.
Complexity and cost of reporting
Today’s model tracks differences betweenthe book and tax balances of assets andliabilities under the theory that suchdifferences represent future taxable incomeor deductions. The model then calculatesand records the future taxes that are to bepaid (or reduced) because of thosedifferences at the statutory tax rate.
Since the model was introduced, changes inaccounting standards and tax laws havemade those differences more numerous
IFRS news
In this issue:
1 Income taxes
The end of an era
3 Variable payments for
the separate acquisition
of PPE and intangible
assets
4 Decommissioning
liabilities and
impairment testing
6 Current IC rejections
8 Difficulties in
translating IFRSs
9 Cannon Street Press
IFRS 9 and Insurance
Investment property
Annual Improvements
Conceptual Framework
10 Leases lab
Communications industry
11 IC rejections
IAS 23
12 Fun stuff
14 The bit at the back…
For further information or to
subscribe, contact us [email protected] register online.
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IFRS news – August 2016 2
and complex. Businesses have alsoexpanded across more geographic marketsand are subject to a wider range of tax laws.
The model also contains many intricaterules and a variety of exceptions designedto compensate for unintendedconsequences or impracticalities.
Entities need employees with deepknowledge of income tax laws and financialreporting standards to support theirincome tax accounting. The processestypically rely on spreadsheets that areoutside of general ledger systems.Management often turns to outside serviceproviders for help, increasing the cost offinancial statement preparation. Yetaccounting errors and control problemspersist.
Economic faithfulness
One criticism of the current model is that itmay not show an economic measure ofincome tax costs or benefits. For example,deferred income tax amounts shown on anentity’s balance sheet are not discountedand are not risk-adjusted to account for theprobability of realising a future tax benefitor incurring a future tax cost. The amountstherefore do not reflect the economic valueof expected future cash flows, particularlywhen future recovery or settlement periodsare prolonged.
Some constituents question whetherdeferred taxes faithfully represent an actualfuture cash inflow or outflow. For example,they suggest that, as long as managementexpects to continually reinvest in capitalequipment, the related deferred tax liabilitywill replenish, thereby deferring cashsettlement indefinitely. However, othersbelieve that a deferred tax liabilityrepresents a future cash outflow eventhough future investments may give rise toa similar liability.
The model’s asymmetric treatment ofdeferred tax assets and liabilities is also aconcern. That is, assets must be supportedby the likelihood of having future taxableincome, whereas liabilities are recordedeven when future losses are anticipated.
The treatment of economically equivalenttax law changes can vary depending on howlegislation is written. Tax rate changesproduce an immediate adjustment to
deferred taxes and tax expense, whereastax credits and deductions are sometimesnot recognised until the tax benefit isclaimed.
Lastly, one of the more significantshortcomings of the existing standard is theabsence of any guidance related to incometax uncertainties.
Change ahead?
Research agenda
In July the IASB reviewed its researchprocess and decided upon the following:
The Board does not start a standard-setting project before carrying outresearch to gather sufficient evidencethat an accounting problem exists, thatthe problem is sufficiently importantthat standard-setting is required andthat a feasible solution can be found.
The objective of a research project is togather evidence to establish whetherstandard-setting is required. Incontrast, the objective of a standard-setting project is to develop or amenda Standard.
Research projects do not automaticallyhave a lower priority than standard-setting projects.
The research pipeline lists all theresearch projects on which the Boardexpects to carry out work before thenext Agenda Consultation, which isexpected to start around 2021. Ifcircumstances change, for example ifsignificant new issues emerge, theBoard may need to add to the pipeline.
In 2015, the Board introduced adistinction between assessment-stageresearch projects and development-stage research projects. Introducingthat distinction highlighted someimportant questions, but thedistinction has proved too rigid to beuseful for classifying research projects.
To avoid burdening the stakeholdersunnecessarily, the Board is unlikely toseek public feedback on researchfindings of all projects. The Board willseek such feedback only if it is needed.
The evidence obtained from researchprojects will be summarised conciselyand visibly, and made readilyretrievable.
