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Financial Reporting Council MONTHLY UPDATES (September 2014) – What’s new from IASB 1. Meetings of the International Accounting Standards Board (IASB) The topics discussed at the IASB’s September 2014 meetings were with respect to: Insurance Contracts Conceptual Framework 2. Insurance Contracts The IASB continued its discussions on insurance contracts and the following decisions were made: (a) Premium-allocation approach: revenue recognition pattern The IASB clarified that when an entity applies the premium-allocation approach to account for an insurance contract, it should recognise insurance contract revenue in profit or loss: on the basis of the passage of time; but if the expected pattern of release of risk differs significantly from the passage of time, then on the basis of expected timing of incurred claims and benefits. (b) Determination of interest expense in the premium-allocation approach The IASB tentatively decided that when an entity applies the premiumallocation approach to contracts for which the entity: discounts the liability for incurred claims; and chooses to present the effect of changes in discount rates in OCI; the interest expense in profit or loss for the liability for incurred claims should be determined using the discount rate that is locked in at the date the liability for incurred claims is recognised. This tentative decision also applies to the presentation of interest expense for 1 any onerous contract liability that is recognised when the entity applies the premium - allocation approach. 3. Conceptual Framework The IASB continued its redeliberations on the Conceptual Framework and the following were discussed: (a) Measurement Use of a single or default measurement basis The IASB tentatively reconfirmed its decision not to develop a single or default measurement basis. Selection of a measurement The IASB tentatively decided that the Exposure Draft should state that: consideration of the objective of financial reporting, of the qualitative characteristics of useful information and of the cost-benefit constraint is likely to result in the IASB selecting different measurement bases for different assets and liabilities; the factors to be considered when selecting a measurement basis for an asset or liability should include: o how the asset or liability will contribute to future cash flows; and o the characteristics of the asset or liability; the relative importance of each of the factors to be considered when selecting a measurement basis will depend upon facts and circumstances; and it may be appropriate to use one measurement basis for the statement of financial position and a different measurement basis for the statement of profit or loss when such an approach better reflects the nature of the business activities conducted. Initial Measurement The IASB tentatively decided to amend the discussion of initial measurement that was included in the Discussion Paper by: replacing references to the three measurement bases described in the Discussion Paper with references to historical cost and current value; 2 removing some Standards-level detail, to be consistent with the agreed strategy for the measurement section; removing the statement that, for exchanges of equal value, initial measurement issues are rarely significant; and clarifying that cost and fair value are only the same if transaction costs are excluded from cost or are negligible. (b) Implications of long-term investment for the Conceptual Framework The IASB discussed the implications of long-term investment for the Conceptual Framework and tentatively decided that: the IASB’s tentative decisions on measurement and on profit or loss and other comprehensive income (OCI) would provide sufficient tools so that the IASB would be able to make appropriate standard-setting decisions if future projects were to consider: o how to measure the long-term investments (or liabilities) of entities whose business activities include long-term investment; and o whether such entities should present changes in the carrying amount of those investments (or liabilities) in profit or loss or in OCI; no other areas of the Conceptual Framework need to include a specific reference to reporting entities whose business activities include holding long-term investments; the Conceptual Framework contains sufficient and appropriate discussion of primary users and their information needs, and about the objective of general purpose financial reporting, to address appropriately the needs of long-term investors in a reporting entity; and when updated for the IASB's tentative decisions in May 2014, the Conceptual Framework would contain sufficient and appropriate discussion of stewardship and prudence to address appropriately the needs of long-term investors in a reporting entity. (c) Equity and liabilities The IASB discussed the role of the definitions of a liability and of equity in distinguishing liabilities from equity claims, and considered possible amendments to the definition of a liability to implement the combined 3 settlement and value approach. The IASB tentatively decided not to amend those definitions at this time. 4. Proposals for measuring quoted investments in subsidiaries, joint ventures and associates at fair value The IASB published for public comment an Exposure Draft detailing proposals concerning the measurement of investments in subsidiaries, joint ventures and associates at fair value when those investments are quoted in an active market. The proposed amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities, IAS 27 Separate Financial Statements, IAS 28 Investments in Associates and Joint Ventures and IAS 36 Impairment of Assets aim to address questions received on: the unit of account for investments in subsidiaries, joint ventures and associates and on the fair value measurement when those investments are quoted in an active market (quoted investments); and the measurement of the recoverable amount of cash-generating units (CGUs) on the basis of fair value less costs of disposal when they correspond to entities that are quoted in an active market (quoted CGUs). The proposed amendments clarify that an entity should measure the fair value of quoted investments and quoted CGUs as the product of the quoted price for the individual financial instruments that make up the investments held by the entity and the quantity of financial instruments. The Exposure Draft also includes proposed amendments to the Illustrative Examples for IFRS 13 Fair Value Measurement to clarify questions received relating to the application of the exception in paragraph 48 of IFRS 13. The example illustrates the fair value measurement of an entity’s net exposure to market risks arising from a group of financial assets and financial liabilities whose market risks are substantially the same and whose fair value measurement is categorised within Level 1 in the fair value hierarchy. The Exposure Draft is open for comments until 16 January 2015. 5. IASB issues Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) The IASB issued narrow-scope amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures (2011). 4 The amendments address an acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28 (2011), in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognised when a transaction involves a business (whether it is housed in a subsidiary or not). A partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. The amendments will be effective from annual periods commencing on or after 1 January 2016. 6. IASB concludes the Annual Improvements to IFRSs 2012–2014 Cycle The International Accounting Standards Board (IASB) issued Annual Improvements to IFRSs 2012 2014 Cycle. These amendments result from proposals that were contained in the Exposure Draft for proposed amendments to IFRS, Annual Improvements to IFRSs 2012– 2014 Cycle, published in December 2013. The IASB uses the Annual Improvements process to make necessary, but nonurgent, amendments to IFRSs if those amendments will not be included as part of any other project. The following table shows the topics addressed by these amendments: The effective date of the amendments is 1 January 2016. For further information: http://www.ifrs.org Financial Reporting Council 02 October 2014 5