Determining whether an ENTITY is an INVESTMENT ENTITY (exception to Consolidation)

On 31 October 2012, the IASB published Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27), providing an exception to the consolidation requirements in IFRS 10 for INVESTMENT ENTITIES.

The amendments define an investment entity and introduce an exception to consolidating particular subsidiaries for investment entities. These amendments require a parent that is an investment entity to measure those subsidiaries at FAIR VALUE through Profit or Loss in accordance with IFRS 9 Financial Instruments instead of consolidating those subsidiaries in its consolidated and separate financial statements. In addition, the amendments also introduce new disclosure requirements related to investment entities in IFRS 12 Disclosure of Interests in Other Entities and IAS 27 Separate Financial Statements.

Under IFRS 10 Consolidated Financial Statements, reporting entities were required to consolidate all investee that they control (i.e. all subsidiaries). Preparers and users of financial statements have suggested that consolidating the subsidiaries of investment entities does not result in useful information for investors. Rather, reporting all investments, including investments in subsidiaries, at fair value, provides the most useful and relevant information.

Para.27 of the amendments states that :

A parent shall determine whether it is an INVESTMENT ENTITY. An investment entity is an entity that :

1. obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services;
2. commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and
3. measures and evaluates the performance of substantially all of its investments on a fair value basis.

Para.28 further states that :

In assessing whether it meets the definition described in paragraph 27, an entity shall consider whether it has the following typical characteristics of an investment entity :

1. it has more than one investment
2. it has more than one investor
3. it has investors that are not related parties of the entity; and
4. it has ownership interests in the form of equity or similar interests

The absence of any of these typical characteristic does not necessarily disqualify an entity from being classified as an investment entity. An investment entity that does not have all of these typical characteristics provides additional disclosure required by paragraph 9A of IFRS 12 Disclosure of Interests in Other Entities.

In facts and circumstances indicate that there are changes to one or more of the three elements that make up the definition of an investment entity, as described in paragraph 27, or the typical characteristics of an investment entity, as described in paragraph 28, a parent shall reassess whether it is an investment entity.

A parent that either ceases to be an investment entity or become an investment entity shall account for the change in its status PROSPECTIVELY from the date at which the change in status occurred.

An Investment Entity shall not consolidate its subsidiaries. Instead, an investment entity shall measure an investment in a subsidiary at fair value through profit or loss in accordance with IFRS 9 (HRD).

Clarifications to IFRS 15 regarding Revenue from Contracts with Customers

In May 2014, the IASB and the US national standard-setter, the FASB, jointly issued a new revenue Standard – IFRS 15 Revenue from Contracts with Customers and Topic 606 Revenue from Contracts with Customers.

Following the discussions conducted at meetings of the Transition Resource Group (TRG), which was set up jointly by the IASB and the US FASB to support companies in implementing the new revenue Standard after it was issued in May 2014, further on 30 July 2015 the IASB published for public consultation some proposed clarifications to and transition reliefs for IFRS 15 Revenue from Contracts with Customers.

The Exposure Draft proposes to clarify :

• how to identify the performance obligations in a contract;
• how to determine whether a party involved in a transaction is the PRINCIPAL (responsible for providing the goods or services) or the AGENT (responsible for arranging for the goods or services to be provided to the customer); and
• how to determine whether a licence provides the customer with a right access or a right to use the entity’s intellectual property.

In Questions for Respondents part, concerning the Question 1 – Identifying performance obligations, it states that IFRS 15 requires an entity to assess the goods or services promised in a contract to identify the performance obligations in that contract. An entity is required to identify performance obligations on the basis of promised goods or services that are distinct. To clarify the application of the concept of ‘distinct’, the IASB is proposing to amend the Illustrative Examples accompanying IFRS 15. In order to achieve the same objective of clarifying when promised goods or services are distinct, the FASB has proposed to clarify the requirements of the new revenue Standard and add illustrations regarding the identification of performance obligations. The FASB’s proposals include amendments relating to promised goods or services that are immaterial in the context of a contract, and an accounting policy election relating to shipping and handling activities that the IASB is not proposing to address. The reasons for the IASB’s decisions are explained in paragraph BC7-BC25 of the ED.