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IFRS news – August 2016 3
A project resulting from a Post-implementation Review (PIR) may,depending on the nature of the topicand the extent of the evidenceprovided by the PIR, be a standard-setting project, a research project or amaintenance project.
Draft work plan
The Board confirmed that the focus of itsactivities should now move fromtransaction-specific standards-levelprojects to placing greater emphasis on:
Supporting the implementation andconsistent application of standards,
Enhancing consistency betweenindividual standards and theConceptual Framework,
Promoting better communication infinancial reporting, and
Keeping the research programmerealistic and achievable.
What does this mean for tax?
The good news first: having learned fromthe 2011 Agenda Consultation, the IASB
made a conscious decision to keep the listof active research projects short enough tobe realistic (or at least more realistic thanthe previous one).
The comments received on the 2015 agendaconsultation did not reveal a consistentmessage from a majority asking for theprioritisation of major change to the model.Thus the income tax research project wasremoved from the current work plan. Onlythe following changes are expected in thenear future:
A summary of the feedback receivedon the Exposure Draft on uncertain taxpositions was discussed in July. The ICis expected to issue the finalinterpretation in the near future.
The Annual Improvements cycle 2015-2017 is expected to include anamendment to the standard on theaccounting for income taxconsequences of payments on financialinstruments that are classified asequity. The Exposure Draft is expectedin Q3 2016.
Variable payments for the separateacquisition of PPE and intangibleassetsThe IC declined to address the accounting in such cases. The current diversepractice is expected to continue. This article looks at the impact and provides aninsight into the issue.
The issue has been subject to discussions atthe IC and the IASB for several years.Given the IC’s conclusion that the issue wastoo broad for it to address, how shouldentities account for such transactions in theabsence of further guidance?
Impact
Variable payments occur in a number ofindustries; the purchaser makes an initialpayment to acquire an asset and promisessubsequent payments to the vendor. Theadditional payments may be triggered, forexample, by the occurrence or non-occurrence of future events, theperformance of the asset, the financial
return earned by the purchaser or theexistence and quantity of natural resources.
There are two key accounting questions toconsider:
1. Should a financial liability berecognised for variable payments oninitial recognition of the related asset?
2. Are subsequent changes in the liabilityrecognised in profit or loss or asadjustments to the cost of the asset?
There are two broad approaches applied inpractice to accounting for variablepayments. The effect on the balance sheetand the income statement could bematerial depending on the accountingapproach selected.
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IFRS news – August 2016 4
Financial liability approach
The first approach is to apply a financialliability model, with the liability recognisedat fair value at the date of recognition of theasset and subsequently remeasuredthrough the income statement at everyreporting date. The measurement of theliability is impacted by changes in theamount of payment, the likelihood ofpayment and the timing of payment.Significant income statement volatility mayresult as subsequent increases or reversalsof the liability hit profit or loss.
Cost accumulation approach
The second approach is a costaccumulation model. A liability isrecognised for estimated additionalpayments at the date of recognition of theasset. The liability is not remeasured untilthe change becomes highly probable orvirtually certain. The adjustment to theliability is added to (or deducted from) thecarrying amount of the related asset. Thisapproach can expose assets to a greater riskof impairment as the cost accumulates.
Insight
Who is affected?
The issue is relevant for entities in anumber of industries: pharmaceuticals,mining, oil and gas, telecommunications,entertainment and real estate, amongothers.
Examples of arrangements with variablepayment terms include the purchase of alicence, purchase of a complex piece ofequipment, acquisition of an in-processresearch and development project for anew drug, and service concessionagreements.
What’s next?
A company should choose a measurementapproach that is appropriate for the type oftransactions it does and then apply thatapproach consistently to all similartransactions. The approach followed shouldbe clearly disclosed and may in somecircumstances rise to the level of a criticaljudgement under IAS 1.
Impact of a decommissioningliability in determining therecoverable amount of a CGUThe IC declined to address this accounting issue for impairment tests under the fairvalue less costs of disposal approach. This article looks at the impact and providesan insight into the issue.
