As IFRS (International Financial Reporting Standards) are evolving fast, we continue our focus on the latest IASB’s (International Accounting Standards Board) updates. Since our last blog published in July 2020, the following publications have been issued by the IASB:
Interest rate benchmark, phase 2 (amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16)
These amendments arise from the ongoing reform of interest rate benchmarks. The Financial Stability Board has encouraged local jurisdictions to progressively replace current benchmarks, such as IBOR, with alternative nearly risk-free rates. In September 2019, the Board issued first amendments (phase I) that provide temporary exceptions from applying specific hedge accounting requirements during the period of uncertainty arising from the reform.
These new amendments (phase 2) are wider and relate to changes in the basis for determining contractual cash flows of financial assets, financial liabilities and lease liabilities, hedge accounting and disclosures.
The replacement or reform of an interest rate benchmark is likely to change the basis for determining the contractual cash flows of a financial asset or financial liability. In the absence of any relief from the requirements in IFRS 9, the consequences would have been important: derecognition of the financial instrument or recognition of a gain or loss. The new amendments provide a practical expedient so that a company will not have to derecognise or adjust the carrying amount of financial instruments for changes required by the reform, but will instead update the effective interest rate to reflect the change to the alternative benchmark rate.
As regards hedge accounting, the amendments allows a company not to discontinue its hedge accounting solely because it makes changes required by the reform, if the hedge meets other hedge accounting criteria. Finally, the amendments add new disclosure requirements about new risks arising from the reform and how the transition to alternative benchmark rates is managed.
Discussion paper for business combinations under common control
Discussion paper is a preliminary step for research projects before developing an exposure-draft. Business combinations under common control are mergers and acquisitions involving companies within the same group. These combinations are common; however, no IFRS Standard specifically applies to them. As a result, companies currently report these combinations in different ways. Some use the acquisition method as defined in IFRS3; others use different book-value methods.
The discussion paper first proposes criteria to choose between acquisition method and book-value method depending on the business combination’s characteristics. This is summarized as follows:
The discussion paper then gives guidance on how each method should be applied in case of a business combination under common control.
As regards acquisition method, some adjustments to the current practice may be questioned as the consideration paid may be set by the controlling entity and not negotiated at arm’s length.
A book-value method is not described in current IFRS Standards. In practice, a variety of book-value methods are used. The Board’s view is that IFRS Standards should prescribe a single book-value method. For example, the receiving company would have to measure the assets and liabilities received at their book values reported by the transferred company rather than the book values reported by the controlling entity. The discussion paper also states that the difference between the consideration paid and the assets and liabilities received should be recognised in equity, which is consistent with current practice.
The discussion paper is open to comment until 1 September 2021.
Update of the Board’s Work Plan
The latest workplan is available here on the official IFRS website.