- The date indicated under ‘status’ refers to when an Agenda Decision was published in IFRIC Update, which may differ from when it was approved by the IASB.
A summary of 2022 IFRIC activity and comparison to US GAAP.
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 2022, the IFRS IC has discussed obligations for low emission vehicle credits, government grants, insurance contracts, lessor accounting, SPACs, demand deposits, financial instruments, and software revenue. In this article, we summarize these Agenda Decisions and shed light on how they compare to US GAAP.
The IFRS IC is the interpretative body of the International Accounting Standards Board (the IASB®). It supports the consistent application of IFRS Accounting Standards and helps improve 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. This year, two issues considered by the IFRS IC were escalated to standard-setting. Read the related KPMG articles: Classification of debt with covenants as current or noncurrent, and Accounting for electronic payments.
|Principal vs agent: software reseller (IFRS 15, Revenue from Contracts with Customers)||Final: April 2022|
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:
The fact pattern provides additional relevant facts not reproduced here.
The IFRS IC issued an Agenda Decision explaining how to apply the relevant guidance in IFRS 15:
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 Accounting Standards, conclusions in this area under US GAAP frequently involve significant judgment and depend heavily on the specific facts and circumstances.
|Lessor forgiveness of lease payments (IFRS 9, Financial Instruments and IFRS 16, Leases)||Final: September 2022|
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 concluded that, 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:
We believe this accounting would generally result in a difference from US GAAP. Under US GAAP, forgiving either type of lease payment would 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.
|Definition of a lease – Substitution rights (IFRS 16, Leases)||Final: November 2022|
How to assess whether a contract contains a lease when the supplier has particular substitution rights?
In the fact pattern discussed by the IFRS IC, the contract is for the use of multiple similar assets (e.g. 100 batteries used in electric buses) and the supplier has the practical ability to substitute alternative assets throughout the period of use. However, the supplier would not benefit economically from exercising its substitution right in the first three years of the contract.
The IFRS IC tentatively concluded that there is an identified asset in this fact pattern (which is one of the conditions for a lease to exist) since the supplier’s substitution right is not substantive throughout the period of use. Further, if a contract contains multiple independent assets, the supplier’s substitution right must be assessed individually for each asset.
|Negative low emission vehicle credits (IAS 37, Provisions, Contingent Liabilities and Contingent Assets)||Final: June 2022|
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 by obtaining and surrendering 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 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.
|Demand deposits with restrictions on use arising from a contract with a third party (IAS 7, Statement of Cash Flows)||Final: March 2022|
Can demand deposits with contractual restrictions be classified as cash and cash equivalents in the statement of cash flows and the balance sheet?
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 statement of cash flows and the balance sheet.
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.
|Transfer of insurance coverage under a group of annuity contracts (IFRS 17, Insurance Contracts)||Final: June 2022|
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:
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 IFRS IC concluded that only Method 1 is appropriate in the fact pattern considered.
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 Accounting Standards may arise in practice.
Multi-currency groups of insurance contracts (IFRS 17, Insurance Contracts and IAS 21, The Effects of Changes in Foreign Exchange Rates)
|Final: September 2022|
Are currency exchange risks considered when identifying insurance contract portfolios under IFRS 17? How are IAS 21 and IFRS 17 applied in measuring a multi-currency group of insurance contracts?
Companies may issue insurance contracts with cash flows in more than one currency. IFRS 17 requires companies to recognize and measure groups of insurance contracts. This involves identifying portfolios of contracts subject to similar risks and managed together.
The IFRS IC concluded that currency exchange risks should be considered when grouping contracts. However, a portfolio may include contracts subject to different currency exchange rate risks in certain situations.
Under IFRS 17, a group is measured at the total of the fulfilment cash flows and the contractual service margin (CSM). To measure a multi-currency group, an entity does the following.
Under US GAAP, long-duration insurance contracts are accounted for using different concepts. Therefore, differences from IFRS Accounting Standards may arise in practice.
|Classification of public shares as financial liabilities or equity (IAS 32, Financial Instruments: Presentation)||Final: June 2022|
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:
IAS 32 is silent about how to assess whether the shareholders’ contractual right to extend the SPAC’s life indefinitely gives the SPAC the unconditional right to avoid paying cash to settle a contractual obligation – i.e. whether a decision of shareholders is treated as a decision of the entity.
The IFRS IC concluded that the request was too narrow to be addressed in isolation and noted that the IASB will consider 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 Accounting Standards, conclusions around classification of temporary equity under US GAAP frequently involve significant judgment and depend heavily on the specific facts and circumstances. However, because the accounting requirements under IAS 32, IFRS 2, and IFRS 9 significantly differ from the corresponding US GAAP requirements, we have observed significant differences between US GAAP and IFRS Accounting Standards in practice.
|Accounting for warrants at acquisition (IAS 32, Financial Instruments: Presentation and IFRS 2, Share-based Payment)||Final: September 2022|
How does a company account for warrants on acquiring a SPAC?
In the fact pattern discussed by the IFRS IC, a SPAC that is not a business and with cash as its sole asset identifies a target operating company for acquisition. However, the operating company acquires the SPAC by issuing shares and warrants to the SPAC’s shareholders in exchange for the shares and legal cancellation of the warrants of the SPAC. The SPAC shareholders are not SPAC employees, nor will they provide services to the company after the acquisition.
The IFRS IC concluded that the company accounts for the acquisition of the SPAC by recognizing the individual assets acquired, the stock exchange listing service acquired, the liabilities assumed in the transaction, and cash. Based on the facts and circumstances, the company needs to determine whether or not it has assumed the SPAC warrants as part of the acquisition because this affects the accounting for the newly issued warrants.
The Agenda Decision further explores the accounting when SPAC warrants are assumed, noting that:
Although not addressed in the fact pattern discussed by the IFRS IC, in the United States, warrants are also often issued to PIPE (Private Investment in Public Equity) investors, which makes this Agenda Decision applicable to those warrants as well.
Because of the different requirements, we have observed significant differences between US GAAP and IFRS Accounting Standards in practice, when accounting for warrants in SPAC acquisitions.
TLTRO III transactions (IFRS 9, Financial Instruments and IAS 20, Accounting for Government Grants and Disclosure of Government Assistance)
Final: February 2022
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:
1. The fair value of a TLTRO III tranche at initial recognition differs from its transaction price because of a below-market interest rate; or
2. The loan is forgivable.
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 and referred the matter to the IASB to consider as part of the post-implementation review of IFRS 9.
Unlike IFRS Accounting Standards, US GAAP does not allow interest on low-interest or interest free loans from a government to be imputed.
Goodwill impairment: IFRS® Accounting Standards vs. US GAAP
Key differences between IAS 36 and ASC Topic 350 for testing goodwill impairment.
Q2 2023 new IFRS® Accounting Standards and amendments: Are you ready?
Our semi-annual outlook helps preparers in the US keep track of changes in IFRS Accounting Standards and assess relevance.