IFRS® Accounting Standards Discussion Group Meeting Report – December 3, 2024

ITEMS PRESENTED AND DISCUSSED AT THE DECEMBER 3, 2024 MEETING

IFRS 9: Accounting for Debt Modifications – Helpful Reminders

Background

Recent decreases in the Bank of Canada interest rates and corporate borrowing rates have incentivized some entities to renegotiate their debt agreements. Given the accounting for debt modifications remains a complex area, the discussion that follows highlights some helpful reminders for a borrower to consider when accounting for debt modifications in accordance with IFRS 9 Financial Instruments.

Paragraph 3.3.1 of IFRS 9 states that:

An entity shall remove a financial liability (or a part of a financial liability) from its statement of financial position when, and only when, it is extinguished —
ie when the obligation specified in the contract is discharged or cancelled or expires.

Paragraph 3.3.2 of IFRS 9 further notes that:

An exchange between an existing borrower and lender of debt instruments with substantially different terms shall be accounted for as an extinguishment
of the original financial liability and the recognition of a new financial liability. Similarly, a substantial modification of the terms of an existing financial
liability or a part of it (whether or not attributable to the financial difficulty of the debtor) shall be accounted for as an extinguishment of the original financial
liability and the recognition of a new financial liability.

As noted in paragraph B3.3.6 of IFRS 9, the terms of a debt instrument are considered to be substantially different if the discounted present value (PV) of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate (EIR), is at least 10 per cent different from the discounted PV of the remaining cash flows of the original financial liability. This is commonly referred to as the “10 per cent test”. In determining those fees paid net of fees received, a borrower includes only fees paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other's behalf. The test applies to both fixed-rate and variable-rate debt instruments.

When a debt instrument is extinguished due to a debt modification with substantially different terms, the carrying value of the old debt is derecognized from the balance sheet and the new debt is recorded at fair value. A gain or loss is recognized in profit or loss for the difference between the carrying value of the original liability and the consideration paid, with all costs and fees included in the calculation of the gain or loss. All associated costs and fees are expensed as incurred.

When changes to the terms of the debt instrument are determined to be a non-substantial modification, the entity recalculates the gross carrying amount of the debt as the PV of the estimated future contractual cash flows that are discounted at the original EIR, revised only for costs and fees. The modification gain or loss is recognized in profit or loss for the difference between the PV of the original and the modified cash flows discounted using the original EIR. Any costs or fees incurred adjust the carrying amount of the liability and are amortized over the remaining term of the modified debt using the revised EIR.¹

Fact Pattern 1a

• An entity enters into a two-year $100,000 loan, with the principal repayable at maturity.
• Interest is eight per cent per annum, payable annually.
• The entity incurred $5,000 in legal fees and $5,000 in fees paid to the lender.
• At the end of Year 1, the terms of the loan were modified as follows:
  • the term of the loan was extended from two years to three years;
  • the interest rate was decreased from eight per cent to six per cent; and
  • the entity incurred an additional $1,000 in legal fees and $2,000 in fees paid to the lender.

Issue 1a: Fixed rate debt modification

Analysis

Step 1: Determine the original EIR

Period	Opening carrying value	Interest expense  EIR (14.079%)*	Interest payment	Principal repayment	Ending carrying value
Year 1	90,000**	12,671	(8,000)	-	94,671
Year 2	94,671	13,329	(8,000)	(100,000)	-*

*The EIR is the rate that exactly accretes the carrying value of the loan to its par value at maturity. The EIR in this case is greater than the coupon rate of eight per cent to account for the initial discount to par derived from the impact of the transaction costs.

**The opening carrying value of $90,000 reflects the initial $100,000 principal less the $5,000 legal fees and the $5,000 fee paid to the lender. Per paragraph 5.1.1 of IFRS 9, entities shall measure financial liabilities at fair value plus or minus transaction costs that are directly attributable to the acquisition or issue of the financial liability.

Step 2: Assess if the terms of the loan are substantially different

10 per cent cash flow test:

PV of debt before modification = NPV (14.079%, - $108,000) = $94,671

PV of modified debt = $2,000 + NPV (14.079%, - $6,000, - $106,000) = $88,710

Difference ($) = $94,671 - $88,710 = $5,961

Difference (%) = $5,961/$94,671 = 6.3%

The $1,000 in additional legal fees are excluded from the calculation of the PV of the modified debt because those fees are paid to a third party, and therefore excluded from the calculation (paragraph B3.3.6 of IFRS 9). The PV of the cash flows under the new terms is less than 10 per cent different from the PV of the remaining cash flows under the original terms. Therefore, the terms of the debt are not substantially different, and the debt is not extinguished.

Step 3: Revise the cash flows and calculate the modification gain or loss

Period	Opening carrying value	Interest expense EIR (14.079%)	Interest payment	Principal repayment	Ending carrying value
Year 1	90,000	12,671	(8,000)	-	94,671
Year 2	94,671	13,329	(6,000)	-	102,000
Year 3	102,000	14,361	(6,000)	(100,000)	10,361*

*The modification of cash flows results in the need for a modification gain in order to make the ending balance nil.

Carrying value of debt immediately before the modification = $94,671

PV of future cash flows after modification = NPV (14.079%, - $6,000, - $106,000) = $86,710

Gain = $94,671 - $86,710 = $7,961 (the modification gain differs from the result of the 10 per cent test by the amount of the new lender fee)

Step 4: Adjust the carrying value of the loan for the modification gain or loss

Period	Opening carrying value	Interest expense EIR (14.079%)	Interest payment	Principal repayment	Ending carrying value
Year 1	90,000	12,671	(8,000)	-	94,671
Year 2	86,710*	12,208	(6,000)	-	92,918
Year 3	92,918	13,082	(6,000)	(100,000)	-

*Opening carrying value in Year 2 was computed in Step 3.