Most liabilities are ignored whencalculating recoverable amounts inimpairment testing. However, certainliabilities, such as decommissioning andrestoration liabilities, cannot be separatedfrom the related assets. This presentschallenges when applying both the ‘fairvalue less costs of disposal’ (FVLCOD)approach and the ‘value in use’ (VIU)approach.
The IC considered how to apply the currentguidance to a VIU calculation and declinedto take the issue on to the agenda, as theguidance on VIU is clear. Neither anInterpretation nor an amendment to IAS36 was therefore necessary. This articlelooks at the impact and provides an insightinto the issue.
Impact
The scope of the IC agenda decision islimited to VIU calculations and particularlyto the guidance in IAS 36 Impairment ofAssets, paragraph 78. The standardrequires the carrying amount of arecognised liability to be deducted fromboth the carrying amount of a CGU and theamount determined under VIU without thecash outflows associated with the liability.The IC observed this approach makes thecomparison of the carrying amount and therecoverable amount meaningful. Theagenda decision does not address how toincorporate the decommissioningobligation in a FVLCOD approach. We lookat the challenges that arise in practiceunder VIU and FVLCOD below.
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IFRS news – August 2016 5
Insight
Who is affected?
The agenda decision is not relevant to themajority of liabilities, only those where theliability cannot be separated from the assetbecause a purchaser could not, or wouldnot, acquire the asset or business withoutthe liability. Thus, debt, working capitalliabilities, deferred tax and otherprovisions are not relevant. The mostcommon form of a non-separable liabilityis a decommissioning or restorationprovision. These are most frequently seenin the mining, oil and gas and powergeneration industries although they appearelsewhere as well. They are usuallyassociated with long-lived assets.
How does it work in practice in VIU?
The recoverable amount of the asset isdetermined under the VIU cash flow modelapproach described in IAS 36 Impairmentof Assets in paragraphs 30 to 57. The VIUcash flow model excludes the cash outflowsfor decommissioning provision. Therecorded amount of the provision isdeducted from the amount determined inthe VIU model to produce a net recoverableamount. The net recoverable amount isthen compared to the carrying amount ofthe cash-generating unit including thedecommissioning provision under IAS 37.
It is not appropriate to include the cashoutflows for the decommissioningobligation in the VIU cash flow model. Themodel uses a discount rate that is specificto the assets being tested, reflects the timevalue of money and the return investorswould require to invest in the asset. Theperformance of the asset will have anumber of uncertainties associated with it;demand, price and operational risk amongothers.
The cash outflows associated with thedecommissioning obligation have differentuncertainties associated with them, butthese are more around amount and timingrather than occurrence or performancerisk. Future sales might be uncertain butthe need to restore at the end of the asset’slife is not. The effect of discounting thesecash outflows using the asset rate ratherthan the risk free rate required by IAS 37 islikely to materially decrease the amount of
the liability; this effect is known as the‘discount rate cushion’.
How does it work in practice in FVLCOD?
The impairment standard has little specificguidance on determining FVLCODgenerally and none on using how to useFVLCOD as the recoverable amount for acash-generating unit with a non-separableliability. Fair value is almost alwaysdeveloped using a cash flow model toproduce an enterprise value unless there isa binding offer in place to sell the relevantasset or business. Fair value is defined inIAS 36 as the price that would be paid tosell an asset or assume a liability. Thechallenge arises from both the differentapproaches that might be taken to measureassets and liabilities at fair value as well asthe practical approach often used byvaluers.
Valuation practice is to produce a singlecash flow model that produces a fair valuefor the business (cash generating unit) thatincludes the cash outflows for the liability.This approach is consistent with how amarket participant would think aboutdetermining the fair value of the business.The core asset may have a very long life anddecommissioning or restoration is manyyears in the future. Cash outflows for anobligation that will commence in twentyyears in the future would seldom bespecifically modelled, even by a partylooking to buy the assets, but would beincorporated in a terminal value in the cashflow model.
