IASB publishes amendments to IFRS 9

On 12 October 2017, the IASB issued amendments to IFRS 9 “Prepayment Features with Negative Compensation”.

The amendments aim to clarify the classification of particular financial assets with prepayment features pursuant to IFRS 9 “Financial Instruments” and an aspect of accounting for financial liabilities following a modification.

Clarification of classification in the case of prepayment features with negative compensation

According to the old rules under IFRS 9, particular prepayment options would preclude financial instruments that otherwise only feature contractual cash flows that are solely payments of principal and interest on the principal amount outstanding from being measured at amortized cost or fair value through other comprehensive income. This related in particular to prepayment features where the lender could be forced to accept a prepayment amount that is substantially less than the unpaid amounts of principal and interest. This could be considered as a payment from the lender to the borrower and thus not as compensation from the borrower to the lender.

The IASB made an amendment so that such financial assets can be measured at amortized cost or at fair value through other comprehensive income. The authoritative factor for assessing whether the prepayment amount does not solely constitute payments of principal and interest on the principal amount outstanding is whether the party that terminates the contract early obtains reasonable compensation.

Changes regarding symmetric termination rights

The amendments concern only symmetric termination rights that can lead to settlement either of an early repayment penalty or an early repayment gain, depending on the interest rate prevailing at the time of early repayment. Up until now, the cash flow condition under IFRS 9 was not met if the lender had to pay a compensation payment when the borrower terminated the contract.

The existing rules on termination rights will not be changed. However, the amendments to IFRS 9 mean that the cash flow conditions continues to be met even if negative compensation is paid, allowing for measurement at amortized cost.
This applies regardless of the amount of the fair value of the prepayment feature upon initial recognition of the financial asset because – unlike the original draft (Exposure Draft ED/2017/3 dated 21 April 2017), which required the additional eligibility condition of an “insignificant fair value” – this additional condition was not included in the final amendments to IFRS 9.

Clarification regarding the modification of financial liabilities

The amendments clarify that, in the case of a restructuring of financial liabilities that does not result in their derecognition, the carrying amounts must be adjusted directly in profit or loss. In cases where only the effective interest rate was adjusted instead of amortized cost, the accounting may in future have to be adjusted with retrospective effect.

Note: EFRAG (European Financial Reporting Advisory Group) published the final endorsement advice in November 2017. The amendments to IFRS 9 apply with mandatory retrospective effect to annual periods beginning on or after 1 January 2019. Early adoption is permitted.

IASB finalizes amendments to IAS 28

On 12 October 2017, the IASB issued amendments to IAS 28 entitled “Long-term Interests in Associates and Joint ventures”.

The reason for these independent and narrow-scope amendments, which were still contained in the draft “Annual improvements to IFRSs (2015-2017 Cycle)” until May 2017, was a question submitted to the IFRS Interpretations Committee. It was unclear whether investments in associates and joint ventures recognized under IAS 28 are only excluded from the scope of IFRS 9 “Financial Instruments” if they are measured using the equity method or whether this also applies to investments that are not measured using the equity method.

The amendments now clarify for long-term interests that IFRS 9 “Financial Instruments” only applies to net investments in associates or joint ventures if they are not measured using the equity method.

The application of IFRS 9 to such investments relates not only to classification and measurement but also to impairment rules.

Note: The amendments apply to reporting periods beginning on or after 1 January 2019; voluntary early adoption is permitted. This allows entities to implement the amendments to IAS 28 together with IFRS 9 as of 1 January 2018. During first-time application, the amendments must be applied retrospectively. Exemptions for modified retrospective first-time application are possible if the entity does not implement the amendments to IAS 28 until after IFRS 9 is applied.

IASB publishes exposure draft on IAS 8 entitled “Accounting Policies and Accounting Estimates”

On 12 September 2017, the IASB issued exposure draft ED/2017/5 “Accounting Policies and Accounting Estimates” concerning amendments to IAS 8 on distinguishing accounting policies from accounting-related estimates. The proposed amendments relate mainly to the following:

Accounting policies and accounting estimates

The draft provides a clearer distinction between accounting policies and accounting estimates by clarifying the definition of accounting policies and supplementing the definition of accounting estimates.

Selection of an estimation technique or valuation technique

Based on the proposed clarification, the selection of an estimation technique or valuation technique should constitute an accounting estimate.