Step 5: Adjust for the new fees and costs

The entity incurred $3,000 in fees ($2,000 paid to the lender and $1,000 in legal fees)

Revised opening carrying value in Year 2 = $86,710 - $3,000 = $83,710

Period	Opening carrying value	Interest expense EIR (14.079%)	Interest payment	Principal repayment	Ending carrying value
Year 1	90,000	12,671	(8,000)	-	94,671
Year 2	83,710	11,786	(6,000)	-	89,496
Year 3	89,496	12,600	(6,000)	(100,000)	(3,904)*

*Need to revise the EIR for the impact of costs and fees so the carrying value of the loan accretes to its par value at maturity and the ending balance is nil.

Step 6: Compute the revised EIR

Period	Opening carrying value	Interest expense EIR (16.2%*)	Interest payment	Principal repayment	Ending carrying value
Year 1	90,000	12,671	(8,000)	-	94,671
Year 2	83,710	13,536	(6,000)	-	91,246
Year 3	91,246	14,754	(6,000)	(100,000)	-*

*The EIR is the rate that exactly accretes the carrying value of the loan to its par value at maturity. For greater clarity, interest expense is calculated using the original EIR of 14.079 per cent in Year 1, and the revised EIR of 16.2 per cent is used in Years 2 and 3.

Fact Pattern 1b

• An entity enters into a two-year $100,000 loan, with the principal repayable at maturity.
• Interest is Canadian Overnight Repo Rate Average (CORRA) plus four per cent (total of eight per cent at inception), payable annually.
• CORRA resets annually at the end of each year.
• The entity incurred $5,000 in legal fees and $5,000 in fees paid to the lender.
• Fees and costs are amortized using the EIR method as opposed to the straight-line method.
• No forecast of future CORRA rate is used to establish the original EIR.
• At the end of Year 1, the terms of the loan were modified as follows:
  • the term of the loan was extended from two years to three years; and
  • no additional fees or costs were incurred.
• In addition, at the end of Year 1, the CORRA decreased to two per cent; therefore, the new variable interest rate is six per cent (two per cent CORRA + four per cent spread).

Issue 1b: Variable rate debt modification

Analysis

Step 1a: Determine the original EIR

Period	Opening carrying value	Interest expense  EIR (14.079%)**	Interest payment	Principal repayment	Ending carrying value
Year 1	90,000*	12,671	(8,000)	-	94,671
Year 2	94,671	13,329	(8,000)	(100,000)	-**

*The opening carrying value of $90,000 reflects the initial $100,000 principal less the $5,000 legal fees and the $5,000 fee paid to the lender. Per paragraph 5.1.1 of IFRS 9, entities shall measure financial liabilities at fair value plus or minus transaction costs that are directly attributable to the acquisition or issue of the financial liability.

**The EIR is the rate that exactly accretes the carrying value of the loan to its par value at maturity. The EIR in this case is greater than the coupon rate of eight per cent to account for the initial discount to par derived from the impact of the transaction costs.

Step 1b: Determine the new EIR in Year 2 given the decrease to CORRA (not part of the debt modification)

For floating-rate financial instruments, paragraph B5.4.5 of IFRS 9 requires periodic re-estimation of cash flows to reflect the movements in the market rates of interest which alters the EIR.

Period	Opening carrying value	Interest expense  EIR	Interest payment	Principal repayment	Ending carrying value
Year 1	90,000	12,671	(8,000)	-	94,671
Year 2 – original EIR 14.079%	94,671	13,329	(6,000)	(100,000)	2,000
Year 2 – revised EIR 11.967%*	94,671	11,329	(6,000)	(100,000)	-

*The calculation of the revised EIR ignores the change in carrying value of the debt (and the related gain or loss) associated with the original fees as the amount was immaterial. Therefore, the EIR was updated to 11.967 per cent instead of 12.079 per cent (original EIR of 14.079 per cent minus two per cent change in CORRA).

Step 2: Assess if the terms of the loan are substantially different

10 per cent cash flow test (using the latest EIR of 11.967%):

PV of debt before modification = NPV (11.967%, - $106,000) = $94,671

PV of modified debt = NPV (11.967%, - $6,000, - $106,000) = $89,912

Difference ($) = $94,671 - $89,912 = $4,759

Difference (%) = $4,759/$94,671 = 5%

The PV of the cash flows under the new terms is less than 10 per cent different from the PV of the remaining cash flows under the original terms. Therefore, the terms of the debt are not substantially different, and the debt is not extinguished.

Step 3: Revise the cash flows and calculate the modification gain or loss

Period	Opening carrying value	Interest expense  EIR	Interest payment	Principal repayment	Ending carrying value
Year 1 – original EIR 14.079%	90,000	12,671	(8,000)	-	94,671
Year 2 – revised EIR 11.967%	94,671	11,329	(6,000)	-	100,000
Year 3 – revised EIR 11.967%	100,000	11,967	(6,000)	(100,000)	5,967

Carrying value of debt immediately before the modification = $94,671

PV of future cash flows after modification = NPV(11.967%, - $6,000, - $106,000) = $89,912

Modification gain = $94,671 - $89,912 = $4,759

Step 4: Adjust the carrying value of the loan for the modification gain or loss

Period	Opening carrying value	Interest expense  EIR	Interest payment	Principal repayment	Ending carrying value
Year 1 – original EIR 14.079%	90,000	12,671	(8,000)	-	94,671
Year 2 – revised EIR 11.967%	89,912*	10,759	(6,000)	-	94,671
Year 3 – revised EIR 11.967%	94,671	11,329	(6,000)	(100,000)	-

*Opening carrying value in Year 2 was computed in Step 3.

If the modification had instead included new incremental costs or fees, it would require a further revision to the EIR once the costs or fees are booked. The approach would be the same as the example in Issue 1a on the fixed rate debt modification.