However, if the mine or power plant iscoming to the end of its life and the cashflows are imminent (say expected to beginwithin the next five years or the periodcovered by the specific projections) then amarket participant may take a differentapproach to consider at what price it iswilling to transact for the assets and thenon-separable liabilities.
An alternative approach would be tocalculate the fair value of the assetexcluding the cash outflows to satisfy theliability and discount those using a marketparticipant discount rate. Separately, theliability would be calculated using marketparticipant assumptions, rather than anIAS 37 approach. The liabilitymeasurement should reflect the amount
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IFRS news – August 2016 6
the entity would need to pay a third partyto assume the obligation. This wouldinclude a profit margin for the third party,plus a margin for estimation risk (that itmight be underestimated) and similarmarket participant type assumptions. Thisis likely to produce a higher value for theliability than under IAS 37. The amountdetermined for the liability would then be
deducted from the amount determined forthe asset to produce a ‘net’ fair value.
The recoverable amount determined underFVLCOD under either of the valuationapproaches described is then compared tothe carrying amount of the CGU includingthe decommissioning obligation measuredunder IAS 37.
Current IC rejectionsRuth Preedy and Anna Schweizer from Accounting Consulting Services examinesome of the issues the IC recently rejected.
IAS 20 Government Grants –Accounting for repayable cashreceipts
Cash received by the government
repayable if exploit Research and
Development (R&D)
The IC was asked to clarify if cash receivedfrom the government to perform R&Dshould be recorded as a government grantor a forgivable loan.
The fact pattern submitted was:
Government gives cash to an entity toperform research.
The cash is repayable if the entitydecides to exploit and commercialisethe results of the R&D.
The IP is transferred to the governmentif the entity decides to abandon theproject.
Financial liability under IFRS 9
The IC concluded that this arrangement wasa financial liability. The entity can onlyavoid delivering cash by settling with a non-financial obligation (the IP.) The IC statedthat the cash receipt was not in the scope ofIAS 20 as the loan would not be forgiven.The entity would repay in cash or assets.
A financial liability is recorded at fair valueinitially. Any difference between the cashreceived and fair value could be treatedunder IAS 20.
The IC rejected the issue as the outreachshowed limited diversity in practise and thatIFRS was clear.
Practical implications
There are often funding arrangements inthe Pharmaceutical and life scienceindustry so whilst this fact pattern was veryspecific it could have broader implications.A venture capitalist might lend a Pharmacompany cash for R&D and requestrepayment if the drug is commercialised.The IP would be transferred if the PharmaCompany chose to abandon the research.This rejection would suggest this should betreated as a financial liability.
IFRS 11 Joint Arrangements andIFRS 10 Consolidated FinancialStatements – Accounting for loss ofcontrol transaction
The IC discussed whether an entity shouldremeasure its retained interest in the assetsand liabilities of a joint operation when theentity loses control of a business, or anasset or group of assets that is not abusiness.
The submitter pointed out a potentialconflict between the guidance in IFRS 11,which specifies that an entity recognisedgains or losses on the sale or contributionof assets to a joint operation only to theextent of the other parties’ interests in thejoint operation, and the guidance in IFRS10, which specifies that an entityremeasures any retained interest when itloses control of the subsidiary.
The IASB has recently deferred theeffective date of suggested amendments toIFRS 10 and IAS 28 Investments inassociates and decided to consider anumber of related issues at a later date.
On this basis, the IC observed that thePost-implementation Review of IFRS 10
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IFRS news – August 2016 7
Have you seen the latest PwC IFRS blogs
Jessica Taurae discusses the impact of the Brexit on financial reports
Mary Dolson and Arjan Brouwer discuss OCI – should it be a recycle-bin or anelephant’s graveyard?
and IFRS 11 would provide the Board withan opportunity to consider loss of controltransactions and a sale or contribution ofassets to an associate or a joint venture.
Reporting entities should develop anaccounting policy for these transactionsand apply it consistently. The policy choiceshould be disclosed in the financialstatements.