Regarding the Principal versus Agent considerations as concerned in Question 2, the ED states further that when another party is involved in providing goods or services to a customer, IFRS 15 requires an entity to determine whether it is the PRINCIPAL in the transaction or the AGENT. To do so, an entity assesses whether it controls the specified goods or services before they are transferred to the customer. To clarify the application of the CONTROL principle, the IASB is proposing to amend paragraphs B34-B38 of IFRS 15, amend Examples 45-48 accompanying IFRS 15 and add Examples 46A and 48A. The FASB has reached the same decisions as the IASB regarding the application of the control principle when assessing whether an entity is a principal or an agent, and is expected to propose amendments to Topic 606 that are the same as (or similar to) those included in this ED in this respect. The reasons for the Boards’ decisions are explained in paragraphs BC26-BC56.

In addition, the IASB also proposes two reliefs to aid the transition to the new revenue standard.

The IASB is seeking comments on this ED by 28 October 2015.

IFRS 15 regarding Revenue from Contracts with Customers, reasons for issuing the IFRS

In May 2014, the IASB and the US national standard-setter, the FASB, jointly issued a new revenue Standard – IFRS 15 Revenue from Contracts with Customers and Topic 606 Revenue from Contracts with Customers. IFRS 15 provides a comprehensive framework for recognising revenue from contracts with customers.

Reasons for issuing the IFRS

Revenue is an important number to users of financial statements in assessing an entity’s financial performance and position. However, previous revenue recognition requirements in IFRS differed from those in US GAAP and both sets of requirements were in need of improvement. Previous revenue recognition requirements in IFRS provided limited guidance, and, consequently, the two main revenue recognition Standards, IAS 18 Revenue and IAS 11 Construction Contracts, could be difficult to apply to complex transactions. In addition, IAS 18 provided limited guidance on many important revenue topics such as accounting for multiple-element arrangements. In contrast, US GAAP comprised broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions.

Accordingly, the IASB and the US national standard-setter, the FASB initiated a joint project to clarify the principles for recognising revenue and to develop a common revenue standard for IFRS and US GAAP that would :

1. remove inconsistencies and weaknesses in previous revenue requirements;
2. provide a more robust framework for addressing revenue issues;
3. improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets;
4. provide more useful information to users of financial statements through improved disclosure requirements; and
5. simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.

IFRS 15, together with Topic 606 that was introduced into the FASB Accounting Standards Codification by Accounting Standards Update 2014-09 Revenue from Contracts with Customers (Topic 606), completes the joint effort by the IASB and the FASB to meet those objectives and improve financial reporting by creating a common revenue recognition standard for IFRS and US GAAP.

IFRS 15 will be effective for annual reporting periods beginning on or after 1 January 2017. Earlier application is permitted. If an entity applies this Standard earlier, it shall disclose the fact.

IFRS 15 supersedes the following Standards :

1. IAS 11 Construction Contracts;
2. IAS 18 Revenue;
3. IFRIC 13 Customer Loyalty Programmes;
4. IFRIC 15 Agreements for the Construction of Real Estate;
5. IFRIC 18 Transfer of Assets from Customers; and
6. SIC-31 Revenue-Barter Transactions Involving Advertising Services

Latest, on 22 July 2015 the IASB issued a press release letter which confirmed a one-year deferral of effective date of IFRS 15 to 1 January 2018.

The revenue Standard was issued jointly by the IASB and the US Financial Accounting Standards Board (FASB) in May 2014 with an effective date of 1 January 2017. Both Boards have now confirmed a one-year deferral of the effective date. Companies applying IFRS continue to have the option to apply the Standard earlier if they wish to do so.

The proposed amendments to IAS 1, replacing the word ‘Discretion’ with ‘Right’

The International Accounting Standards Board (IASB) has published on 10 February 2015 the Exposure Draft of proposed amendments to IAS 1 Presentation of Financial Statements to clarify the criteria for the classification of a LIABILITY as either CURRENT or NON-CURRENT.