The Group’s Discussion

The Group agreed with the analysis. Some Group members emphasized the importance of evaluating all relevant terms and conditions in loan arrangements when determining whether to apply the non-substantial debt modification or extinguishment guidance in IFRS 9. One Group member raised an example that was highlighted in a 2018 IDG discussion on modifications or exchanges of fixed-rate and floating-rate financial instruments. As part of that discussion, the Group discussed the accounting for the modification of a floating-rate loan with a prepayment option and no early prepayment penalty. The discussion highlighted that, depending on the facts and circumstances, the modification of the loan could be accounted for as a non-substantial modification or an extinguishment. Alternatively, an entity might conclude that the loan itself should be accounted for as a variable-rate loan.

One Group member noted that IFRS 9 does not provide specific guidance on calculating the EIR for variable-rate debt, resulting in diversity in how it is calculated. In practice, some entities use the actual benchmark rate at loan inception, while others incorporate forecast rates for future periods. Another member emphasized the requirement to recalculate the EIR for variable-rate loans when the benchmark rate changes before applying the 10 per cent test.

One Group member observed that a payment stated in an agreement between a borrower and a lender that is labelled as a “fee” should not automatically be accounted for as a “fee” under paragraph B3.3.6A of IFRS 9. They emphasized the importance of considering the substance of such payments. For example, for a modification that is not an extinguishment, if in substance, the fee payable to the lender relates to the provision of services to modify the debt but exceeds the fair value of such services, the excess amount would not adjust the carrying amount of the debt. Instead it would be treated as a cash flow of the modified debt and therefore it would be included in the calculation of the modification gain or loss.

One Group member noted that when a debt modification is treated as an extinguishment, costs or fees incurred may be attributed to the new debt in rare circumstances and amortized over its term as part of the effective interest rate instead of being expensed immediately. However, this would require clear evidence that the costs are solely attributable to the new debt.

Issue 2: Qualitative factors

In certain situations, the terms of a loan might have substantially changed even if the net PV of the cash flows under the new terms differs by less than 10 per cent from the PV of the original debt instrument’s remaining cash flows. In such situations, the entity would apply paragraph 3.3.2 of IFRS 9 and extinguish the original loan and recognize a new loan. A qualitative assessment can help identify substantial changes in terms that may not be captured by the quantitative assessment. This requires judgment based on the specific facts and circumstances.

Qualitative factors to consider include, but are not limited to, the following:

• a change in the currency in which the liability is denominated;
• a change in the interest rate basis (e.g., converting from a fixed to a floating or vice versa);
• a significant extension of the debt’s term;
• substantial changes in debt covenants; and
• the introduction or removal of a conversion feature.

The Group’s Discussion

The Group agreed with the analysis of qualitative factors an entity might consider when assessing whether the terms of a loan have substantially changed. Group members highlighted additional factors that could indicate a loan has been extinguished. For example:

• a modification occurring close to the loan's maturity date;
• changes in recourse or non-recourse features;
• changes in the loan's priority level; and
• adjustments to the requirement for or type of collateral.

Some Group members noted that in some circumstances qualitative factors might be assessed before or alongside the 10 per cent test and could lead to a conclusion of substantial modification regardless of the outcome of the 10 per cent test.

One Group member also thought that entities should consider how substantial changes to loan terms might affect the application of other accounting standards. For example, an entity might consider the impact on financial instrument disclosures, interest capitalization policies, or the functional currency assessment in the case of a change in the currency of an entity’s primary source of financing.

Issue 3: Modification of revolving credit facilities

Revolving credit facilities or lines of credit often have balances that fluctuate as entities borrow and repay amounts. In some circumstances it can be unclear if or how the derecognition requirements in IFRS 9 apply to loan commitments. If no IFRS Accounting Standard specifically applies to the modification of a revolving credit facility, an entity must apply judgment in developing and applying an accounting policy that results in information that is relevant and reliable. In developing an accounting policy that complies with the requirements in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the entity should consider the applicability of requirements in IFRS Accounting Standards dealing with similar and related issues, as well as the concepts in the Conceptual Framework for Financial Reporting. The entity may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards. Two possible approaches include:

• apply the 10 per cent test and, if applicable, qualitative assessment; or
• apply the applicable requirements in U.S. generally accepted accounting principles (GAAP) (i.e., Accounting Standards Codification® (ASC) 470-50-40-21 Modifications and Exchanges of Line-of-credit or Revolving Debt Arrangements) by analogy.

ASC 470-50-40-21 applies only to modifications or exchanges of revolving credit arrangements when the parties in the arrangement remain the same. Consistent with IFRS 9, under U.S. GAAP a change in creditor would be considered a substantial change and accounted for as an extinguishment.

For a modification or exchange that results in an increase in an entity’s borrowing capacity (i.e., remaining term multiplied by the maximum credit per term), ASC 470-50-40-21 requires the remaining unamortized deferred costs and any new fees and costs incurred to be deferred and amortized over the term of the new arrangement.

For a modification or exchange that results in a decrease in an entity’s borrowing capacity, the following requirements apply:

• New fees and costs incurred on the new arrangement should be deferred and amortized over the term of the new arrangement.
• Unamortized deferred costs relating to the old arrangement should be written off in proportion to the decrease in borrowing capacity of the old arrangement.
• The remaining unamortized deferred costs relating to the old arrangement should be deferred and amortized over the term of the new arrangement.

The Group’s Discussion

Since IFRS 9 does not provide guidance on the accounting for modifications to revolving credit facilities, some Group members noted that they have observed diversity in the accounting for such modifications. Some noted that they have observed the application of the U.S. GAAP requirements by analogy by entities applying the GAAP hierarchy in IAS 8. They also noted that it can be challenging to perform the 10 per cent test on a revolving credit facility since the amount of credit drawn by an entity can fluctuate over time, and there are varying interpretations as to how this test should be performed. One Group member noted that entities should apply the 10 per cent test and qualitative assessment required by IFRS 9 for modifications to drawn revolvers because drawn revolvers meet the definition of a financial liability in IFRS 9. However they noted that there is diversity in how the 10 per cent test is applied to revolvers, and that it is important for entities to establish an appropriate accounting policy.  

