A summary of 2024 IFRIC activity and comparison to US GAAP.
Authors: Valerie Boissou and Jeswin John
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. So far in 2024, the IFRS IC has issued final and tentative Agenda Decisions addressing certain post-acquisition payments in business combinations, climate-related commitments, operating segments, cash flow classification of variation margin calls, guarantees, revenue recognition of tuition fees, assessing indicators of hyperinflationary economy, and recognition of intangible assets resulting from climate-related expenditure. In this article, we summarize these Agenda Decisions and shed light on how they compare to US GAAP.
The IFRS IC is the interpretive body of the International Accounting Standards Board (the 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, but through its Agenda Decisions it explains its rationale and provides 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 2024. For a refresher on 2023 Agenda Decisions, read KPMG IFRS Perspectives article here.
| Issue: Payments contingent on continued employment during handover periods | Status: Final Full text available here1 |
| 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 to the sellers are contingent on both the future performance of the acquired business and their continued employment. The sellers are entitled to receive the additional payments if their employment is terminated in specific circumstances – e.g. death, disability – or with the entity’s agreement. The sellers forfeit the additional payments if their employment is terminated for any other reason. Evidence gathered by the IFRS IC indicated no significant diversity in the accounting for these fact patterns. Entities follow the 2013 Agenda Decision and account for the payments as compensation for post-acquisition services, not as additional consideration for the acquired business, unless the service condition is not substantive. Therefore, the IFRS IC 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-acquisition services. The accounting for arrangements in which the payments are not affected by employment termination requires an evaluation of additional indicators. | |
| Issue: Climate-related commitments | Status: Final Full text available here1 |
| Should an entity recognize a provision for its commitment to reduce or offset its greenhouse gas emissions and, if a provision is recognized, is the expenditure treated as an asset or expense? | |
In the fact pattern discussed by the IFRS IC, the entity publicly states in 20X0 its commitment to gradually reduce its annual greenhouse gas emissions, reducing them by at least 60% of their current level by 20X9, and to offset its remaining emissions in 20X9 and in subsequent years by buying carbon credits and retiring them from the carbon market. The entity’s public statement includes a transition plan on how it will modify its manufacturing methods between 20X1 and 20X9 to achieve the 60% reduction in its annual emissions by 20X9. The IFRS IC concluded the following in the fact pattern described.
If a provision is recognized, the expenditure is treated 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 under an IFRS Accounting Standard. Irrespective of whether an entity’s commitment to reduce or offset its greenhouse gas emissions results in the recognition of a provision, the actions the entity plans to take to fulfill that commitment could affect the measurement and disclosure of its other assets and liabilities, under other IFRS Accounting Standards. The IFRS IC decided not to add a standard-setting project to the work plan because IAS 37 provides an adequate basis for entities to evaluate their climate-related commitments. KPMG offers insights on the impact of net-zero commitments on financial reporting in its latest article. | |
| Under US GAAP, ‘constructive obligation’ is more narrowly defined compared to IFRS Accounting Standards and is only 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’) under IFRS Accounting Standards. | |
| Issue: Disclosure of revenues and expenses for reportable segments | Status: Final Full text available here1 |
| 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:
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 by disclosing, for each reportable segment, material items of income and expense disclosed in accordance with paragraph 97 of IAS 1, an entity:
The IFRS IC observed that paragraph 23(f) of IFRS 8 does not require an entity to disclose by reportable segment each item of income and expense presented in its statement of profit or loss or disclosed in the notes. In determining information to disclose for each reportable segment, an entity applies judgment and considers the core principle of IFRS 8 – which requires an entity to disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates. The IFRS IC decided that the principles and requirements in IFRS Accounting Standards provide an adequate basis for an entity to apply the disclosure requirement under paragraph 23 of IFRS 8 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 unusual items, rather than material items of income and expense. | |
| Issue: Classification of cash flows related to variation margin calls on ‘Collateralized-to-Market’ contracts | Status: Final Full text available here1 |