The proposals clarify that classification of liabilities as either current or non-current is based on the RIGHTS that are existence at the END OF THE REPORTING PERIOD. In order to make this clear, the IASB proposes :

1. replacing ‘DISCRETION’ in paragraph 73 of the Standard with ‘RIGHT’ to align it with the requirements of paragraph 69(d) of the Standard;
2. making it explicit in paragraph 69(d) and 73 of the Standard that only rights in place AT THE REPORTING DATE should affect the classification of a liability; and
3. deleting ‘UNCONDITIONAL’ from paragraph 69(d) of the Standard so that ‘an unconditional right’ is replaced by ‘a right’

The IASB also proposes making clear the link between the settlement of the liability and the outflow of resources from the entity by adding that settlement ‘refers to the transfer to the counterparty of cash, equity instruments, other assets or services’ to paragraph 69 of the Standard.

The IASB further proposes that guidance in the Standard should be reorganised so that similar examples are grouped together.

Finally, the IASB proposes that retrospective application should be required and that early application should be permitted.

Comments on the proposals in this Exposure Draft (to be received by 10 June 2015) should be submitted using one of the following methods :

• Electronically, by visiting the ‘Comment on a proposal’ page, which can be found at : go.ifrs.org/comment
• Email, by sending to : commentletters@ifrs.org
• Postal, by addressing to : IFRS Foundation, 30 Cannon Street, London EC4M 6XH, United Kingdom

Please click this link to access the Exposure Draft

Classifying Liability as CURRENT or NON-CURRENT

IAS 1 Presentation of Financial Statements states that an entity shall present current and non-current LIABILITIES as separate classification in its Statement of Financial Position except when a presentation based on liquidity provides information that is reliable and more relevant.

Paragraph 69 of IAS 1 states that an entity shall classify a liability as CURRENT when :

1. it expects to settle the liability in its normal operating cycle;
2. it holds the liability primarily for the purpose of trading;
3. the liability is due to be settled within twelve months after the reporting period; or
4. it does not have an unconditional right to defer settlement of the liability for at least 12 months  after the reporting period. Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification

An entity shall classify ALL OTHER LIABILITIES as NON-CURRENT.

Some current liabilities, as stated within paragraph 70, such as trade payables and some accruals for employee and other operating costs, are part of the WORKING CAPITAL used in the entity’s NORMAL OPERATING CYCLE. An entity classifies such operating items as current liabilities even if they are due to be settled more than 12 months after the reporting period. The same normal operating cycle applies to the classification of an entity’s assets and liabilities. When the entity’s normal operating cycle is not clearly identifiable, it is assumed to be 12 (twelve) months.

Further, paragraph 72 states that an entity classifies its financial liabilities as current when they are due to be settled within 12 months after the reporting period, even if :

1. the original term was for a period longer than 12 months, and
2. an agreement to refinance, or to reschedule payments, on a long-term basis is completed AFTER THE REPORTING PERIOD and before the financial statements are authorised for issue

If an entity expects, and has the DISCRETION, to refinance or roll over an obligation for at least 12 months after the reporting period under an existing loan facility, it classifies the obligation as NON-CURRENT, even if it would otherwise be due within a shorter period. However, when refinancing or rolling over the obligation is not at the discretion of the entity (for example, there is no arrangement for refinancing), the entity does not consider the potential to refinance the obligation and classifies the obligation as CURRENT.

When an entity breaches a provision of a long-term loan arrangement ON or BEFORE the END OF REPORTING PERIOD with the effect that the liability becomes payable on demand, it classifies the liability as current, even if the lender agreed, AFTER THE REPORTING PERIOD and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. An entity classifies the liability as current because, at the end of the reporting period, it does not have an unconditional right to defer its settlement for at least 12 months after that date.

However, an entity shall classify the liability as non-current if the lender agreed BY THE END of the REPORTING PERIOD to provide a period of grace ending at least 12 months after the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.

Latest, paragraph 76 of IAS 1 states that in respect of loans classified as CURRENT LIABILITIES, if the following events occur between the end of the reporting date and the date the financial statements are authorised for issue, those events are DISCLOSED as NON-ADJUSTING EVENTS in accordance with IAS 10 Events after the Reporting Period :

• refinancing on a long-term basis;
• rectification of a breach of a long-term loan arrangement; and
• the granting by the lender of a period of grace to rectify a breach of a long-term loan arrangement ending at least 12 months after the reporting period

NOTE : On 10 February 2015 the IASB has published the Exposure Draft of Proposed Amendments to IAS 1 to clarify the criteria for the classification of a Liability as either Current or Non-current (HRD).