IASB and ISSB Updates
Summaries of recently held meetings
Consultation on Agenda Priorities
The staff previously stated the ISSB’s intention to publish the RFI in Q4 of 2022. Due to the need to strongly emphasise foundational activities—and the importance of IFRS S1 and IFRS S2—the staff now expect to publish an RFI in the first half of 2023. The ISSB supported focusing on the work to build on the foundation established by IFRS S1 and IFRS S2, once finalised, and new research and standard-setting for stakeholder input to inform the IASB’s decisions on the future work plan.
General Sustainability-related Disclosures
This was the first decision-making session of the ISSB in relation to the exposure drafts (EDs). The IASB confirmed that information is provided to meet the information needs of the primary users of general purpose financial reporting who are “existing and potential investors, lenders and other creditors”, in alignment with the IASB’s Conceptual Framework and decided to remove “enterprise value” from the objective and from the definition of materiality which would create alignment with the IASB’s Conceptual Framework but not fundamentally change the focus of the required disclosures. Additional resources and language would clarify the concept of enterprise value and the scope of sustainability-related financial information required. The ISSB also decided to introduce a requirement to disclose the process of identifying and disclosing material information and/or materiality judgments and decided not to use the term “significant”.
The ISSB confirmed the requirements for an entity to disclose: its absolute gross Scope 1 and Scope 2 greenhouse gas (GHG) emissions generated during the reporting period, including separate disclosure for the consolidated accounting group and unconsolidated investees; and its Scope 3 GHG emissions, considering the 15 Scope 3 GHG emissions categories described in the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard. The ISSB will consider ways to help entities meet the Scope 3 disclosure requirements, such as deferring the effective date for this disclosure or developing additional guidance. The ISSB decided to proceed with the proposal that entities use the GHG Protocol Corporate Standard. However, entities that have been using a different measurement method would be permitted to do so during a transition period, or while a jurisdiction requires use of that other method.
General Sustainability-related Disclosures and Climate-related Disclosures
The ISSB decided to make some drafting changes that the staff think would improve the interoperability with proposals published in Europe and the US. The ISSB confirmed the use of the TCFD pillars for structuring the core content in IFRS S1 and IFRS S2 and confirm the meaning of the global baseline. In addition to the recommendations in the other papers, the ISSB decided to confirm that time horizons not be defined for short, medium and long term; that disclosures be required about the effects of climate-related risks and opportunities on the entity’s financial position, financial performance and cash flows for the reporting period (i.e. the current effects); that disclosures are not required to be reported separately for physical risks, transition risks and climate-related opportunities; that separate disclosures be required about assets subject to physical and transition risks and climate-related opportunities, in the form of metrics; the disclosures proposed in relation to climate resilience; to add a requirement to disclose whether and how an entity uses climate-related scenario analysis to inform the identification of climate-related risks and opportunities; and use the term “carbon credit” instead of “carbon offset”.
The ISSB will begin alignment around the strategy for integrating industry-based materials into IFRS Sustainability Disclosure Standards, including the role of the SASB Standards in [draft] IFRS S1, the industry-based requirements in Appendix B of [draft] IFRS S2, improving the international applicability of the SASB Standards, the ISSB’s upcoming consultation on agenda priorities and advancing SASB projects inherited by the ISSB. All ISSB members supported that IFRS S2 should maintain the requirement that entities provide industry-specific disclosures. They also supported that the ISSB classify the content in Appendix B as illustrative examples, while stating the intention to make Appendix B mandatory in the future, subject to further consultation.
The IASB decided that the final Accounting Standard retains the definition of allowable expense proposed in the ED, clarifies that a regulatory agreement may determine the amount that compensates for an allowable expense using the same or a different basis from the basis an entity uses for measuring the allowable expense in accordance with IFRS Accounting Standards; and clarifies the treatment of allowable expenses based on benchmarks and includes examples to help entities identify differences in timing in those cases. The IASB also decided that the final Accounting Standard retain the proposals in the ED for entities to account for regulatory assets or regulatory liabilities arising from differences between the regulatory recovery period and assets’ useful lives when there is a direct relationship between an entity’s regulatory capital base and its property, plant and equipment; provides guidance to help entities determine when there is no direct relationship between their regulatory capital base and their property, plant and equipment; and requires entities that have concluded there is no direct relationship between their regulatory capital base and their property, plant and equipment to provide disclosures to enable users of financial statements to understand the reasons for their conclusion.