IFRIC 12 Service concessionarrangements – Payments made byan operator to a grantor in a serviceconcession arrangement
The IC received a request to clarify how anoperator accounts for payments it makes toa grantor in a service concessionarrangement (SCA) within the scope ofIFRIC 12.
The IC observed the following incircumstances other than those in whichthe operator is collecting amounts (forexample, sales taxes) on behalf of, andremitting them to, the grantor:
a. If payments are for a right to a good orservice that is separate from the SCA,then the operator accounts for thosepayments applying the applicable IFRSStandard(s);
b. If payments are for the right to use anasset that is separate from theinfrastructure within the scope ofIFRIC 12, then the operator assesseswhether the arrangement contains alease, in which case IFRS 16 Leases(IAS 17 Leases) applies;
c. If payments are not for the right to aseparate good or service or a separateright-of-use that is a lease, then theoperator accounts for those paymentsas follows:
i. If the SCA results in the operatorhaving only a contractual right toreceive cash from the grantor, theoperator applies IFRS 15 (IAS 18)and accounts for those payments asa reduction of the transactionprice;
ii. If the SCA results in the operatorhaving only a right to charge usersof the public service, the operatorhas received an intangible asset inexchange for construction/upgradeservices and the payments to bemade to the grantor. Consequently,IAS 38 Intangible Assets applies;and
iii. If the operator has both a right tocharge users of the public serviceand a contractual right to receivecash from the grantor, the operatorconsiders whether those paymentsrepresent payments made for theintangible asset, or considerationpayable to a customer, or both.
The IC noted that it had determined inMarch 2016, that the issue of accountingfor variable payments for asset purchases istoo broad for it to address. It also notedthat variable payments to the grantor whenthe intangible asset model applied is linkedto the broader question of variablepayments for asset purchases. It thereforedecided not to add the issue to its agenda.
The IC agenda decision means that thecurrent diversity in practice in accountingfor variable payments when the intangibleasset applies will continue.
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IFRS news – August 2016 8
Difficulties in translating IFRSIFRS has greatly contributed to bringing transparency, comparability, andefficiency to financial markets. However, as the guidance is written in English, therisk of incorrect translation is likely (or is it probable?). Sam King-Jayawardanaexplores the current research
In July the Australian AccountingStandards Board (AASB) and the KoreanAccounting Standards Board (KASB)published their findings on inconsistenciesin interpreting IFRS resulting fromdifferent cultural backgrounds andlanguages in a joint research project. Theproject focused on the different terms oflikelihood in IFRS and how these may beinterpreted different in Korea andAustralia.
What are ‘terms of likelihood’?
‘Terms of likelihood’ explain the probabilityof a transaction or event occurring. IFRScontains at least 35 of these terms. Eachvariant of these terms has, in the minds ofauditors and preparers, a differentpercentage or range of probability. As aresult, differences in interpretation canhave a significant impact, determining therecognition (or not), and extent of assetsand liabilities.
What terms were selected?
Thirteen terms of likelihood were selected,covering the full range of probability fromthe highest (‘virtually certain’) to the lowest(‘remote’).
What differences were identified?
The report highlights two main reasons fordivergence: translation into otherlanguages, and differing culturalinterpretations.
The research identified that many of thesubtleties of the English language are lost,with terms such as ‘probable’ and ‘likely’,‘virtually certain’ and ‘reasonably certain’,and ‘highly unlikely’ and ‘extremelyunlikely’, all being translated into onesingle Korean term, respectively. As each ofthese in commercial practice has anassociated level of probability, it may resultin an asset not being recognised inAustralia (as the realization of income is,
for example, not ‘virtually certain’), whileanother jurisdiction may recognise such anasset as a lower threshold is applied.
Similarly, different jurisdictions ascribe adifferent level of numerical probability toeach term of likelihood. For example, inAustralia, ‘probable’ and ‘reasonablypossible’ are interpreted with a numericalprobability of 10% lower compared to thesame terms in Korea. Conversely, ‘unlikely’and ‘highly unlikely’ are interpreted with a10% greater probability in Australia thantheir Korean equivalents. This may resultin the recognition of a transaction in onejurisdiction, while an identical transactionwould not be recognised in another.
