25 October 2012

EFRAG's feedback statement on the IASB's ED/2012/1 Annual Improvements to IFRSs 2010-2012

EFRAG finalised its comment letter to the IASB on the ED/2012/1 'Annual Improvements to IFRSs 2010-2012' on 11 September 2012. The feedback statement describes the arguments used by EFRAG’s constituents in favour and against the proposals in the ED/2012/1 'Annual Improvements to IFRSs 2010-2012'. It also explains EFRAG’s technical analysis of those arguments and why EFRAG decided not to reflect some of the concerns received in its final comment letter.

Issue 1: IFRS 2 'Share-Based Payment': Definition of vesting conditions

The IASB identified the need to clarify the definition of a vesting condition in IFRS 2 'Share-based Payment' to ensure the consistent classification of conditions attached to a share-based payment as the standard does not separately define a performance condition or a service condition, but instead describes both concepts within the definition of vesting conditions. In addition, it intended to clarify some issues which had been raised by constituents in applying the definition of vesting condition in IFRS 2.

EFRAG’s tentative position: In its draft comment letter, EFRAG agreed with the IASB’s assessment of the issues and with the proposed amendments.

Constituents' comments: Constituents agreed with EFRAG’s tentative view and also expressed additional concerns on the drafting and identified other application issues. In addition, they noted their concerns on the increasing complexity of the standard.

Issue 2: IFRS 3 'Business Combinations': Subsequent measurement of contingent consideration

The proposed changes clarified the intention of the board that financial liabilities recognised in relation to contingent consideration should be measured at fair value. The proposed changes also removed references to ‘other applicable IFRSs’ and inserted the words ‘that meets the definition of a financial instrument’ when determining whether contingent consideration should be classified as equity or a liability. As a result, only the requirements of IAS 32 would apply.

EFRAG’s tentative position: In its draft comment letter, EFRAG agreed with the IASB’s proposed changes, but reiterated its request that when changes were being made to IFRS 9 Financial Instruments, they should also be made to IAS 39 'Financial Instruments: Recognition and Measurement'.

Constituents’ comments: Constituents raised concerns about two aspects:

1. that the amendments appeared to state that all contingent consideration was either a financial liability or an equity instruments by deleting ‘or other applicable IFRSs’ from paragraph 40 of IFRS 3; and
2. that the proposed amendments to paragraph 58 of IFRS 3 required non-financial contingent consideration liabilities to be measured at fair value through profit or loss.

A number of constituents also noted that the directions of the IFRS Interpretations Committee discussion on contingent consideration payable on acquisition of property, plant and equipments or intangible assets might not be consistent with the decisions taken in developing IFRS 3, where changes in subsequent measurement were required to be recognised in profit or loss.

Issue 5: IAS 1 'Presentation of Financial Statements': Current/non-current classification of liabilities

The IASB proposed to amend IAS 1 'Presentation of Financial Statements' so that an entity could classify a liability as non-current if it expected, and had such discretion, to refinance or roll over an existing liability for a period of at least twelve months from the balance sheet date, with the same lender at the same or similar terms.

EFRAG’s tentative position: EFRAG supported the amendments in its draft comment letter.

Constituent’s comments: Constituents supported the aim of the IASB, but expressed reservations about consistency with derecognition criteria in IAS 39/IFRS 9, particularly with respect to situations in which the loan facility was moved within the lender’s corporate structure.

Constituents were concerned that the amendments could have unintended consequences if they were not worded to reflect that what mattered was the borrower’s perspective (irrespective of who the final lender would be). A number of constituents also requested that the definition of what was meant by the same terms and conditions be moved from the Basis for Conclusions to the body of the standard.

Issue 6: IAS 7 'Statement of Cash Flows': Classification of interest paid that is capitalised as part of an asset

The proposed amendments changed IAS 7 Statement of Cash Flows to allow interest costs capitalised within Property Plant and Equipment under IAS 23 Borrowing Costs to be presented within the investing activities section of the cash flow statement rather than financing activities.

EFRAG’s tentative position: EFRAG expressed support for the amendments in its draft comment letter.

Constituents’ comments: Constituents generally supported the proposals. However some believed that the wording should be consistent with the definition of borrowing costs in IAS 23, which includes charges and some Exchange differences, as well as interest.

Press release

© EFRAG - European Financial Reporting Advisory Group