| How does an entity present variation margin call payments made on contracts to purchase or sell commodities in its statement of cash flows? | |
In the fact pattern discussed by the IFRS IC, the entity enters a contract to purchase or sell commodities at a predetermined price and at a specified time in the future. The entity may enter into such a contract for different purposes and applies the relevant requirements in IFRS Accounting Standards accordingly. Such a contract typically has a maturity of up to three years, can be settled physically or net in cash and is both:
The IFRS IC considered whether the cash flows related to variation margin call payments should be presented as cash flows from operating activities or other than operating activities. Evidence gathered by the IFRS IC did not indicate that the matter described in the fact pattern is widespread. Therefore, the IFRS IC decided not to add this matter to its standard-setting agenda. | |
| US GAAP does not address the classification of variation margin payments. We believe an entity can classify variation margin cash flows on collateralized-to-market or settled-to-market derivatives consistent with the derivative settlement cash flows or alternatively classify them based on whether the collateral account is in an asset position (as cash flows from investing activities) or a liability position (as cash flows from financing activities). Read Questions 13.4.50 and 13.4.60 in KPMG Handbook, Statement of cash flows, for more guidance. | |
| Issue: Guarantees issued on obligations of other entities | Status: Final Full text available here1 |
| How does an entity, in its separate financial statements, account for guarantees it issues on obligations of a joint venture? | |
The IFRS IC discussed three fact patterns in the context of an entity’s separate financial statements. In the fact patterns, an entity issues several types of contractual guarantees on obligations of a joint venture. For example, the entity guarantees to make payments to a bank, a customer or another third party in the event the joint venture fails to meet its contractual obligations under its service contracts or partnership agreements and fails to make payments when due. The IFRS IC noted that IFRS Accounting Standards do not define ‘guarantees’, and there is no single Accounting Standard that applies to all guarantees. In determining which IFRS Accounting Standard to apply, an entity should apply judgment based on the specific facts and circumstances and the terms and conditions of the guarantee unless those terms and conditions have no substance. An entity follows these three steps.
An entity accounts for a guarantee that it issues based on the requirements, including the scoping requirements, in IFRS Accounting Standards and not based on the nature of the entity’s business activities. The IFRS IC noted that the IASB will consider the broader application questions related to financial guarantee contracts during its next agenda consultation, including the meaning of the term ‘debt instrument’ in the definition of a financial guarantee contract. The IFRS IC therefore concluded that an entity applies judgment in interpreting the meaning of the term ‘debt instrument’ when determining whether to account for a guarantee as a financial guarantee contract. Consequently, the IFRS IC decided not to add a standard-setting project to the work plan. | |
| Under US GAAP, guarantees of the debt of a joint venture accounted for under the equity method, generally do not meet the ASC 4605 scope exceptions for initial recognition and measurement. US GAAP does not define a financial guarantee contract, unlike IFRS 9. Instead, US GAAP provides guidance on when to account for a financial guarantee contract as a derivative or as a guarantee. Like IFRS Accounting Standards, an issued financial guarantee contract is first analyzed to determine if it is in scope of derivative accounting. If the contract is eligible for the scope exception from derivative accounting and it creates off-balance sheet credit exposure for the guarantor, then it is accounted for under ASC 460 and the credit impairment standard under ASC 326-20. | |
| Issue: Recognition of revenue from tuition fees | Status: Final Full text available here1 |
| What is the period over which an educational institution recognizes revenue from tuition fees? | |
In the fact pattern discussed by the IFRS IC, students attend the educational institution for approximately 10 months of the year and have a summer break of approximately two months. During the summer break the educational institution’s academic staff take a four-week holiday and use the rest of the time to wrap up the previous academic year and prepare for the next academic year. During their four-week holiday, the academic staff continue to receive salary but provide no teaching services. During this four-week period, non-academic staff provide some administrative support while the educational institution continues to receive and pay for services. Applying IFRS 15, the educational institution recognizes revenue from tuition fees over time. The question asked was whether the educational institution is required to recognize revenue evenly over the academic year (10 months), evenly over the calendar year (12 months) or over a different period. Based on the evidence gathered, the IFRS IC noted that there is no diversity in accounting for revenue from tuition fees. Any differences in the period over which educational institutions recognize revenue from tuition fees rather result from differing facts and circumstances. Consequently, the IFRS IC concluded that the fact pattern does not have widespread effect and decided not to add a standard-setting project to the work plan. | |
