Fact pattern

Entity A has a dispute with a tax authority as to whether it is required to pay an amount of tax (i.e. not income tax).

The tax is not an income tax, so it is therefore not within the scope of IAS 12 Income Taxes. Any liability or contingent liability to pay the tax instead falls within the scope of IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Entity A judges it probable that the entity will not be required to pay the tax, i.e. it is more likely than not that the dispute will be resolved in Entity A’s favour.

Under IAS 37, Entity A discloses a contingent liability and does not recognise a liability. However, to avoid possible penalties, Entity A deposits the disputed amount with the tax authority.

Upon resolution of the dispute, the tax authority will be required to either refund the tax deposit to Entity A (if the dispute is resolved in Entity A’s favour), or use the deposit to settle the liability (if the dispute is resolved in the tax authority’s favour).

Question 1: 

Does the tax deposit give rise to an asset, a contingent asset, or neither in the financial statements of Entity A?

Rationale for agenda decision:

• In accordance with IAS 8, paragraphs 10-11, the Committee referred to the definitions of an asset in the Conceptual Framework for Financial Reporting (issued March 2018) and the previous Conceptual Framework because, if the tax deposit was an asset, it may not be clearly within the scope of a particular standard, and nor does IFRS deal with similar or related issues.
• The Committee concluded that:
  • The right arising from the tax deposit meets the definition of an ‘asset’ in these frameworks because it gives Entity A the right to obtain future economic benefits, either by receiving a cash refund, or by using the payment to settle the tax liability
  • The nature of the tax deposit (i.e. whether voluntary or required) does not impact this assessment
  • The right is therefore not a contingent asset as defined in IAS 37 because it is an asset of Entity A, and
  • The tax deposit is an asset of Entity A when it makes the tax deposit to the tax authority.

Conclusion: 

The tax deposit is an asset of Entity A when it makes the tax deposit to the tax authority.

Question 2:

How should the tax deposit be recognised, measured, presented and disclosed in the financial statements of Entity A?

Rationale for agenda decision:

• In the absence of a standard that applies specifically to the tax deposit asset, IAS 8, paragraphs 10-11 are applied to develop an appropriate accounting policy.
• Entity A’s management would apply judgement to develop and apply a policy that results in information that is relevant to the decision-making needs of users, and also reliable.
• Issues that need to be addressed when developing a policy for the tax deposit may be similar to those that arise for the recognition, measurement, presentation and disclosure for monetary assets. Management would therefore refer to IFRS standards dealing with those issues for monetary assets (e.g. IFRS 9 Financial Instruments, IFRS 7 Financial Instruments: Disclosures, etc.)

Conclusion:

When applying IAS 8, paragraphs 10-11 to develop an appropriate accounting policy, Entity A would consider the recognition, measurement, presentation and disclosure requirements for similar assets such as monetary assets, and refer to the relevant IFRS standards dealing with monetary assets (i.e. IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures).

Fact pattern

Stock Exchange provides listing services to Entity B.

Entity B is required to pay an upfront, non-refundable fee when it is admitted (admission service), and then an ongoing listing fee.

The upfront fee relates to activities that Stock Exchange undertakes at, or near, contract inception, such as:

• Performing due diligence for new applications
• Reviewing the customer’s listing application (including assessing whether to accept the application)
• Issuing reference numbers and tickers for the new security
• Processing the listing and admission to the market
• Publishing the security on the order book, and
• Issuing the dealing notice on the admission date.

Question: Is the promise by Stock Exchange to transfer an admission service distinct from the ongoing listing service?

Rationale for agenda decision:

• IFRS 15, paragraph 22 requires Stock Exchange to assess the goods or services promised in a contract with Entity B (the customer), and to identify as a separate performance obligation, each promise to transfer a distinct good or service to Entity B.
• IFRS 15, paragraph BC87 notes that Stock Exchange must first identify the promised goods or services in the contract, and then determine how many performance obligations it has to Entity B.
• IFRS 15, paragraph 25 states that performance obligations do not include activities that an entity must undertake to fulfil the contract unless those activities transfer a good or service to a customer.
• IFRS 15, paragraph B49 states that to identity performance obligations when an entity receives an upfront, non-refundable fee, the entity assesses whether the fee relates to the transfer of promised goods or services. Even though the fee may relate to activities the entity is required to undertake at or near contract inception to fulfil the contract, these activities may not always result in the transfer of a good or service to the customer. Instead, the upfront fee could be an advance payment for future goods and services.
• The Committee observed that:
  • The activities performed by Stock Exchange at or near contract inception are required in order to transfer the promised good/service (i.e. the listing service) to Entity B. However, Stock Exchange’s performance of these services does not transfer a good or service to Entity B, and
  • The listing service transferred is the same on initial listing and on all subsequent days that Entity B remains listed.
• The Committee concluded that Stock Exchange therefore does not promise to transfer any good or service to Entity B other than the listing service.