Contractual Cash Flow Characteristics
The IASB decided that IFRS 7 be amended to require disclosure of, for each class of financial assets and financial liabilities not measured at fair value through profit or loss, a qualitative description of the nature of the contingent events that could change the timing or amount of contractual cash flows; quantitative information about the potential range of changes to contractual cash flows that could result from the contractual terms; and the gross carrying amount of financial assets and amortised cost financial liabilities subject to these contractual terms. The effective date would be set after the proposals have been exposed.
The purpose of this meeting was to review the progress of the equity method research project. The staff acknowledged that developing solutions to the application questions has taken longer than anticipated, but they still think it is possible to develop solutions. The IASB decided to continue the research project with its current objective and approach.
The IASB decided to shorten the comment period to 30 days for the Proposed IFRS Accounting Taxonomy Update for Lease Liability in a Sale and Leaseback and Non-current Liabilities with Covenants.
Maintenance and consistent application
The IASB has on its work plan a project to make three targeted improvements to IAS 37, including one in relation to the discount rate an entity applies in measuring a provision. The IASB is considering developing proposals to specify in IAS 37 whether that rate should reflect its own performance risk. The staff are gathering information to help the IASB reach a tentative decision on this question at a future meeting. In addition, no IASB members objected to the publication of three IFRS Interpretations Committee agenda decisions: Multi-currency Groups of Insurance Contracts (IFRS 17 and IAS 21); Special Purpose Acquisition Companies (SPAC)—Accounting for Warrants at Acquisition; and Lessor Forgiveness of Lease Payments (IFRS 9 and IFRS 16).
Disclosure Initiative—Targeted Standards-level Review of Disclosures
The IASB decided to develop a middle ground approach to drafting disclosure requirements with the aim of providing a better framework for entities to use judgement to identify and disclose useful information to users of financial statements. Applying such an approach, disclosure objectives would be accompanied by a prescriptive list of items of information that an entity should disclose to meet the objectives. The IASB decided to publish the Guidance for the Board as a document posted on the IFRS Foundation website. Furthermore, the IASB decided not to proceed with any further work on the disclosure requirements in IFRS 13 and IAS 19.
Post-implementation Review (PIR) of IFRS 9—Classification and Measurement
The staff are not recommending any changes to the requirements in IFRS 9. However, to increase the usefulness and transparency of information provided about the overall performance of equity investments for which the OCI presentation election was made, the staff recommend amending paragraph 11A of IFRS 7 to require disclosure of the aggregated fair value of equity investments for which the OCI presentation option is applied at the end of the reporting period and changes in fair value recognised in OCI during the period. The IASB also decided to continue to consider as part of this review the accounting for BACS transfers and to explore permitting the derecognition of financial liabilities before settlement date if specified criteria are met. The staff plan to bring a paper back in November.
Disclosure Initiative—Subsidiaries without Public Accountability: Disclosures
In this session, the IASB discussed the objective and structure of the new standard and the approach to developing disclosure requirements. The IASB agreed with all of the staff recommendations.
Goodwill and Impairment
The purpose of this meeting is to initiate the IASB’s discussion on the subsequent accounting for goodwill. The IASB will not be asked to make any decisions at this meeting. The staff reminded the IASB of its preliminary decision to retain the impairment-only model for the subsequent accounting of goodwill. The staff also provided an overview of respondents’ feedback on the Discussion Paper (DP) and a summary of additional information and recent developments since the feedback on the DP. No decisions were made, but the IASB indicated that it has sufficient information to be in a position to make a decision at a future meeting.
The ISSB Chair gave an overview of the first meetings of the ISSB, including this week’s meeting and decisions made to date. The ISSB Chair reiterated the importance of building a global baseline for sustainability reporting and therefore, the ISSB is working closely with the European Financial Reporting Advisory Group (EFRAG) who is currently developing European Sustainability Reporting Standards (ESRS). He also listed the various consultative groups that have been established over the last few months to inform the standard-setting process of the ISSB.
