• Accounting Alert August 2022

Three new agenda decisions from the IFRS Interpretations Committee

IFRS Interpretations Committee (the Committee) agenda decisions are those issues that the Committee decided not to take onto its agenda. Although not authoritative guidance, these decisions are regarded as being highly persuasive in practice. All entities reporting under IFRS and NZ IFRS should be aware of these decisions, as they could impact the way particular transactions and balances are accounted for. If there is an overlap in accounting requirements between IFRS / NZ IFRS and PBE Standards, these decisions would also impact on PBE Reporters.

At its July 2022 meeting, the Committee issued three final agenda decisions dealing with the following:

  • Negative low-emission vehicle credits
  • Classification of public shares as debt or equity in special purpose acquisition companies
  • Transfer of insurance coverage under a group of annuity contracts.

The first two agenda decisions are discussed further below, while our FAQ provides more information regarding the third agenda decision.
 

Negative low-emission vehicle credits

 Fact pattern

  • Vehicle Manufacturer (VM) produces vehicles that have average fuel emissions that are higher than the government’s target and it therefore receives negative credits
  • If VM were to produce vehicles that have average fuel emissions that were lower than the government’s target, it would receive positive credits
  • VM is required to eliminate these negative credits by obtaining and surrendering positive credits
  • VM can obtain positive credits either by purchasing them from another entity, or by generating them itself in the next year by producing more low-emission vehicles
  • If VM does not eliminate its negative credits, the government can impose sanctions - such as restricting access to the market – but the sanctions would not comprise fines or penalties

This fact pattern also applies to importers of low-emissions vehicles.

 

Question

Does VM have a present obligation that meets the definition of a liability under IAS 37 Provisions, Contingent Liabilities and Contingent Assets?
 

Rationale for agenda decision

  • Yes. A liability is defined as ‘a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits’
  • A past event that leads to a present obligation is called an ‘obligating event’. An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation
  • The Committee noted that to determine whether the entity has a liability, it would consider:
    • Whether settling the obligation to eliminate negative credits would result in an outflow of resources embodying economic benefits
    • Which event creates a present obligation to eliminate negative credits
    • Whether the entity has no realistic alternative to settling the obligation.
  • Both methods of settling the obligation – purchasing positive credits or producing them - would result in an outflow of resources embodying economic benefits
  • In the calendar year, the entity has produced vehicles with average fuel emissions higher than the government’s target. It therefore has an obligation that:
    • Has arisen from past events (i.e., producing vehicles with average fuel emissions higher than the government’s target)
    • Exists independently of the entity’s future actions (i.e., the entity cannot avoid settling the obligation because of its future actions).
  • The entity has no realistic alternative to settling the obligation because the government sanctions described give rise to a legal obligation. Accepting the possible sanctions for non-settlement is not a realistic alternative for VM
  • Refer to our FAQ for a more in-depth analysis of the rationale for the agenda decision.


Conclusion

  • The principles and requirements in the IFRS standards provide an adequate basis to deal with this fact pattern
  • The Committee therefore decided not to add a standard-setting project to its work plan.


Classification of public shares as debt or equity in special purpose acquisition companies (SPACs)

 Fact pattern

  • Special purpose acquisition company (SPAC) issues two classes of shares: founder shares (Class A) and public shares (Class B)
  • Class B shareholders:
    • Individually have the right to demand reimbursement of their shares if the SPAC’s shareholders approve the acquisition of a target company
    • Are reimbursed if the SPAC is liquidated, which occurs if no target entity is acquired within a specified period.
  • Class B shareholders, together with Class A shareholders, have the contractual right to extend the SPAC’s life indefinitely if no target company is acquired
  • Extension of the SPAC’s life must be approved by either:
    • Two-thirds of all the shareholders (Class A and Class B)
    • Two-thirds of Class A shareholders and two-thirds of Class B shareholders.

 

Question

  • Does the shareholders’ contractual right to extend the SPAC’s life indefinitely affect the classification of the Class B shares?
  • Is the shareholders’ discretion to extend the SPAC’s life indefinitely considered to be within the control of the SPAC? Is it such that the SPAC has the unconditional right to avoid delivering cash, or another financial asset, to settle the contractual obligation?
     

Rationale for agenda decision

  • IAS 32 Financial Instruments: Presentation includes no requirements on how to assess whether a decision of shareholders is treated as a decision of the entity.
  • Similar questions about shareholder decisions arise in other circumstances.
  • Assessing whether a decision of shareholders is treated as a decision of the entity has been identified as one of the practice issues the International Accounting Standards Board (IASB) is considering as part of its Financial Instruments with Characteristics of Equity (FICE) project.


Conclusion

  • The matter discussed in the request is, in isolation, too narrow for the IASB or the Committee to address in a cost-effective manner.
  • The IASB should consider the matter as part of broader discussions on the FICE project.
  • The Committee therefore decided not to add a standard-setting project to its work plan.
  • However, it is important for SPACs to disclose information in the notes to the financial statements about the classification of its public shares.
  • Refer to our FAQ for a more in-depth analysis of the rationale for the agenda decision.

 

For more on the above, please contact your local BDO representative.

 


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