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Issue 71 / December 2013

IFRS Developments

The IASB issues two cycles of annual improvements to IFRS

What you need to know The IASB issued two cycles of Annual Improvements to IFRSs – 2010-2012 Cycle and 2011-2013

Cycle – on 12 December 2013.

The amendments contain 11 changes to nine standards – IFRS 1, IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS 16, IAS 24, IAS 38 and IAS 40, excluding consequential amendments.

Other than the amendments that only affect the standards’ Basis for Conclusions, the changes are effective 1 July 2014.

Generally, the amendments are effective prospectively, unless they relate to a disclosure standard or revaluing owned assets.

Overview On 12 December 2013, the International Accounting Standards Board (IASB) issued two cycles of Annual Improvements to IFRSs – Cycles 2010-2012 and 2011-2013 - that contain 11 changes to nine standards: IFRS 1 First-time Adoption of International Financial Reporting Standards; IFRS 2 Share-based Payment; IFRS 3 Business Combinations; IFRS 8 Operating Segments; IFRS 13 Fair Value Measurement; IAS 16 Property, Plant and Equipment; IAS 24 Related Party Disclosures; IAS 38 Intangible Assets; and IAS 40 Investment Property. One of the amendments to IFRS 13 and the amendment to IFRS 1 only affect the Basis for Conclusions for the respective standards and, therefore, are effective immediately. The other amendments are effective from 1 July 2014 either prospectively or retrospectively. A summary of each amendment is described in the tables below.

How we see it

The annual improvements process is the way in which the IASB makes small, non-urgent changes to standards where they are currently unclear. While these changes are not meant to drastically alter the standard, entities should review their accounting policies to determine any potential impact.

The amendments are effective on or before 1 July 2014

2 The IASB issues two cycles of annual improvements to IFRS

Amendments 2010-2012 cycle

Standard Amendment Summary of change Transition Possible consequences/clarification

IFRS 2 Definitions relating to vesting conditions

Performance condition and service condition are defined in order to clarify various issues, including the following: A performance condition must contain a service condition

A performance target must be met while the counterparty is rendering service

A performance target may relate to the operations or activities of an entity, or to those of another entity in the same group

A performance condition may be a market or non-market condition

If the counterparty, regardless of the reason, ceases to provide service during the vesting period, the service condition is not satisfied

The amendment is effective prospectively.

The period of the performance target must not extend beyond the end of the service period, but may start earlier if the service period is not ‘substantially before the commencement of the service period’, e.g., a performance target for an entity-wide scheme could be set prior to the counterparty becoming an employee.

If an employee does not meet a service condition for any reason, no amount is recognised for the services received and any cumulative expense is reversed. This does not apply when there is full or partial vesting of an award on cessation of employment.

IFRS 3 Accounting for contingent consideration in a business combination

Contingent consideration in a business acquisition that is not classified as equity is subsequently measured at fair value through profit or loss whether or not it falls within the scope of IFRS 9 Financial Instruments.

The amendment is effective for business combinations prospectively.

Contingent consideration cannot be measured at fair value through other comprehensive income.

IFRS 8 Aggregation of operating segments

Operating segments may be combined/aggregated if they are consistent with the core principle of the standard, if the segments have similar economic characteristics and if they are similar in other qualitative respects. If they are combined, the entity must disclose the economic characteristics (e.g., sales and gross margins) used to assess whether the segments are ‘similar’.

The amendment is effective retrospectively.

The level of detail entities need to disclose in their financial statements will increase. Specifically, the similar economic characteristics used to aggregate operating segments will need to be disclosed.

This amendment arose as a result of a European regulatory submission to the IASB and could be an area of focus for other regulators.

Reconciliation of the total of the reportable segment assets to the entity’s total assets

The reconciliation of segment assets to total assets is only required to be disclosed if the reconciliation is reported to the chief operating decision maker, similar to the required disclosure for segment liabilities.

The amendment is effective retrospectively.

