www.pwc.lu/ifrs IFRS news - April 2017 1 IFRS news In This Issue 1. Article 50 triggers uncertainty in income taxes 3. Demystifying IFRS 9— ECL model 2 4. Leases lab—IFRS 16 5. Demystifying IFRS 9 for Corporates 7. The IFRS 15 Mole 8. Cannon Street Press Primary Financial Statement Conceptual Framework for Financial Reporting FICE 9. Bit at the Back 10. IFRIC Rejections Supplement- IAS 32 The UK Government gave on 30 March formal notice of its intention to leave the EU. This notice has triggered the process of negotiating the UK’s exit, which is likely to last at least two years. There are various tax reliefs and exemptions applicable to transactions between UK entities and entities in other EU member states that under existing tax laws might cease to apply when the UK’s exit finally occurs. The tax legislation, if any, which will replace those reliefs and exemptions is unknown at this stage. How will it impact accounting for income tax? IAS 12 does not explicitly address income tax uncertainties. It requires entities to measure income tax, including uncertainties, at the amount expected to be paid using the tax laws that have been enacted or substantively enacted by the end of the reporting period. The standard appears to envisage a process in which national parliaments consider and enact tax laws. However, Brexit is different because the UK’s withdrawal notice occurred before it is known which revised arrangements might be enacted in the future. The notice of withdrawal is the commencement and not the culmination of a legal process. There is substantial uncertainty about what will happen to UK and European tax laws over the next two years. Entities might therefore conclude that the UK giving notice of its intention to withdraw substantively enacts the UK’s withdrawal from the EU. However, the effects of the withdrawal on tax legislation will depend on the ‘withdrawal agreement’ (if any) that might contain tax reliefs similar to or different from those currently available. This is in itself a tax uncertainty. Entities should assess the potential tax consequences of the withdrawal agreement. It is likely that during the negotiation process, entities might become aware of potential exposures, but the outcome will be insufficiently clear to determine whether additional tax liabilities Article 50 triggers uncertainty in income tax accounting John Chan, IAS 12 specialist, explains the deferred tax implications of article 50. For further information or to subscribe, contact us at [email protected] or register online.
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www.pwc.lu/ifrs
IFRS news - April 2017 1
IFRS news
In This Issue
1. Article 50 triggers
uncertainty in income
taxes
3. Demystifying IFRS 9—
ECL model 2
4. Leases lab—IFRS 16
5. Demystifying IFRS 9
for Corporates
7. The IFRS 15 Mole
8. Cannon Street Press
Primary Financial Statement
Conceptual Framework for Financial Reporting
FICE
9. Bit at the Back
10. IFRIC Rejections
Supplement- IAS 32
The UK Government gave on 30 March
formal notice of its intention to leave the
EU. This notice has triggered the process
of negotiating the UK’s exit, which is likely
to last at least two years.
There are various tax reliefs and
exemptions applicable to transactions
between UK entities and entities in other
EU member states that under existing tax
laws might cease to apply when the UK’s
exit finally occurs. The tax legislation, if
any, which will replace those reliefs and
exemptions is unknown at this stage.
How will it impact accounting for
income tax?
IAS 12 does not explicitly address income
tax uncertainties. It requires entities to
measure income tax, including
uncertainties, at the amount expected to be
paid using the tax laws that have been
enacted or substantively enacted by the
end of the reporting period.
The standard appears to envisage a process
in which national parliaments consider
and enact tax laws. However, Brexit is
different because the UK’s withdrawal
notice occurred before it is known which
revised arrangements might be enacted in
the future. The notice of withdrawal is the
commencement and not the culmination of
a legal process. There is substantial
uncertainty about what will happen to UK
and European tax laws over the next two
years.
Entities might therefore conclude that the
UK giving notice of its intention to
withdraw substantively enacts the UK’s
withdrawal from the EU. However, the
effects of the withdrawal on tax legislation
will depend on the ‘withdrawal
agreement’ (if any) that might contain tax
reliefs similar to or different from those
currently available. This is in itself a tax
uncertainty.
Entities should assess the potential tax
consequences of the withdrawal
agreement. It is likely that during the
negotiation process, entities might become
aware of potential exposures, but the
outcome will be insufficiently clear to
determine whether additional tax liabilities
Article 50 triggers uncertainty in income tax accounting John Chan, IAS 12 specialist, explains the deferred tax implications of article 50.
The right to use an asset is a separate lease component from other lease components if two criteria are met:
1. The lessee can benefit from the use of the asset either on its own or together with other readily-available resources.
2. The underlying asset must not be highly dependent on or highly interrelated with other underlying assets in the contract.
Lessees allocate consideration based on:
the relative stand-alone price of each lease component; and
the aggregate stand-alone price of the non-lease components.
The prices are determined based on the price a lessor or similar supplier would charge for that component separately. If observable prices are not readily available, a lessee should estimate the price maximising the use of observable information.
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Lessors allocate consideration in accordance with IFRS 15, on the basis of stand-alone selling prices.
There are many arrangements in which two or more unrelated parties are involved in providing a specified good or service to a customer. IFRS 15 requires an entity to determine whether;
it has promised to provide a specified good or service itself and is therefore the principal; or
to arrange for those specified goods or services to be provided by another party, and is therefore the agent.
This determination affects how much revenue is recognised. The principal recognises the transaction price of the item and the agent recognises only its commission.
An entity is the principal in a transaction if it obtains control of the specified goods or services before they are transferred to the customer. When it is not immediately obvious that an entity has obtained control, there is a framework and a list of indicators in the standard to help with the assessment. As with all IFRS 15 analysis, first identify the nature of the promise to the customer and which party;
has the primary responsibility in delivering goods or services;
bears the inventory risk; and
chooses the pricing;
Facts
Case 1 - Travel agent with non-refundable discounted flight tickets
A travel agent purchases non-refundable discounted flight tickets from an airline. The travel agent determines the price at which it sells the tickets and might also provide assistance to travellers to resolve any complaints (for example timing of flights, problems with the booking).