The staff recommended that when measuring the carrying amount to be derecognised in a partial disposal would identify the cost of the specific portion of the investment being disposed of or, if it cannot be identified, apply the last-in, first-out method. They also recommended relief to allow the weighted average method to be used as a practical expedient for equity method investments held prior to the transition date. Several IASB members expressed concerns about the approach and more work will need to be undertaken. The IASB decided that when an equity accounted investee issues equity instruments, and the investor continues to apply the equity method, an ownership interest increase would be treated as a purchase of an additional interest whereas a decrease would be a partial disposal. The IASB also discussed application questions related to transactions between an investor and its associate or joint venture and acknowledged conflicts between the requirements in IFRS 10 and those in IAS 28.
Goodwill and Impairment
The IASB made several changes to its preliminary views in relation to disclosures about the objectives and rationale for the business combinations an entity has made, including an exemption from some of the disclosure requirements when disclosure would be seriously prejudicial to the entity’s objectives for the business combination. The IASB decided that, if some disclosure requirements are required only for a sub-set of business combinations, the focus should be on strategically important business combinations—i.e. those for which failing to meet the objectives would seriously put at risk the entity achieving its overall business strategy.
Post-implementation Review (PIR) of IFRS 9—Classification and Measurement
At this meeting, the IASB discussed questions relating to matters raised by respondents to the RFI that are not covered by other staff papers. The staff recommended that the IASB not consider further issues related to: derecognition and whether ‘substantially all of the risks and rewards’ of a financial asset have been transferred; assessing whether the entity has a practice of settling similar contracts net in cash when considering using the ‘own use exemption’; the disposal of equity instruments classified as FVTOCI; whether interest rates contractually linked to an index that adjusts the time value of money based on a market interest rate and/or inflation rate introduce ‘leverage’ in the context of recent significant rises in inflation rates; and whether rates including a leverage factor imposed by the government should follow IFRS 9 for regulated rates guidance and, if so, how to consider whether the rate provides exposure to risks or variability in the contractual cash flows that are inconsistent with a basic lending arrangement. The staff therefore recommend that questions about purchased or originated credit-impaired financial assets be considered as part of the upcoming PIR of the impairment requirements in IFRS 9. IASB members were generally supportive of the staff suggestions, but no decisions were made.
Financial Instruments with Characteristics of Equity (FICE)
The IASB decided to clarify that: IAS 32:23 would apply to an obligation to redeem own equity instruments settled in a variable number of another type of own equity instruments. It decided that on expiry of a written put option on own equity instruments: the financial liability would be reclassified to the same component of equity as that from which it was reclassified on initial recognition of the put option; and the cumulative amount in retained earnings related to the put option would be permitted to be reclassified to another component of equity but amounts previously recognised in profit or loss on remeasuring the financial liability would not be reversed. Furthermore, written put options or forward purchase contracts on own equity instruments are presented gross rather than net.
Primary Financial Statements
The IASB decided not to proceed with any specific requirements for unusual income and expenses. It also decided that all entities would classify income and expenses from associates and joint ventures accounted for using the equity method in the investing category. It withdrew the proposal that an entity classify incremental expenses in the investing category but confirmed the proposal that the specified subtotals listed (in paragraph 104 of the ED) are not management performance measures and adding ‘operating profit or loss and income and expenses from investments accounted for using the equity method’ to the list of specified subtotals. Lastly, it withdrew the proposed prohibition on a mixed presentation of operating expenses.
The staff provided an update on the IASB’s work plan since its last update in May 2022. The IASB decided to consider in the second half of 2023 when to begin the PIRs of the hedge accounting requirements of IFRS 9 and the requirements of IFRS 16. The IASB also discussed clarifying the purpose of a PIR and managing stakeholder expectations about their objectives.
PIR of IFRS 15 Revenue from Contracts with Customers
The staff anticipate that they will undertake outreach from October 2022 to Q1 2023. The RFI is expected to be published in H1 2023, with a 120-day comment period.