IAS 2 Inventories

Selecting the procedure for allocating acquisition and production cost for interchangeable inventories now constitutes selecting an accounting policy rather than (as in the past) making an accounting estimate.

Note: The effective date for the amendments has not yet been set. The draft provides for prospective application of a change in accounting policy (e.g. transition to use of the components approach pursuant to IAS 16) if retrospective application is impracticable. The period for comments ended on 15 January 2018.

Published exposure draft on the definition of “material”

On 2 October 2017, the IASB issued exposure draft ED/2017/6 “Definition of Material (Proposed amendments to IAS 1 and IAS 8)”, which changed the definition of “material” as follows:

“Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of a specific reporting entity’s general purpose financial statements make on the basis of those financial statements.”

The reasons for the changed definition are as follows:

  • “could reasonably be expected to influence”:
    This addition should serve to limit the disclosures and not require too much information.
  • “obscuring”:
    The addition “obscuring material information” stemmed from the opinion that this could have similar effects as omitting or misstating material information.
  • “primary users”:
    Because the existing definition only refers to “users” and this term is open to interpretation, the Board listed examples of primary users.

Note: To provide support in determining materiality, the IASB issued a practice statement “Making Materiality Judgements”. The content of the practice statement is described in more detail in the next section. The effective date has not yet been specified, but early adoption is to be permitted. The period for comments ended on 15 January 2018.

Practice statement “Making Materiality Judgements” issued

On 14 September 2017, the IFRS practice statement “Making Materiality Judgements” was issued by the IASB. The aim of the practice statement is to support management in reporting financial information in order to create more transparency for the different lenders.

The practice statement deals with the definition of “material” from IAS 1 and IAS 8. Amendments resulting from ED/2017/6 are included in the practice statement as subsequent amendments. Materiality judgments are broken down into the following four steps in the practice statement:

Step 1: Identify information that has the potential to be material
Step 2: Use quantitative (size criteria) and qualitative factors (characteristics) to assess whether the information identified is in fact material.
Step 3: Organize the information in the entity’s financial statements.
The practice statement contains examples of different proposed structures, for example emphasizing material matters or tailoring information to the entity’s own circumstances.
Step 4: Review whether information is material in the context of its financial statements as a whole.
Note: Because the practice statement is not a standard, but merely provides guidelines, there is no obligation to apply the statement. However, the topic of materiality is an important principle within IFRS and should be observed.

Update of the IFRS Taxonomy for the submission of electronic financial statements

The IFRS Taxonomy 2017 is a translation of the IFRSs into the business reporting language iXBRL (inline eXtensible Business Reporting Language) and has been updated since the IFRS Taxonomy 2015 was issued by the IFRS Foundation, most recently on 9 March 2017.

The Taxonomy 2017 complies with the IFRSs as issued by the IASB as of 1 January 2017, and contains the iXBRL labels for all IFRS disclosure requirements. The XBRL is used to prepare a digital financial report where the data are labeled and allocated clearly using the labels. Because the report is machine-readable, it is possible to exchange information directly.

To make it easier to prepare and use financial information digitally, the IFRS Foundation issued a preparer’s guide for the IFRS Taxonomy on 14 December 2017.

All companies listed in the European Union are obliged from 1 January 2020 onward to submit their financial statements electronically in a uniform format across Europe (European Single Electronic Format, ESEF). For consolidated financial statements, the IFRS Taxonomy should be used. On 18 December 2017, ESMA (European Securities and Markets Authority) issued the final draft Regulatory Technical Standards to implement ESEF and other guidelines.

From 1 January 2022, the ESEF reporting duty covers not only the primary components of financial statements (statement of financial position, income statement and other comprehensive income, statement of changes in equity, statement of cash flows) as well as fundamental information on the entity, such as name, domicile and purpose of the entity, but also extensive disclosures, which must be allocated to an element of the Taxonomy as a text block.

For foreign issuers, IFRS financial statements must already be submitted in XBRL for annual periods ending on or after 15 December 2017. To this end, the US Securities and Exchange Commission has already updated its EDGAR submission system accordingly.

Note: The IFRS Taxonomy data can be downloaded from the website of the IFRS Foundation together with supporting materials. Use of the IFRS Taxonomy will lead to a once-off adoption effort for publicly traded entities in order to ensure a uniform chart of accounts worldwide. In addition, it will be important to ensure a functioning software interface.