Issue 4: Loan Syndications

In applying the debt modification requirements in IFRS 9, the borrower in a loan syndication arrangement should determine whether the arrangement represents a single loan from a single lender or multiple separate loans from each individual lender based on evaluation of the legal terms and substantive conditions of the arrangement. Factors that an entity may consider, individually or in combination, in assessing whether there is a single loan or multiple loans include the following:

• determining whether the borrower negotiates loan terms only with the lead lender or with individual lenders within the syndicate;
• determining whether the loan terms are identical or differ, depending on the lender;
• determining whether loan repayments are automatically allocated among lenders on a pro rata basis, or the borrower may be able to selectively repay amounts to specific lenders within the syndicate;
• determining whether the borrower can only renegotiate with the lead lender or may selectively renegotiate loans with individual lenders or subsets of lenders within the syndicate; and
• determining whether members of the syndicate may change without the permission of the borrower, or whether such a change may require an amendment to the loan agreement.

The Group’s Discussion

The Group agreed with the analysis. One Group member emphasized the importance of examining the legal terms and substantive conditions of a contract to determine whether it represents a single loan from a single lender or multiple separate loans from each individual lender. They noted that, while an arrangement might appear to be a single loan, particularly if one lender is appointed to negotiate or administer the loan on behalf of the syndicate, a detailed review of the terms could indicate otherwise. Additionally, they raised that syndicated loans often include embedded derivatives, which should be considered when assessing whether the loan terms have been substantially modified.

Overall, the Group’s discussion raised awareness of the accounting for debt modifications. No further actions were recommended to the AcSB.

 

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¹ This is explained in paragraph B5.4.6 of IFRS 9, the IFRIC Update (March 2016 and June 2017) and paragraph B3.3.6A of IFRS9.

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Year-end Financial Reporting Reminders

The Group discussed several topics relating to the preparation of their 2024 year-end financial statements.

Issue 1: New tax regulations

There are several new tax regulations that will require consideration as part of the preparation of an entity’s year-end financial statements.

Pillar Two Income Taxes

Background

In December 2021, the Organisation for Economic Co-operation and Development (OECD) published the Pillar Two model rules (also known as the Global Anti-Base Erosion rules or GloBE rules) as part of an international tax reform to respond to taxation challenges in the digital economy. “Pillar Two income taxes” are income taxes arising from tax laws enacted, or substantively enacted, requiring the application of Pillar Two model rules.

Pillar Two aims to ensure that qualifying multinational enterprises (MNEs) pay a minimum level of tax of 15 per cent on income arising in each jurisdiction where they operate. It does this by requiring qualifying MNEs to pay a top-up tax when they have an effective tax rate of less than 15 per cent in any given jurisdiction. Qualifying MNEs are those with consolidated revenues in excess of €750 million (approximately $1 billion) in at least two out of the last four years.

On June 19, 2024, Bill C-69, which implements the global minimum tax rules into Canadian law, received royal assent. The legislation includes an income inclusion rule and domestic minimum top-up tax that applies to fiscal years of qualifying MNE groups starting on or after December 31, 2023. The legislation also incorporates the OECD guidance released since August 2023.

Amendments to IAS 12 Income Taxes

In May 2023, IAS 12 was amended to introduce a mandatory temporary exception from recognizing and disclosing information about deferred tax assets and liabilities related to Pillar Two income taxes. The amendments became effective immediately upon issuance, and entities must disclose their application of the exception. The exception will remain in effect until the International Accounting Standards Board (IASB) decides to remove it or make it permanent.

The IASB also introduced disclosure requirements for periods when Pillar Two legislation is enacted or substantively enacted but not yet in effect, and for periods when it is enacted and effective. These additional disclosure requirements were effective for annual reporting periods beginning on or after January 1, 2023.

Key Considerations

MNEs must track the implementation of Pillar Two model rules in all jurisdictions where they operate, including subsidiaries, joint ventures, flow-through entities, and permanent establishments. Transitional “safe-harbour provisions” may apply, reducing top-up taxes to zero in jurisdictions that meet specific criteria. However, the rules, calculations, and application of these provisions are complex.

Impact of Pillar Two Taxes when Assessing Recoverability of Deferred Tax Assets

At its May 14, 2024, meeting, the Group discussed whether the impact of Pillar Two should be considered when assessing the recoverability of deferred tax assets arising under an entity’s existing corporate tax regime.

Based on the fact pattern discussed, most group members supported the view that Pillar Two is ignored when assessing the recoverability of deferred tax assets arising under a corporate tax regime. Several group members thought the intent of the temporary mandatory exception was clear in that no Pillar Two impacts should be reflected in the accounting for deferred tax assets or liabilities. Further details of this discussion can be found here.

Other Considerations

Entities should conduct and/or consider the following in the preparation of their year-end financial statements:

• Consider if new financial reporting controls and system updates are needed to manage the calculations and data requirements of Pillar Two income taxes.
• Identify whether there are any challenges to obtaining data necessary to perform the calculations based on the model rules.
• Monitor the implementation of the GloBE rules and other tax legislations in relevant jurisdictions, particularly on when the rules are substantively enacted in their tax laws.
• Engage with users to determine the appropriate level of disclosures for the 2024 annual financial statements.

Excessive Interest and Financing Expense Limitations (EIFEL)

Background

EIFEL are Canadian tax regulations designed to limit the deductibility of interest and financing expenses for corporations and trusts. These rules primarily apply to prevent tax avoidance through excessive interest deductions, particularly in scenarios where interest payments are made to related non-resident entities.

