JANUARY 2013: LATEST IASB EXPOSURE DRAFTS

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Our article provides an overview of the latest Exposure Drafts issued by the IASB in November and December 2012:

• ED/2012/3 Equity method: share of other net asset changes
  
• ED/2012/4 Classification and measurement: limited amendments to IFRS 9
  
• ED/2012/5 Clarification of acceptable methods of depreciation and amortisation
  
• ED/2012/6 Sale or contribution of assets between an investor and its associate or joint venture
  
• ED/2012/7 Acquisition of an interest in a joint operation
  

ED 2012/3 Equity method: share of other net asset changes
The IASB proposes amendments to IAS 28 Investments in Associates and Joint Ventures requiring an investor to recognise in its equity its share of so-called “other net asset changes”. These are changes in the net assets of the investee which are not recognised in the investee’s profit or loss or OCI, and that are not distributions received. Examples include an issue of shares by an investee to third parties or movements in the investee’s equity arising from the purchase of shares that belong to its non-controlling shareholders. The background is that some entities viewed paragraphs of IAS 28 as being inconsistent, or at least unclear.
Moreover, the cumulative amount recognised in the investor’s equity for the investee’s other net asset changes, should be reclassified to profit or loss when the investor discontinues using the equity method.
The IASB proposes retrospective application of the amendments.

ED/2012/4 Classification and measurement: limited amendments to IFRS 9 Financial Instruments
As part of the phased project to replace IAS 39, the IASB issued chapters of IFRS 9 in 2009 and 2010, specifying the classification and measurement of financial assets and financial liabilities. Although IFRS 9 will only be mandatorily effective from 2015, the IASB proposes amendments to these chapters to:

• reduce key differences with the corresponding tentative US requirements;
  
• address specific application questions relating to IFRS 9 raised by interested parties; and
  
• take into account the interaction with its project on insurance contracts.
  

The ED proposes the following amendments to IFRS 9, which will mainly affect entities in the financial services sector:

• Introduce a fair value through other comprehensive income (FVOCI) category for debt instruments held in a business model whose objective is to collect contractual cash flows and for sale. The accounting treatment of assets assigned to this category would be similar to the available-for-sale category of IAS 39.
  
• Guidance has been developed on how to account for transfers of financial assets into and out of the new FVOCI category. Moreover, the existing option to designate on initial recognition a financial asset as at fair value through profit or loss (Fair Value Option) has been extended to debt instruments held by the entity that would otherwise belong to the FVOCI category.
  
• In IFRS 9, one prerequisite for amortised cost measurement of financial assets is that the objective of the business model in which an asset is held is to collect contractual cash flows consisting solely of payments of principal and interest. The IASB proposes additional application guidance to clarify when this criterion is met.
  
• The IASB also proposes to amend transition guidance. The most important change is that companies should no longer be permitted to early adopt previous versions of IFRS 9 once the final version of the standard is issued. Instead, it would only be permitted to early adopt the standard in its entirety. An exception to this is proposed: entities should be able to early adopt only the requirement for presenting in OCI gains and losses attributable to changes in an entity’s own credit risk for financial liabilities designated as at FVTPL under the Fair Value Option.
  

ED/2012/5 Clarification of acceptable methods of depreciation and amortisation
The ED proposes amendments to IAS 16 Property, Plant & Equipment and IAS 38 Intangible Assets clarifying that revenue-based methods should not be used to calculate depreciation and amortisation expense. The rationale is that these methods reflect the economic benefits generated by assets, rather than the consumption of those economic benefits. Conceptually, depreciation methods should reflect the pattern of consumption.
However, there would be one exception to this rule in relation to broadcast rights in the media industry provided that there is a linear relationship between viewer numbers and advertising revenue. This is because in such situations, the result would be the same as when applying the units of production method.
Moreover, it is proposed to provide additional guidance relating to the application of the diminishing balance method: Information about technical or commercial obsolescence of the product or service output should be relevant for estimating both the pattern of consumption of future economic benefits and the useful life of the asset. Accordingly, an expected future decrease in unit selling price of the asset’s product or service output could indicate a reduction of the asset’s future economic benefits.
The IASB proposes retrospective application of the amendments.

ED/2012/6 Sale or contribution of assets between an investor and its associate or joint venture
The IASB has identified an inconsistency between the standards IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures:

• IFRS 10 requires a full gain or loss recognition approach on the loss of control of a subsidiary.
  
• IAS 28 requires a partial gain or loss recognition approach in transactions between an investor and its associate or joint venture. This means that the gains or losses are only recognised to the extent of the other investors’ interests in the investee.
  
• It is intended to resolve the issue by prescribing the following procedures:
  
• A gain or loss resulting from the sale or contribution of assets which represent a business (as defined in IFRS 3 Business Combinations) between an investor and its associate or joint venture should be recognised in full.
  
• A gain or loss on assets which do not represent a business should be recognised according to the partial gain or loss recognition approach.
  

When determining whether the assets constitute a business, it should be considered whether the sale or contribution is part of multiple arrangements that should be accounted for as a single transaction. The amendments do not address the sale or contribution of assets by an investor in a joint operation.
The IASB proposes prospective application of the amendments.

ED/2012/7 Acquisition of an interest in a joint operation
The IFRS Interpretations Committee has observed diversity in practice relating to the accounting treatment of acquisitions of interests in joint operations, which constitute businesses (as defined in IFRS 3 Business Combinations). The IASB is proposing amendments to IFRS 11 Joint Arrangements.
The acquisition of an interest in a joint operation, which constitutes a business, does not represent a business combination, since the acquirer does not obtain control. Nevertheless, the IASB proposes that business combination accounting should be applied to the extent of the entity’s interest in the assets and liabilities of the joint operation. This would (normally) include:

• recognising acquisition-related costs in profit or loss;
  
• measuring identifiable assets and liabilities at fair value;
  
• recognising deferred tax assets and deferred tax liabilities (except for deferred tax liabilities which arise from the initial recognition of goodwill); and
  
• recognising the residual as goodwill.
  

The procedure described would only apply when the acquired interest is in an existing joint operation which represents a business or in the case of the contribution of an existing business into a newly formed joint operation. However, it would not apply, if the formation of the joint operation coincides with the formation of the business.
The IASB proposes prospective application of the amendments.