What actions will result from thisresearch?
The research recommends that, amongother things, the IASB reduce the numberof different terms of likelihood used andestablish a limited set of such terms.Additionally, it encourages standard-setting outreach and consultative processto specifically seek input on translation andinterpretation issues in differentjurisdictions.
Finally, in redeliberating the ConceptualFramework, consideration should be givento the level of conservatism factored in bypreparers and auditors. Current proposalsregarding the recognition criteria mayresult in probability being removed,potentially narrowing interpretation of thisprobability term. However, this may stillresult in some standards retaininglikelihood criteria, resulting in potentialdivergence in application. Furthermore,even if probability is removed from theConceptual Framework, a high degree ofjudgement might still be required todetermine whether an asset or liabilityshould be recognised.
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IFRS news – August 2016 9
Cannon Street PressApplying IFRS 9 Financial Instruments with IFRS 4 Insurance contracts
The IASB tentatively decided to simplifythe disclosures applicable to entitiesapplying the temporary exemption to alignthe scope of the fair value disclosures withthe scope of the credit-risk disclosures.Accordingly, an entity should disclose thefair value at the end of the reporting periodand the change in the fair value during thereporting period for the following twogroups of financial assets separately:
Financial assets with contractual cashflows that are solely principal and
interest, excluding financial assetsheld for trading or managed on a fairvalue basis, and
All other financial assets. That is, anyfinancial assets:o With contractual cash flows that
are not solely principal andinterest, or
o That are held for trading ormanaged on a fair value basis.
The Board expects to issue the finalamendments in September 2016.
IAS 40 Investment property: Transfers of investment property
The IASB considered an analysis ofcomments on the Exposure Draft andtentatively decided to proceed withfinalising the proposed amendmentssubject to the following revisions:
Clarifying that a change inmanagement’s intentions, in isolation,provides no evidence of a change inuse,
Amending two examples so they couldrefer to property under construction ordevelopment as well as to completedproperty,
Emphasising in the Basis forConclusions that an entity should use
judgement in assessing whether aproperty meets, or ceased to meet, thedefinition of investment property,
Allowing an entity to apply either oftwo transition approaches, and
Requiring entities to discloseinformation about any reclassificationof property as a result of applying thesimplified transition approach.
The effective date is expected to be 1January 2018 with earlier applicationpermitted. The Board instructed the staff tobegin the balloting process and expects toissue the proposed amendments in Q42016.
Annual Improvements 2014-2016 cycle
The IASB considered comments receivedand tentatively decided to finalise thefollowing:
IFRS 1 First-time adoption of IFRS:Deletion of short-term exemptions forfirst-time adopters (1 January 2018)
IFRS 12 Disclosure of interests inother entities: Clarification of thescope of the disclosure requirements (1January 2017)
IAS 28 Investments in associates andjoint ventures: Measuring investees atfair value through profit or loss on aninvestment-by-investment basis. (1January 2018)
The Board instructed the staff to begin theballoting process and expects to issue theproposed amendments in Q4 2016.
Conceptual Framework:
The Board tentatively decided to confirmthe proposed definitions of an asset and aliability, and the approach to recognition.The IASB instructed the staff to present ata future meeting a revised discussion abouthow selecting a measurement basis mightbe influenced by the characteristics of an
asset or a liability, and how an asset or aliability contributes to future cash flows.
At the September meeting the IASB willdiscuss further concepts and whether andhow the CF should acknowledge thatasymmetric treatment of gains (or assets)and losses (or liabilities) could be selected.
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IFRS news – August 2016 10
Theleases labThis month Professor Lee Singh investigates the new standard’s possible impact onthe Communications industry with the help of his assistant Maria Williams.
Hypothesis
IFRS 16 will have significant impact on theCommunications industry, including howcontracts are entered into and KeyPerformance Indicators (KPIs) in financialstatements.
Testing and analysis
Most communications companies enter intolease agreements both as lessors andlessees. While lessor accounting remainslargely unchanged under IFRS 16, the newstandard introduces a single accountingtreatment for lessees and the recognition ofa right of use asset and lease liability for allleases.