EIFEL limits the deductibility of net interest and financing expenses (IFE), generally capping them at a 30 per cent fixed ratio of adjusted taxable income. Any interest amounts denied under these rules are carried forward, providing taxpayers with the opportunity to offset them against future taxable income.

The EIFEL rules apply to taxation years beginning on or after October 1, 2023.

Exceptions to EIFEL

Exceptions to the EIFEL rules include:

• Canadian-controlled private corporations with taxable capital employed in Canada of less than $50 million.
• A group of corporations and trusts whose aggregate net interest expense among their Canadian members is $1,000,000 or less.
• Certain stand-alone Canadian-resident corporations and trusts, and groups consisting exclusively of Canadian-resident corporations and trusts that carry on substantially all of their businesses, undertakings, and activities in Canada.

A new definition was also included for exempt IFE, which provides a safe harbour for the public-private partnership industry. Essentially, the rules do not apply to limit the deductibility of IFE on third-party borrowings or other financing expenses that were entered into in respect of an agreement with a Canadian public sector authority to design, build, and finance real or immovable property owned by the public sector authority.

Share Repurchase Tax (Buyback Tax)

Background

As of January 1, 2024, Canada has implemented a two per cent tax on share repurchases by publicly listed entities. The tax is intended to reduce the incentive for corporations to repurchase shares as a way of returning capital to shareholders while avoiding the higher tax treatment of dividends. The Buyback Tax will apply to relevant transactions that occur on or after January 1, 2024, and does not include a safe harbour for equity issued prior to January 1, 2024. 

The tax applies to Canadian-resident corporations (excluding mutual fund corporations) whose shares are listed on designated stock exchanges, real estate investment trusts, and specified investment flow-through trusts and partnerships.

Disclosure Considerations

Background

To comply with the disclosure requirements in paragraphs 79-88 of IAS 12, an entity should provide details on how the recently introduced tax legislation affects an entity’s tax position, particularly the recognition, measurement, and recoverability of deferred tax assets. For example, EIFEL may result in certain finance expenses being disallowed for tax purposes but available for carry-forward, which may give rise to the recognition of deferred tax assets and required disclosures relating to such balances. Entities in scope of Pillar Two should be aware of the specific disclosure requirements in paragraph 88A-88D of IAS 12 relating to Pillar Two taxes, and the prohibition against disclosing information about deferred tax assets and liabilities relating to Pillar Two income taxes.

The Group’s Discussion

The Group agreed with the analysis presented and raised several other points for consideration.

Pillar Two Income Taxes

One Group member noted that many entities may not be in scope of the Pillar Two model rules (e.g., entities that are not part of a qualifying MNE group). However, for those entities that are in scope of the Pillar Two model rules, there can be significant complexity involved in determining if a tax accrual should be recognized. Entities should also exercise caution when assessing their current and deferred taxes due to the mandatory exemption in IAS 12, which prohibits the recognition and disclosure of deferred tax assets and liabilities related to Pillar Two income taxes.

One Group member reiterated the complexity of tax calculations under the Pillar Two model rules. Provided an entity is applying full Pillar Two model rules, effective tax rate calculations must be done at the jurisdictional level, which represents a change from current practice. It will also be important for entities to monitor when global minimum tax rules are enacted or substantively enacted in jurisdictions in which they operate as this can impact the amount of top-up taxes paid.

One Group member highlighted that Canadian subsidiaries of MNE groups may be impacted by Canada’s domestic minimum top-up tax and, as a result, will need to consider whether a tax accrual should be recognized.

Other tax considerations

Other tax considerations raised by Group members are listed below:

• One Group member noted that the EIFEL rules could impact the recognition of an entity’s deferred tax assets. This is because an entity may have higher taxable income in future periods if they are unable to make as many interest or financing expense deductions.
• One Group member encouraged large entities to carefully assess whether they would be in scope of Canada’s digital services tax to determine whether a related tax accrual should be recognized.²
• One Group member reaffirmed that entities are required to use tax rates that are substantively enacted when applying the requirements in IAS 12. As a result, entities should not be factoring in the proposed new capital gains inclusion rate for their 2024 year-end financial statements.³

Issue 2: Impact of amendments to IAS 1 Presentation of Financial Statements

Background

In January 2020, the IASB issued, “Classification of Liabilities as Current or Non-current (Amendments to IAS 1),” which addresses the classification of liabilities that are settleable through an entity’s own shares (e.g., convertible debt). Convertible debt is a compound (or hybrid) financial instrument which includes a host liability and a conversion option held by the counterparty, which is classified as either an equity instrument or a liability applying IAS 32 Financial Instruments: Presentation.

Prior to the amendments, paragraph 69(d) of IAS 1 included a statement that, “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.” The effect of this statement was that a bond that the holder may convert to equity before maturity is classified as current or non-current according to the terms of the bond, without considering the possibility of earlier settlement by conversion to equity. The IASB concluded that when it added this statement to paragraph 69(d) in 2009, it had intended the statement to apply only to liabilities that include a counterparty conversion option that meets the definition of an equity instrument in IAS 32.⁴

The amendments to IAS 1 clarify the IASB’s intention. The amendments indicate that if the terms of a liability could, at the option of the counterparty, result in settlement of the liability by the transfer of the entity’s own equity instruments and the option is classified as an equity instrument applying IAS 32, the option would not affect classification of the host liability as current or non-current. In contrast, if the option is classified as a liability, it would affect classification of the host liability as current or non-current (paragraph 76B of IAS 1). These amendments are effective for annual reporting periods beginning on or after January 1, 2024, and are applicable retrospectively.

The Group discussed this topic at its May 2020 meeting. That discussion focused on analyzing how the amendments to IAS 1 should be applied when classifying convertible debt in several fact patterns. This topic was brought back to the Group with a specific focus on comparing approaches an entity may have taken in classifying convertible debt as current or non-current before the amendments to IAS 1, and whether such classification would change following the adoption of the amendments to IAS 1.