The level of segment disclosures may decrease by deleting information that the entity considers irrelevant or unnecessary.

IFRS 13 Short-term receivables and payables

The IASB clarified in the Basis for Conclusions that short-term receivables and payables with no stated interest rates can be held at invoice amounts when the effect of discounting is immaterial.

The amendment is effective immediately.

Entities still need to perform an evaluation of ‘immaterial’ in order to record the receivable and payable at invoice amount.

The IASB issues two cycles of annual improvements to IFRS 3

Standard Amendment Summary of change Transition Possible consequences/clarification

IAS 16 and IAS 38

Revaluation method proportionate restatement of accumulated depreciation

The amendment to IAS 16.35(a) and IAS 38.80(a) clarifies that revaluation can be performed, as follows:

Adjust the gross carrying amount of the asset to market value

Or

Determine the market value of the carrying amount and adjust the gross carrying amount proportionately so that the resulting carrying amount equals the market value

The IASB also clarified that accumulated depreciation/amortisation is the difference between the gross carrying amount and the carrying amount of the asset (i.e., gross carrying amount – accumulated depreciation/amortisation = carrying amount).

The amendment to IAS 16.35(b) and IAS 38.80(b) clarifies that the accumulated depreciation/amortisation is eliminated so that the gross carrying amount and carrying amount equal the market value.

The amendment is effective retrospectively.

This amendment provides more detail when users revalue assets and clarifies how an adjustment is recognised.

IAS 24 Key management personnel

The amendment clarifies that a management entity – an entity that provides key management personnel services – is a related party subject to the related party disclosures. In addition, an entity that uses a management entity is required to disclose the expenses incurred for management services.

The amendment is effective retrospectively.

Even though an entity incurs key management personnel expenses, detailed key management personnel compensation disclosures (IAS 24.17) do not apply if the individual is part of a separate management entity. Less information on the individual’s remuneration is required.

2011-2013 cycle

Standard Amendment Summary of change Transition Possible consequences

IFRS 1 Meaning of effective IFRSs

An entity may choose to apply either a current standard or a new standard that is not yet mandatory, but that permits early application, provided either standard is applied consistently throughout the periods presented in the entity’s first IFRS financial statements.

The amendment is effective immediately.

The meaning of ‘effective IFRS’ will be better understood by first-time adopters of IFRS.

IFRS 3 Scope exceptions for joint ventures

The amendment clarifies that:

Joint arrangements are outside the scope of IFRS 3, not just joint ventures

The scope exception applies only to the accounting in the financial statements of the joint arrangement itself

The amendment is effective prospectively.

IFRS 11 Joint Arrangements introduced ‘joint arrangements’ to replace the concept of ‘joint ventures’ in IAS 31 Interests in Joint Ventures. A joint venture is a type of joint arrangement within IFRS 11. The scope exception to IFRS 3 is updated to reflect this change.

Standard Amendment Summary of change Transition

requirements Possible consequences

IFRS 13 Scope paragraph 52 (portfolio exception)

The portfolio exception in IFRS 13 can be applied to financial assets, financial liabilities and other contracts.

The amendment is effective prospectively.

When measuring fair value, the portfolio exception can be applied to contracts within IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 (e.g., commodity derivative contracts) not just to those contracts that meet the definition of financial assets or financial liabilities.

IAS 40 Clarifying the interrelationship of IFRS 3 and IAS 40 when classifying property as investment property or owner-occupied property

The description of ancillary services in IAS 40 differentiates between investment property and owner-occupied property. IFRS 3 is used to determine if the transaction is the purchase of an asset or a business combination.

The amendment is effective prospectively.

The amendment does not help to differentiate if an acquisition is a purchase of a business or purchase of an asset. Judgement is still needed to make this distinction.

How we see it

These changes will clarify areas in the standards that are currently unclear. We believe these amendments will help preparers apply the relevant standards more consistently.

Next steps Entities should be aware of these changes to determine if their accounting policies are impacted by the amendments.

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