First, the travel agent needs to identify the promises to its customer. The travel agent has purchased the tickets in advance and therefore controls the right to fly before transferring that right to its customer. The promised good or service is therefore the right to fly.
The travel agent might then also consider the three indicators:
The airline is responsible for delivering the flight itself as the agent will not fly the plane, however, the travel agent has primary responsibility for transferring the ‘right’ to fly to the customer.
The travel agent purchases the flight tickets in advance, without any commitment from its customers, and the tickets are non-refundable. Therefore, the travel agent is taking inventory risk in the tickets.
The travel agent sets the price at which the tickets are transferred to its customers.
In this case, the travel agent is the principal and revenue would be the price of the ticket.
Case 2 - Travel agent is instructed to book a specified flight
The customer has a travel plan and instructs the agent to book a flight for a specified price. The travel agent’s promise is therefore to facilitate the purchase of a ticket and it does not at any time have the ability to direct the use of the ticket or obtain substantially all of the remaining benefits from the ticket before transferring to customer. Looking at the indicators;
The travel agent does not deliver a right to fly or any other good or service beyond managing the process of getting the ticket to the customer;
The travel agent does not take the risk of holding tickets;
The travel agent does not determine the price of the ticket.
In this case, the travel agent is an agent, the airline is the principal and revenue would be the commission earned by the travel agent.
Recommendations
When looking to see if an entity is acting as agent or principal, first identify the specified goods or services to be provided to the customer and then consider whether the entity obtains control of that good or service before it is delivered to the customer. Consider the three indicators when it is not clear whether the entity obtains control. It is possible that an entity could be principal for some specified goods or services and an agent for others in a contract. Also, remember that IFRS 15 does not include the form of consideration and credit risk indicators which were included in IAS 18.
Further investigations
Further investigation is required to determine the timing of revenue recognition. For example, an agent might satisfy its performance obligation (facilitating the transfer of specified goods or services) before the end customer receives the specified good or service from the principal.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. It does not take into account any objectives, financial situation or needs of any recipient; any recipient should not act upon the information contained in this publication without obtaining independent professional advice. No
representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
The IC received a request for guidance on whether a financial instru-ment, in the form of a preference share that includes a contractual obli-
gation to deliver cash, is a financial liability or equity, if the payment is
at the ultimate discretion of the issuer’s shareholders. The IC recom-mended that the Board address this issue as part of its project on FICE.
Classification of financial instru-ments that give the issuer the contractu-al right to choose the form of settle-ment (September 2013)
The IC received a request to clarify how an issuer would classify three financial instruments in accordance with IAS 32. None of the financial
instruments had a maturity date but each gave the holder the contrac-
tual right to redeem at any time. The holder's redemption right was different for each of the three; however, in each case the issuer had the
contractual right to choose to settle the instrument in cash or a fixed
number of its own equity instruments if the holder exercised its re-demption right. The issuer was not required to pay dividends on the
three instruments but could choose to do so at its discretion.
The IC considered that in the light of its analysis of the existing IFRS
requirements, an interpretation was not necessary and consequently
decided not to add the issue to its agenda.
Classification of a financial instrument that is mandatorily convertible into a variable number of shares upon a con-tingent ‘non-viability’ event (January 2014)
The IC discussed how an issuer would classify a particular mandatorily convertible financial instrument in accordance with IAS 32. The finan-
cial instrument did not have a stated maturity date but was mandatorily
convertible into a variable number of the issuer’s own equity instru-ments if the issuer breached the Tier 1 Capital ratio (i.e. described as a
‘contingent non-viability event’). Interest is discretionary.
The IC decided not to add this issue to its agenda and noted that the
scope of the issues raised in the submission is too broad for it to ad-
dress in an efficient manner.
A financial instru-ment that is manda-torily convertible into a variable num-ber of shares (subject to a cap and a floor) but gives the issuer the option to settle by delivering the maximum (fixed) number of shares (January 2014)
A question was raised to the IC as to how to assess the substance of a particular early settlement option included in a financial instrument.
The IC noted that the issuer cannot assume that a financial instrument (or its components) meets the definition of an equity instrument simply
because the issuer has the contractual right to settle the financial in-
strument by delivering a fixed number of its own equity instruments. The IC noted that judgement will be required to determine whether the
issuer’s early settlement option is substantive and thus should be con-
sidered in determining how to classify the instrument. If the early set-tlement option is not substantive, that term would not be considered in
determining the classification of the financial instrument.
The IC noted that to determine whether the early settlement option is
substantive, the issuer will need to understand whether there are actual
economic or other business reasons that the issuer would exercise the option.
Accounting for a financial instrument that is mandatorily convertible into a variable number of shares subject to a cap and a floor (May 2014)
The IC discussed how an issuer would account for a particular manda-torily convertible financial instrument in accordance with IAS 32 and
IAS 39 or IFRS 9, which was subject to a cap and floor.
The IC noted that the cap and the floor are embedded derivative fea-
tures whose values change in response to the price of the issuer’s equity
share. The IC decided an interpretation was not necessary.
Accounting for a written put option over non-controlling interests to be set-tled by a variable number of the parent’s shares (May 2016)
The IC received a request regarding how an entity accounts for a writ-ten put option over NCI in its consolidated financial statements. The
NCI put has a strike price that will, or may, be settled by the exchange
of a variable number of the parent’s own equity instruments. The IC observed that in the past it had discussed issues relating to NCI puts
that are settled in cash. Those issues were referred to the Board and are