In October 2022, the IASB issued Non-current Liabilities with Covenants (Amendments to IAS 1). These amendments clarify the criteria for classifying liabilities arising from loan arrangements where the entity’s right to defer settlement for at least 12 months from the reporting date is subject to the entity complying with certain covenants. The amendments also introduce additional disclosure requirements for non-current loan liabilities subject to covenants. These amendments are effective for annual reporting periods beginning on or after January 1, 2024.

The Group discussed this topic at its September 2023 and December 2023 meetings. As the focus of the Group’s discussion is on the classification of convertible debt and not loans with covenants, the October 2022 amendments were not discussed further.

Example 1: Convertible Debt – Conversion Feature is Equity

Fact Pattern

• Entity A issues a currency unit (CU) 100 note payable with an “American style” conversion option. That is, the holders of the option have the right to exercise the option rights at any time before maturity.
• The note is exercisable at the option of the holder at any time over the life of the note.
• Interest is payable at 10 per cent annually in arrears.
• If exercised, the conversion feature will result in the principal amount of the note being converted into 10 common shares of Entity A together with cash settlement of any accrued but unpaid interest.
• If not exercised, the note payable is repayable in five years. CU is the functional currency of Entity A.

Analysis

The note is a compound financial instrument containing:

• a financial liability (the note payable plus interest); and
• an equity instrument (the conversion feature).
• The conversion feature is an equity instrument because there is no obligation to pay cash and the conversion feature will result in a fixed amount of cash (the note) being exchanged for a fixed number of shares (i.e., the “fixed for fixed” test in IAS 32 Financial Instruments: Presentation is met).

The components of the compound financial instrument are classified as follows:

Components of Instrument	Classification and Rationale
	Prior to the amendments	After the amendments
Financial liability – note payable (principal amount)	Non-current Applying paragraph 69(d) of IAS 1, as applicable prior to the amendments, the conversion feature, which could result in the settlement of the liability by the issue of equity instruments, does not affect its classification. The principal is not due for 5 years; therefore, Entity A has the right to defer settlement for at least 12 months after the reporting period (paragraph 69(d) of IAS 1).	Non-current Applying paragraph 76B of IAS 1, the conversion feature, which may be exercised by the holder at any time, does not affect the note’s classification as current or non-current because the conversion feature is classified as an equity instrument. The principal is not due for 5 years; therefore, Entity A has the right to defer settlement for at least 12 months after the reporting period, assuming any covenants attached to the instrument are complied with at the reporting date (paragraph 69(d) of IAS 1).
Financial liability – accrued but unpaid interest	Current Accrued but unpaid interest is not convertible into shares; therefore, its classification is unaffected by the conversion feature. Interest is payable annually in arrears; therefore, Entity A does not have the right to defer settlement for at least 12 months after the reporting period (paragraph 69(d) of IAS 1).	Current Accrued but unpaid interest is not convertible into shares; therefore, its classification is unaffected by the conversion feature. Interest is payable annually in arrears; therefore, Entity A does not have the right to defer settlement for at least 12 months after the reporting period (paragraph 69(d) of IAS 1).
Equity component – conversion feature	Not applicable – equity Equity is not classified as current or non-current.	Not applicable – equity Equity is not classified as current or non-current.

Example 2: Convertible Debt – Conversion Feature is a Derivative Financial Liability

Fact Pattern

Example 2 is identical to Example 1, except CU is not the functional currency of Entity A; its functional currency is foreign units (FU).

Analysis

The note is a hybrid financial instrument containing:

• a financial liability (the note payable plus interest); and
• a derivative financial liability (the conversion feature).
  • The conversion feature is a derivative financial liability because the conversion feature does not meet the “fixed for fixed” criteria in IAS 32. This is because the note payable is denominated in a currency other than Entity A’s functional currency. Therefore, the amount of cash that will be required to settle the liability on conversion is not represented by a fixed amount of cash expressed in Entity A’s functional currency. That is to say, the note that may be settled by the exercising of the conversion feature is fixed in terms of CU, but not in terms of FU, the functional currency of Entity A.

The components of the hybrid financial instruments are classified as follows:

Components of Instrument	Classification and Rationale
	Prior to the amendments		After the amendments
	Approach #1*	Approach #2*
Financial liability – note payable (principal amount)	Non-current Paragraph 69(d) of IAS 1, as applicable prior to the amendments, is interpreted to mean that the shares that would be issued upon the exercise of the conversion feature are equity instruments. Therefore, this settlement feature does not affect the classification of the liability. As the principal is not due for 5 years, Entity A has the right to defer settlement for at least 12 months after the reporting period (paragraph 69(d) of IAS 1). Therefore, the liability is classified as non-current.	Current Paragraph 69(d) of IAS 1, as applicable prior to the amendments, is interpreted to mean that the conversion feature does affect the classification of the liability, as it is classified as a derivative liability and not equity. Exercise of the conversion option is considered to be settlement of the host liability. As the conversion option is an American-style option, convertible any time prior to maturity, the entity does not have the right to defer settlement of the host liability for at least 12 months after the reporting period and the host liability is classified as current (paragraph 69(d) of IAS 1).	Current Applying paragraph 76B of IAS 1, the conversion feature, which may be exercised by the holder at any time, does affect the note’s classification as current or non-current because the conversion feature is not classified as an equity instrument. Exercise of the conversion option is considered to be settlement of the host liability. As the conversion option is an American-style option, convertible any time prior to maturity, the entity does not have the right to defer settlement of the host liability for at least 12 months after the reporting period and the host liability is classified as current (paragraph 69(d) of IAS 1).
Financial liability – accrued but unpaid interest	Current Accrued but unpaid interest is not convertible into shares; therefore, its classification is unaffected by the conversion feature. Interest is payable annually in arrears; therefore, Entity A does not have the right to defer settlement for at least 12 months after the reporting period (paragraph 69(d) of IAS 1).	Current Accrued but unpaid interest is not convertible into shares; therefore, its classification is unaffected by the conversion feature. Interest is payable annually in arrears; therefore, Entity A does not have the right to defer settlement for at least 12 months after the reporting period (paragraph 69(d) of IAS 1).	Current Accrued but unpaid interest is not convertible into shares; therefore, its classification is unaffected by the conversion feature. Interest is payable annually in arrears; therefore, Entity A does not have the right to defer settlement for at least 12 months after the reporting period (paragraph 69(d) of IAS 1).
Derivative financial liability – conversion feature	Current The conversion feature may be exercised by the holder at any time, and therefore, Entity A does not have the right to defer its settlement for at least 12 months after the reporting period (paragraph 69(d) of IAS 1).	Current The conversion feature may be exercised by the holder at any time, and therefore, Entity A does not have the right to defer its settlement for at least 12 months after the reporting period (paragraph 69(d) of IAS 1).	Current The conversion feature may be exercised by the holder at any time, and therefore, Entity A does not have the right to defer its settlement for at least 12 months after the reporting period (paragraph 69(d) of IAS 1).