Conclusion:

Stock Exchange does not transfer a good/service to Entity B when it admits Entity B to the Stock Exchange. These services are ‘setup costs’ or ‘mobilisation fees’ and do not result in a good or service being transferred to Entity B. The only service provided by Stock Exchange is the ongoing listing service.   

Fact pattern

Entity C has an investment in subsidiary which it measures at cost in its separate financial statements as permitted by IAS 27, paragraph 10(a).

The investment is an equity instrument as defined in IAS 32 Financial Instruments: Presentation.

Entity C subsequently disposes of part of its investment in subsidiary. As a result, Entity C loses control but has neither significant influence nor joint control over the investee.

IAS 27, paragraph 9 requires Entity C to apply all IFRS standards, except when accounting for investments in subsidiaries, associates and joint ventures as permitted by paragraph 10.

After the disposal, the investee is not a subsidiary, associate or joint venture. Therefore, Entity C applies IFRS 9 for the first time to account for the remaining interest in the investee.

Question 1: 

Is the retained investment eligible for the presentation election under IFRS 9, paragraph 4.1.4, i.e. to present subsequent changes in fair value in other comprehensive income (OCI)?

Rationale for agenda decision:

• The OCI presentation election in IFRS 9, paragraph 4.1.4 applies at initial recognition of an investment in an equity instrument to an equity instrument that is not held for trading. Assuming Entity C’s remaining investment is not held for trading:
  • The investment is eligible for the OCI presentation election, and
  • Entity C would need to make this election when it first applies IFRS 9 to the retained interest, i.e. at the date it loses control.

Conclusion:

Paragraph 4.1.4 of IFRS 9 would permit Entity C, on initial recognition (i.e. at date of loss of control), to elect to measure the retained investment at fair value through other comprehensive income (FVTOCI).

Question 2: 

Does Entity C present the difference between the cost of the retained interest and its fair value on the date of losing control in profit or loss or OCI? 

Rationale for agenda decision:

• The difference between the cost of the retained interest and its fair value on date of losing control meets the definition of income or expenses in the Conceptual Framework for Financial Reporting.
• Therefore, applying IAS 1 Presentation of Financial Statements, paragraph 88, IAS 27, paragraph 9 requires Entity C to recognise this difference in profit or loss. This is regardless of whether Entity C elects the OCI presentation option for the retained interest.
• This conclusion is consistent with the requirements of IAS 28 Investments in Associates and Joint Ventures, paragraph 22(b) and IAS 27, paragraph 11B, which deal with similar and related issues.

Conclusion:

Entity C presents this difference in profit or loss.  

Fact pattern

Entity D measures its investments in subsidiaries at cost in its separate financial statements as permitted by IAS 27, paragraph 10(a).

Entity D has an investment in an equity instrument as defined in IAS 32 Financial Instruments: Presentation. The investment is neither a subsidiary, associate nor joint venture, and is therefore accounted for under IFRS 9 (at fair value).

Entity D subsequently acquires an additional interest in the investee, which results in it obtaining control of the investee (i.e. the investee becomes a subsidiary).

Question 1: 

How should the cost of the investment in subsidiary be measured in Entity D’s separate financial statements? That is, should ‘cost’ be determined as the sum of:

• The fair value of the initial interest at date control is obtained of the subsidiary, plus consideration paid for the additional interest (fair value as deemed cost approach), or
• The consideration paid for the initial interest (original consideration), plus any consideration paid for the additional interest (accumulated cost approach)?

Rationale for agenda decision:

• IAS 27 does not define ‘cost’, nor does it specify how an entity determines cost of an investment acquired in stages.
• The two approaches outlined in the fact pattern above arise from different views of the step acquisition approach, i.e. whether:
  • Entity D is exchanging its initial interest (plus consideration paid for the additional interest) for a controlling interest in the investee, or
  • Entity D is purchasing the additional interest while retaining the initial interest.
• A reasonable reading of the requirements in IFRS standards could result in the application of either one of the two approaches outlined above. However, a consistent approach would then be applied to all step acquisition transactions.
• The approach applied should be disclosed as required by IAS 1, paragraphs 117-124 (accounting policies, estimates and judgements).

Conclusion: 

Both approaches are acceptable, but a consistent approach should be applied to all step acquisition transactions. The approach applied should then be disclosed as a significant judgment (IAS 1, paragraph 122).  

Question 2: 

When applying the accumulation cost approach outlined in Question 1 above, how would Entity D account for the difference between the fair value of the initial interest at the date of obtaining control of the subsidiary, and its original consideration?  

Rationale for agenda decision:

• The difference between the fair value of the initial interest at the date of obtaining control of the subsidiary and its original consideration meets the definition of income or expenses in the Conceptual Framework for Financial Reporting.
• Therefore, applying IAS 1 Presentation of Financial Statements, paragraph 88, Entity D recognise this difference in profit or loss. This is regardless of whether Entity D had previously elected to present fair value changes in OCI.

Conclusion:

When applying the accumulation cost approach, Entity D recognises the difference in profit or loss.