IFRS 16 also introduces a new definition of alease, which might result in a change in thetypes of arrangements that qualify as leases.Under IFRS 16, a contract contains a lease iffulfilment depends on an identified assetand the contract conveys the right to controlthe use of that identified asset through theability to obtain substantially all of theeconomic benefits from the use of the asset.
Judgement will be required when evaluatingthe following types of arrangements todetermine whether there is a lease underIFRS 16:
Arrangements with other operatorsincluding indefeasible right of usearrangements or lease circuits;
Leasing of space or capacity inexchanges;
Sharing of assets including towers andradio access network sharingarrangements
Provision of equipment to customersthrough which the operator deliverscommunications services such as settop boxes and modems, data centreservices and other outsourcearrangements; or
Rental contracts for retail outletswhether individual outlets, high streetlocations or shops within departmentstores.
The level of detail included in each contractwill affect the analysis of whether a contractcontains a lease; for example, the practical
ability of a lessor to substitute an alternativeasset, or the extent to which a portion of anasset is specifically identified.
IFRS 16 is also expected to affect a range ofkey financial metrics. The PwC Global LeaseCapitalisation survey published in February2016 indicated that a median debt increaseof 21% is expected for communicationscompanies and a median 8% increase inEBITDA (increases as rental expense isreplaced by interest, depreciation andamortisation). Impacts are also expected onCAPEX (increases as right of use assets arerecognised on the balance sheet), net debtand gearing ratios (increases as leaseliability included in net debt) and otherperformance metrics. As a result, companiesin the communications industry might needto renegotiate covenants and revisedividend policies.
Conclusion
IFRS 16 will have significant impact on thecommunications industry. Judgement willbe required in applying the new definition ofa lease to contracts and application of thenew rules is expected to affect KPIs andfuture commercial negotiations.
Practical application
The new standard will not only result in therecognition of operating leases on thebalance sheet but have wide ranging effectson business operations and performancemetrics. We recommend early planning toassess the likely ramifications of the newstandard.
See more of the Professor’s analysis of theimpact of IFRS 16 Leases on thecommunications industry in our Spotlight.
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IFRS news – August 2016 11
IFRIC Rejections in short - IAS 23Rachel Pang of Accounting Consulting Services examines the practical implicationsof IC rejections related to IAS 23.
Looking for an answer? Maybe it was already addressed by the experts.
The Interpretations Committee (IC) regularly considers anywhere up to 20 issues at its periodicmeetings. A very small percentage of the issues discussed result in an interpretation. Many issuesare rejected; some go on to become an improvement or a narrow scope amendment. The issuesthat are not taken on to the agenda end up as ‘IFRIC rejections’, known in the accounting trade as‘not an IFRIC’ or NIFRICs. The NIFRICs are codified (since 2002) and included in the ‘greenbook’ of standards published by the IASB although they technically have no standing in theauthoritative literature. This series covers what you need to know about issues that have been‘rejected’ by the IC. We go standard by standard and continue with IAS 23 as per below.
IAS 23 covers recognition, measurement,and disclosure of borrowing costs. The IChas rejected two matters related to IAS 23over the last decade.
Foreign exchange and capitalisableborrowing costs (January 2008)
The IC rejected a submission asking forguidance both on the treatment of foreignexchange gains or losses and on thetreatment of any derivatives used to hedgesuch foreign exchange exposures.
The IC noted that the principle of IAS 23Borrowing costs requires an entity tocapitalise borrowing costs that are directlyattributable to the acquisition, constructionor production of a qualifying asset as part ofthe cost of that asset.
The IC also noted that determining theborrowing costs directly attributable to theacquisition of a qualifying asset is difficultand judgement is required. Consequently,how an entity applies IAS 23 to foreigncurrency borrowings is a matter ofaccounting policy requiring the exercise ofjudgement. Clear disclosures of significantaccounting policies and judgements arerequired by IAS 1. The IC concluded that itwas unnecessary to provide applicationguidance.