*At its December 2014 meeting the Group discussed the classification of convertible debt as current or non-current when the conversion feature is classified as a derivative liability. At the time, paragraph 69(d) of IAS 1 stated that “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.” The question was whether this guidance could be applied to convertible debt with a conversion feature that is classified as a derivative liability. At that meeting most Group members supported the view (i.e., Approach #1 above) that the guidance in paragraph 69(d) could be applied by analogy on the basis that the derivative liability will not be settled by cash, but rather by the entity’s own equity, even if it does not meet the “fixed-for-fixed” condition. However, some supported the view (i.e., Approach #2 above) that the guidance in paragraph 69(d) of IAS 1 could not be applied because they thought that paragraph 69(d) was written for equity instruments that meet the “fixed-for-fixed” condition in IAS 32. Since the requirements in paragraph 69(d) could be interpreted in multiple ways, Group members observed that there was diversity in the application of the requirements.

The Group’s Discussion

The Group agreed with the analysis and examples presented dealing with the classification of convertible debt. Separate and apart from these examples, several Group members highlighted the need for entities to consider the new disclosure requirements for liabilities arising from loan arrangements that are classified as non-current but are subject to the entity complying with covenants within the next 12 months in their year-end reporting. They noted that entities with multiple debt instruments (e.g., real estate companies) may face more complexity in drafting the required disclosures. Some Group members also reiterated that when a loan covenant has been breached with the effect that the loan becomes payable on demand, judgment may be required in determining whether a lender’s action to not demand immediate repayment is considered a waiver or period of grace since these terms are not defined in IAS 1.

Issue 3: IFRS 8 Operating Segments Disclosure for Each Reportable Segment

Background

In November 2023, the IFRS Interpretations Committee (Committee) discussed a submission about how an entity applies the requirements in IFRS 8 to disclose specified amounts related to segment profit or loss for each reportable segment. The Committee discussed the feedback on this tentative agenda decision at its June 2024 meeting, and published a final agenda decision in July 2024.

The Committee observed that there were two main aspects to the questions asked in the submission:

• the requirements of paragraph 23 of IFRS 8 to disclose, for each reportable segment, specified amounts included in segment profit or loss reviewed by the chief operating decision maker; and
• the meaning of “material items of income and expense” in the context of paragraph 97 of IAS 1 as referenced in paragraph 23(f) of IFRS 8.

At its September 2024 meeting, the Group discussed this agenda decision, and focused on the second part of the submission (i.e., the meaning of “material items of income and expense” under paragraph 23(f) of IFRS 8). Further details of this discussion can be found here.

Key Considerations

Determining whether one or more of an entity’s expenses are “material items of income and expense” when applying paragraph 23(f) of IFRS 8 would be a matter of judgment based on the entity’s facts and circumstances, and if information could reasonably be expected to influence the decisions of primary users of the financial statements. Even if an expense is material in the context of the financial statements taken as a whole, it may not be material for every reportable segment.

The impact of this agenda decision will vary depending on how an entity has been interpreting and applying the requirements of paragraph 23(f) of IFRS 8. Entities that previously limited disclosures to “unusual” items listed in paragraph 98 of IAS 1 may need to reconsider their approach more than those with a broader interpretation. Even if there is no direct impact on an entity, this agenda decision is expected to bring increased attention to segment disclosures. Entities are encouraged to revisit their segment disclosures, materiality judgments, and related documentation in light of the clarifications provided in this agenda decision.

The Group’s Discussion

The Group agreed with the analysis. Several Group members reiterated that entities should revisit their segment disclosures at year-end in case changes are required and encouraged entities to document their materiality judgments. Some Group members also cautioned that entities would need to look beyond those circumstances listed in paragraph 98 of IAS 1 to determine what would qualify for disclosure as disclosure may be necessary for additional items of income or expense.

Issue 4: Amendments to IFRS 16 Leases for Sale-leaseback Transactions

Background

In September 2022, the IASB issued Lease Liability in a Sale and Leaseback (Amendments to IFRS 16). These amendments specify the requirements that a seller-lessee uses in measuring the lease liability arising in a sale and leaseback transaction. This is to ensure the seller-lessee does not recognize any amount of the gain or loss that relates to the right of use it retains.

In a sale and leaseback transaction, the seller-lessee assesses whether the transfer of the asset satisfies the requirements in IFRS 15 Revenue from Contracts with Customers to be accounted for as a sale. If it is accounted for as a sale, paragraph 100(a) of IFRS 16 requires the seller-lessee to measure the right-of-use asset arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the right of use retained by the seller-lessee. However, IFRS 16 did not specify the measurement of the liability that arises in a sale and leaseback transaction. This has been addressed in the amendments which illustrates several measurement approaches.

