A summary of 2024 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. So far in 2024, the IFRS IC has finalized two Agenda Decisions addressing certain post-acquisition payments in business combinations and climate-related commitments. The IFRS IC is currently reviewing feedback on its 2023 tentative Agenda Decision related to segment reporting, and discussions should resume later this year. 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. 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.
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 here.1 |
| 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. The IFRS IC, therefore, 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 in accordance with 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: Tentative 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, which refers to material items of income and expense disclosed in accordance with paragraph 97 of
The IFRS IC observed that an entity considers an item for disclosure without regard to whether that item is presented or disclosed when applying a requirement other than that in paragraph 97 of IAS 1. The IFRS IC tentatively 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. | |
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.
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