The IC also noted that the IASB specificallyconsidered this issue as part of its project toamend IAS 23 and decided not to developfurther guidance in this area. The ICtherefore rejected this issue.
The meaning of ‘general borrowings’(November 2009)
The IC received a request on whatborrowings comprise ‘general borrowings’when capitalising borrowing costs. Therequest asked for guidance on the treatmentof general borrowings used to purchase aspecific asset other than a ‘qualifying asset’.
The IC noted that only specific borrowingsfor the purpose of obtaining a qualifyingasset can be excluded from determining thecapitalisation rate for general borrowings.One might argue that borrowings related tospecific assets other than qualifying assetscannot be excluded from determining thecapitalisation rate for general borrowings.Alternatively, the general principle of thestandard states that the borrowing costsdirectly attributable to the acquisition of aqualifying asset are borrowing costs thatwould have been avoided had theexpenditure on the qualifying asset not beenmade.
The IC noted that determining theborrowing costs that are directlyattributable to the acquisition of a qualifyingasset is difficult and judgement is requiredwhen applying the standard. The IC alsonoted that the IASB would consider addingthis issue to the annual improvementsproject.
The IASB noted that IAS 23 excludes onlydebt used to acquire qualifying assets fromthe determination of the capitalisation rateand decided not to include this issue in theannual improvements project. The ICtherefore rejected this issue.
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IFRS news – August 2016 12
Have you seen the latest news on Brexit?
In Depth: Accounting implications of UK’s Brexit decision Volume 1
Webcast: Impact on accounting and reporting
Practice aide: A framework to guide disclosures
Fun stuffGive your brain a workout and keep it buzzing during the quiet(er) summer months!Have fun with Ernesto Mendez’ picture quiz and spot the five differences related tothe new revenue standard.
www.pwc.com/ifrs
IFRS news – August 2016 13
Solution:
1. Old (IAS 18 – Revenue) and new (IFRS 15 – Revenue from contracts) revenue standards.
2. The IASB announced the deferral of effective date of the IFRS 15 in 2015. The mandatoryeffective date is now 1 January 2018.
3. An entity is a principal if it controls a specified good or service before that good or service istransferred to a customer. In addition to possession, an entity obtains the control if either (a) ithas right to direct another party to provide a good or service to the customer on its behalf; or (b) itprovides a significant service of integrating goods or services provided by another party into thespecified good or service for which the customer has contracted.
An entity is an agent if its performance obligation is to arrange for the provision of the specifiedgood or service by another party.
4. The licence guidance applies when the promise to grant a licence is a separate performanceobligation (PO) or a pre-dominant item within a combined PO(s). A promise to grant a licence is apromise to provide a right to access (recognise over time) if all of the following criteria are met:
a. An entity is required or reasonably expected to undertake activities that significantly affectthe intellectual property;
b. Such rights granted directly expose the customer to any positive or negative effects of theentity’s activities; and
c. Those activities do not result in separate good or service transferred to the customer.
A licence is a right to use (recognised at point in time) if any of the above criteria are not met.
5. IFRS 15 provides an exception to the model for licences in connection with sales based royalties.An entity records sales or usage-based royalty revenue only when the related sales or usageoccurs. This guidance is applicable to arrangements where the licence represents a separate PO ora pre-dominant item within a combined PO(s).
www.pwc.com/ifrs
IFRS news – August 2016 14
The bit at the back...
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. It does not take into account any objectives, financial situation orneeds of any recipient; any recipient should not act upon the information contained in this publication without obtaining independent professional advice. No representation or warranty (express orimplied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employeesand agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in thispublication or for any decision based on it.
© 2016 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separateand independent legal entity.
For further help on IFRS technical issues, contact:
Andri Stavrou: Tel: +30 210 687 4703
Financial instruments
Kyriaki Plastira: Tel: +30 210 687 4425
Liabilities, revenue recognition and other areas
Vart Kassapis: Tel: +30 210 687 4757
Business combinations
Iliana Kostoula: Tel: +30 210 687 4044