These amendments apply retrospectively to annual reporting periods beginning on or after January 1, 2024. Earlier application is permitted.

Key Considerations

After the commencement date in a sale and leaseback transaction, the seller-lessee applies paragraphs 29-35 of IFRS 16 to the right-of-use asset arising from the leaseback and paragraphs 36-46 of IFRS 16 to the lease liability arising from the leaseback. In applying paragraphs 36-46 of IFRS 16, the seller-lessee determines lease payments, or revised lease payments, in such a way that the seller-lessee would not recognize any amount of the gain or loss that relates to the right of use retained by the seller-lessee.

Applying these requirements does not prevent the seller-lessee from recognizing, in profit or loss, any gain or loss relating to the partial or full termination of a lease, as required by paragraph 46(a) of IFRS 16. The amendments do not prescribe specific measurement requirements for lease liabilities arising from a leaseback. The initial measurement of the lease liability arising from a leaseback may result in a seller-lessee determining lease payments that are different from the general definition of “lease payments” in Appendix A of IFRS 16. The seller-lessee will need to develop and apply an accounting policy that results in information that is relevant and reliable in accordance with IAS 8.

The Group’s Discussion

The Group agreed with the analysis. One Group member reminded entities that variable lease payments should be considered by the seller-lessee when assessing the gain or loss to be recognized in a sale and leaseback transaction.  

Issue 5: Disclosure of Climate-related Matters

When preparing year-end financial statements, entities should consider whether they have disclosed sufficient information about climate-related matters, including related risks and uncertainties, to meet existing disclosure requirements in IAS 1. These disclosure requirements include:

• providing additional disclosure when specific requirements in IFRS Accounting Standards are insufficient to meet users’ needs (paragraph 31 of IAS 1); and
• providing information that is not presented elsewhere in the financial statements but is relevant to understanding them (paragraph 112(c) of IAS 1).

The Group also discussed how climate-related matters should be considered in the context of current IFRS Accounting Standards at its December 2023 meeting. Further information on this discussion can be found here as part of Issue 1: Disclosures about estimation uncertainties and sensitivities given market volatility.

Additional information related to the IASB’s recent climate-related activities is outlined below:

• In July 2023, the IASB republished educational material entitled “Effects of climate-related matters on financial statements.” This document highlights the long-standing requirements in IFRS Accounting Standards to report on the effects of climate-related matters when those effects are material.
• In July 2024, the IASB released an Exposure Draft, “Climate-related and Other Uncertainties in the Financial Statements.” This Exposure Draft proposes to add eight illustrative examples to IFRS Accounting Standards with an objective to improve how the financial statements present and disclose financial information of climate-related and other risks. Responses to this Exposure Draft are currently being deliberated by the IASB and related guidance is therefore not effective for reporting entities.

The Group’s Discussion

Group members agreed with the analysis presented and broadly concluded that the IASB’s educational materials on climate-related matters were helpful resources. Some Group members recommended that entities document their conclusions to support whether a climate-related matter is material for disclosure. One Group member also encouraged entities to reassess whether existing climate-related disclosures remain appropriate as changes may have occurred between their reporting periods.

Overall, the Group’s discussion raised awareness of year-end financial reporting reminders. No further actions were recommended to the AcSB.

 

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² The digital services tax requires foreign and domestic large businesses to pay tax on certain revenue earned from engaging with online users in Canada, provided they meet certain conditions. The Digital Services Tax Act received royal assent on June 20, 2024, and came into force on June 28, 2024.

³ Canada’s 2024 budget announced a proposed increase in the capital gains inclusion rate from one-half to two-thirds for corporations. These changes would be effective for capital gains realized on or after June 25, 2024. As of December 31, 2024, the proposed legislation has not been substantively enacted.

⁴ This is explained in the Basis for Conclusions to IAS 1 (paragraphs BC48G-48H).

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OTHER MATTERS

Equity Method of Accounting – IAS 28 Investments in Associates and Joint Ventures (revised 202x)

In September 2024, the IASB issued the Exposure Draft, “Equity Method of Accounting – IAS 28 Investments in Associates and Joint Ventures (revised 202x).” The Exposure Draft proposes amendments to IAS 28 to answer application questions about how to apply the equity method of accounting. It also proposes new disclosure requirements to IFRS 12 Disclosure of Interests in Other Entities and IAS 27 Separate Financial Statements. The IASB expects the proposed amendments will reduce diversity in practice and provide users of financial statements with more comparable and useful information.

Provisions – Targeted Improvements

In November 2024, the IASB issued the Exposure Draft, “Provisions—Targeted Improvements.” The Exposure Draft proposes amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets to clarify how companies assess when to record provisions and how to measure them. The amendments would also require companies to provide more information about measurement of an obligation. The proposals would most likely be relevant for companies that have large long-term asset decommissioning obligations or are subject to levies and similar government-imposed charges. Comments to the IASB are due by March 12, 2025.

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PRIVATE SESSION

The Group’s mandate includes assisting the AcSB in influencing the development of IFRS Accounting Standards (e.g., providing advice on potential changes to the standards). The Group’s discussion of these matters supports the Board in undertaking various activities that ensure Canadian perspectives are considered internationally. Since these discussions do not relate to assisting interested and affected parties in applying issued IFRS Accounting Standards, this portion of the Group’s meeting is generally conducted in private (consistent with the Board’s other advisory committees).

At its December 2024 meeting, the Group provided input on the following documents for comment to assist in the development of the AcSB’s response letters:

• IASB’s Exposure Draft, “Equity Method of Accounting – IAS 28 Investments in Associates and Joint Ventures (revised 202x)”; and
• IASB’s Exposure Draft, “Provisions—Targeted Improvements.”

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