Contractual Cash Flow Characteristics
In 2022, the IASB added a project to clarify particular aspects of the IFRS 9 requirements for assessing a financial asset’s contractual cash flow characteristics (i.e. the ‘solely payments of principal and interest’ (SPPI) requirements). The IASB decided to clarify that for contractual cash flows to be SPPI, a basic lending arrangement does not give rise to variability in cash flows due to risks or factors that are unrelated to the borrower, even if such terms and conditions are common in the specific market in which the entity operates. The IASB also decided to set out the factors when a financial asset that includes contractual terms that change the timing and amount of the contractual cash flows can be consistent with a basic lending arrangement and therefore have SPPI cash flows. The IASB further decided to clarify that the reference to ‘instruments' in paragraph B4.1.23 of IFRS 9 include lease receivables.
The staff presented papers summarising their reviews of disclosure-related stakeholder feedback from research carried out between 2018 and 2021, relevant academic literature and relevant jurisdictional requirements and a sample of annual filings. Overall, IASB members expressed support for the proposed direction of the project and for the three suggested areas for further research. It was noted that it was very important to communicate clearly to stakeholders that these are the only topics that will be taken forward in this project, and that other potential areas identified have now been scoped out. The IASB was not asked to make any decisions.
Maintenance and consistent application
At its June 2022 meeting, the IFRS Interpretations Committee voted to finalise the agenda decision Cash Received via Electronic Transfer as Settlement for a Financial Asset (IFRS 9). The staff recommended that, rather than finalising the agenda decision, the IASB explore amending IFRS 9. In relation to the forthcoming amendments to IAS 1 for non-current liabilities with covenants, the staff recommended that the IASB clarify requirements around the early application of the 2020 amendments and the 2022 amendments. IASB members agreed with the staff recommendations. Several IASB members noted that the IASB should move quickly as it affects almost all entities in all industries. The Chair acknowledged this but said that it is important to note that the staff recommendation uses the term ‘explore standard-setting’ which means that it is not certain yet that standard-setting will be undertaken. Only if the issue can be resolved in a timely fashion without significant disruption would the IASB move to standard-setting.
The staff recommended that the IASB clarify that an entity would apply IFRIC 12 first and then, apply the requirements of the proposed new Standard to any remaining rights and obligations to determine if the entity has regulatory assets or regulatory liabilities. IASB members generally agreed that IFRIC 12 should be applied before the new Standard, however there were mixed views about how to achieve this.
General Sustainability-related Disclosures—Summary of Comments
The ISSB received over 700 comment letters and/or surveys. Almost all respondents supported the ISSB’s overall aim to develop a comprehensive global baseline of sustainability-related financial disclosures for the capital markets. However, many respondents asked for greater clarity, support, guidance and examples to enable effective application of the ED IFRS S1. Many respondents also suggested that the ISSB should give more consideration to the range of capabilities and preparedness of entities around the world, especially for smaller entities and entities in emerging markets, to apply IFRS S1. Many respondents emphasised the importance of close collaboration with the IASB and the importance of improving understandability, connectivity and consistency by using shared definitions and concepts across IFRS Sustainability Disclosures Standards and IFRS Accounting Standards. In addition, many respondents observed that key differences in concepts, terminologies, and definitions remain between the ISSB’s proposals and jurisdictional initiatives. They emphasised the importance for the ISSB to work together with jurisdictions, including Europe and the United States, in developing a global baseline of sustainability-related financial disclosures.
Climate-related Disclosures—Summary of Comments
The ISSB received comment letters and survey responses from nearly 700 respondents. The proposals in the ED were generally well-received, in particular by users of general purpose financial reporting, who expressed strong agreement with the proposed objective and the specific proposals. While there was broad support for IFRS S2, many respondents also asked for greater support, guidance and examples to enable effective application of the proposals.
Plan for redeliberations
Noting that there has been widespread support for the proposed requirements in the EDs, the staff suggested focusing on a limited number of topics for redeliberations, which are for joint topics relevant to both EDs: scalability, and current and anticipated effects of sustainability-related and climate-related risks and opportunities. For IFRS S1: enterprise value; breadth of reporting required; 'significant’ sustainability-related risk or opportunity; identifying significant sustainability-related risks and opportunities and disclosures; application of the materiality assessment; connected information; and frequency of reporting. For IFRS S2: strategy and decision-making, including transition planning; climate resilience; greenhouse gas emissions; and industry-based requirements, including financed and facilitated emissions.