| Under US GAAP, the method used to recognize tuition fee revenue should align with the transfer of educational instruction services to the students. Depending on the facts and circumstances of each educational institution, recognizing revenue ratably over the academic period is typically appropriate. | |
| Issue: Assessing indicators of hyperinflationary economies | Status: Tentative Full text available here1 |
| When does an economy become hyperinflationary? | |
The IFRS IC received the following questions on identification of when an economy becomes hyperinflationary:
Paragraph 3 of IAS 29 includes the following characteristics for a hyperinflationary economy: the general population prefers to invest wealth in non-monetary assets or stable foreign currency rather than their local currency to maintain purchasing power; monetary values are regarded in terms of a stable foreign currency, with prices being quoted in that currency; credit sales and purchases compensate for expected loss of purchasing power, even over shorter periods; interest rates, wages, and prices are linked to a price index; and the cumulative inflation rate over three years is approaching or exceeds 100%. Based on the evidence gathered, the IFRS IC noted that there is no diversity in understanding the requirements for assessing when an economy becomes hyperinflationary. IFRIC IC noted the following on the questions raised:
Consequently, the IFRS IC concluded that the questions raised do not have widespread effect and decided not to add a standard-setting project to the work plan. | |
| Under US GAAP, a hyperinflationary economy is indicated by cumulative inflation of approximately 100% or more over a three-year period. Unlike IFRS Accounting Standards, if the cumulative inflation rate over three years is higher than 100%, then the economy is highly inflationary in all instances. | |
| Issue: Recognition of intangible assets resulting from climate-related expenditure | Status: Tentative Full text available here1 |
| Should an entity’s expenditure for carbon credits and research and development activities be recognized as intangible assets? | |
In the fact pattern discussed by the IFRS IC, the entity makes a commitment to reduce a percentage of its carbon emissions by 2030. To achieve its 2030 commitment, the entity has undertaken various affirmative actions. The initiative undertaken by the entity typically involve creating teams with expertise to develop solutions for emissions reductions specific to the entity or its sector that will result in the creation of intellectual capital. In applying IAS 37, the entity for its 2023 fiscal year-end concludes that its 2030 commitment and subsequent actions have created a constructive or legal obligation. The entity considers the criteria in paragraph 14 of IAS 37 (discussed in a separate agenda decision) to determine whether to recognize a provision. The question asked was whether in 2024 the entity’s investments in carbon credits and expenditure for research and development activities resulting in intellectual capital meet requirements to be recognized as intangible assets. The IFRS IC noted that the IASB has added to its reserve list a project on Pollutant Pricing Mechanisms (PPMs), some of which include the use of carbon credits. Since the IASB is expected to decide at a future meeting whether to start a project on accounting for PPMs, the IFRIC IC decided not to consider the question about accounting for carbon credits separately from the IASB’s research on PPMs. Therefore, the IFRS IC only considered the question about accounting for expenditure on research and development activities. Evidence gathered by the IFRS IC indicated no material diversity in the accounting for expenditure on research and development activities, including for innovation programs associated with climate-related commitments described in the fact pattern. Consequently, the IFRS IC concluded that the fact pattern does not have widespread effect and decided not to add a standard-setting project to the work plan. | |
| Under US GAAP, like IFRS Accounting Standards, research costs are generally expensed as they are incurred. Unlike IFRS Accounting Standards, except for certain computer software and direct-response advertising costs associated with acquiring or renewing insurance contracts, all other internally generated development costs are expensed as they are incurred. | |
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 their 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.
1 Once finalized and approved by the IASB, all Agenda Decision are available here. Before finalization, a tentative Agenda Decision is usually available in the IFRIC Update summarizing the IFRS IC meeting where it was first discussed.
2 IFRS 17, Insurance Contracts
3 IFRS 15, Revenue from Contracts
4 IAS 37, Provisions, Contingent Liabilities and Contingent Assets
5 ASC 460, Guarantees
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