Sharp eyed amongst you may have spotted a new project recently added to the IASBs work plan – “IAS 8 accounting policy changes resulting from agenda decisions”. The amendment that the IASB are proposing will relax the threshold for arguing impracticability arising from a voluntary change of accounting policy when that change arises from an IFRIC agenda decision. Let’s analyse this in more depth…
Firstly, we need to understand the nature of an IFRIC agenda decision. These are published by IFRIC when the results of their work concludes, after IASB agreement to the conclusion, that no amendment to Standards are required, and no Interpretation is necessary. This may be because the area of concern is not considered to be sufficiently material, or is of very narrow application, or because diversity in practice may be not great, or because the existing Standard is sufficiently clear as to its intention. It is this latter circumstance that we are particularly interested in – because the agenda decision when approved sets out the argument(s) for concluding that the Standard is clear. Now although such a published argument is non-GAAP, it is however persuasive, and could lead to an entity having to revise an accounting policy. By definition, such a change of accounting policy is not by reason of a new IFRS, but a voluntary change, requiring retrospective application.
Consider an example. An entity has, for some years, applied IFRS 9 to its financial instruments, and it makes an accounting policy decision that the fair value changes arising in respect of particular equity instruments held will be recorded through OCI (paragraph 4.1.4). Some of these financial assets held are shares in fixed-life entities. Although the financial reporting team understand the definition of equity instruments as set out in IAS 32, they reason that because in certain circumstances an issued instrument, whilst having the characteristics of a financial liability, may be accounted for by the issuer as an equity instrument (for example, shares in a fixed life entity, as described in paragraphs 16C and 16D of IAS 32), they therefore determine that such shares held are eligible for the accounting treatment of fair value through OCI. Not an unreasonable argument, you might feel, and a reading of IFRS 9 would not appear to deny the approach. And so the entity has applied this approach both this year and in previous years.
Now some of you will have examined the current work plan of the IFRIC, and will have noted that the subject matter of the example set out above is part of the IFRIC open items list. And there is yet to be a published agenda decision. But the indications are that the IFRIC and IASB intend to make it clear, in an agenda decision, that the suggested practice is incorrect (a financial liability is not also an equity instrument, and so in the context of the fair value election in IFRS 9, such instruments held are not eligible for the “through OCI” election. A reference to this issue is also made in the [non-GAAP] basis for conclusions of IFRS 9 BC5.21). This will force the entity in my example to change its accounting policy… not through the issue of a new IFRS… but voluntarily, in order to “provide reliable and more relevant information… (paragraph 14 (b) IAS 8).
Now IAS 8, as you all know, requires that a voluntary change of accounting policy must be effected retrospectively, by restating prior periods, subject to only one exception… impracticability. Impracticability is defined in paragraph 5 of IAS 8, and expanded on in paragraphs 50-53 of that standard. Putting aside the question of whether the entity in my example would be “… unable to apply the requirement after making every reasonable effort to do so…”, could it be appropriate to introduce a further relaxation of the impracticability description, by including a change in accounting policy brought about by an IFRIC agenda decision? (In fact, in these circumstances, it is difficult to imagine that the entity might find the requirement impracticable, but other IFRIC agenda decisions could be far more challenging to apply retrospectively, for example a decision requiring fair value to be identified retrospectively).
So, at last we have got to the reasoning for this new (and, frankly, unexpected) project. For some of you, my article has identified a process you were unaware of, whereby our GAAP understanding is improved by the publication of an IFRIC agenda decision (a non-GAAP publication). This process is important, and there have been many, many such agenda decisions over the last 10 years or more. For example, does “cost” in the context of the purchase of a significant influence and the subsequent application of the equity method, include the professional fees spent? IAS 28 paragraph 10 does not make it clear. But an IFRIC agenda decision in July 2009 makes it clear that guidance in other IFRSs clearly include such costs that are ‘directly attributable to the acquisition…’, and so cost for the purchase of an associate should include such costs. Or another recent example arose from the request to interpret the meaning of ‘close members of the family’ in the context of IAS 24. So as a straightforward practical process, those of you who are grappling with a difficult accounting issue that appears to be not precisely dealt with in the Standards should look at the past IFRIC agenda decisions – there are more than 200 of them (some may now be superseded) going back to 2005, and they are free to access!! (http://www.ifrs.org/supporting-implementation/how-the-ifrs-interpretations-committee-helps-implementation/#agendas)
Others of you will have found the arguments about what is an equity instrument when held as a financial asset particularly interesting and challenging. You should watch out for the finalized IFRIC agenda decision, expected in the next few months.
Still others amongst you will have found the discussion about what may or may not be considered ‘impracticable’ of interest. This is a subject I shall come back to sometime in the future, not least because I find many accountants who equate impracticability with “undue cost or effort” or “delay”.
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