Most respondents to the consultation suggested that the ISSB should give more consideration to the range of capabilities and preparedness of entities around the world to apply the proposals in the EDs. At this meeting, the ISSB members were asked (i) whether they want to explore mechanisms to enable the requirements to be scalable, (ii) for feedback on the proposed mechanisms for addressing scalability and (iii) for feedback on the factors that should be used when evaluating which mechanism could be used for addressing particular scalability challenges.
Climate-related Disclosures—Financed and Facilitated Emissions
The ED IFRS S2 proposed the addition of “transition risks exposure” as a disclosure topic in the industry-based disclosure requirements for four industries–commercial banks, investment banking and brokerage, asset management and custody activities and insurance. The staff thinks the ISSB will need to consider in its future redeliberations the scope of the proposals, data considerations, industry breakdown, complexity and requests for increased flexibility.
IASB Update—developing the IASB’s future work programme
In the presentation, the staff outlined a breakdown of the IASB’s activities, its projects, key messages from the IASB’s agenda consultation and financial reporting issues added to the IASB’s work plan. The staff also provided a closer look at the IASB projects on Intangible Assets, Climate-related Risks in the Financial Statements and Management Commentary.
As this was a meeting to discuss feedback the ISSB was not asked to make any decisions. The summary meeting notes capture the main reflections of the ISSB members. Importantly, the ISSB supported the proposed redeliberation plan. The ISSB will start to discuss specific issues in October.
Goodwill and Impairment (IASB) and Identifiable Intangible Assets and Subsequent Accounting for Goodwill (FASB)
The IASB has, and the FASB had, on their respective agendas projects covering the accounting for goodwill and intangible assets acquired in a business combination. The purpose of this meeting was to provide an opportunity for FASB and IASB members to discuss the status of the respective projects; the subsequent accounting for goodwill—including the FASB’s progress with developing an amortisation-with-impairment model and recent decision to deprioritise and remove the project from its technical agenda, and the IASB’s research on this topic; and the redeliberations of the IASB in relation to disclosures about business combinations. FASB members updated the IASB as to why they had removed the project from the agenda. One of the main reasons why the FASB could not agree on a way forward was that they did not have a clear objective as to whether the project was to reduce cost or to increase benefits. The IASB Chair highlighted that the IASB would have to consider the objective of their project before making a decision on amortisation in November. The boards discussed whether the impairment model could be improved and whether some intangibles could not be separated from goodwill. A FASB member asked whether the IASB would be prepared to split the amortisation part of the project from the disclosure part of the project if they ran into similar difficulties as the FASB. The IASB Chair confirmed that they are prepared to do so if necessary. The other main discussion point was the exemption the IASB tentatively decided to provide with regard to disclosures that are commercially sensitive.
Both the IASB and the FASB are currently undertaking, or will undertake, projects whose objectives include providing users of financial statements with more disaggregated information. The purpose of this meeting was to provide both boards with an opportunity to share comments and ask questions about these projects. The boards discussed their projects on the statement of cash flows; the FASB has already started whereas the IASB has only just added a research project. They discussed investor calls for more disaggregation and more information about direct cash flows. They also discussed income statement disaggregation, including the difficulty of defining unusual items. A suggestion was made by a FASB member that this was better left for management commentary.
The boards discussed the results of the FASB’s research and outreach related to digital assets, which led the FASB to add a project to its technical agenda—Accounting for and Disclosure of Crypto Assets. The IASB outlined its work and its decision not to add a project on cryptocurrencies and related transactions to its workplan. The discussion mainly focused on when to start addressing the crypto asset issue, particularly whether the boards should act now while the issue is not pervasive (i.e. leading the market) or wait until it becomes pervasive (i.e. following the market). There were strongly held, but opposite, views within the IASB about whether the IASB should start a project.
2021 Agenda Consultation (FASB) and Third Agenda Consultation (IASB)
Both the IASB and the FASB have recently finalised their agenda consultations. The purpose of this meeting was to provide both boards with an opportunity to share comments and ask questions about these consultations. The FASB’s new project on software costs sparked some interest among IASB members. The IASB Chair noted that both boards will look into issues around intangibles and cash flow statements and that US GAAP and IFRS are not converged for those areas. He said it would be good to exchange information between the boards on these projects, keeping the broader constituency of both boards in mind.