The IFRS^® Accounting Standards Discussion Group’s purpose is to act in an advisory capacity to assist the Accounting Standards Board (AcSB) in supporting the application in Canada of IFRS^® Accounting Standards. The Group maintains a public forum at which issues arising from the current application, or future application, of issued IFRS Accounting Standards are discussed and makes suggestions to the AcSB to refer particular issues to the International Accounting Standards Board (IASB) or IFRS^® Interpretations Committee. In addition, the Group provides advice to the AcSB on potential changes to IFRS Accounting Standards and such discussions are generally held in private.

The Group comprises members with various backgrounds who participate as individuals in the discussion. Any views expressed in the public meeting do not necessarily represent the views of the organization to which a member belongs or the views of the AcSB.

The discussions of the Group do not constitute official pronouncements or authoritative guidance. This document has been prepared by the staff of the AcSB and is based on discussions during the Group’s meeting.

Comments made in relation to the application of IFRS Accounting Standards do not purport to be conclusions about acceptable or unacceptable application of IFRS Accounting Standards. Only the IASB or the IFRS Interpretations Committee can make such a determination.

ITEMS PRESENTED AND DISCUSSED AT THE SEPTEMBER 12, 2024, MEETING

IFRS 9 and IFRS 16: Distinguishing Between a Lease Modification and an Extinguishment of a Lease Liability

Background

In July 2024, the IASB issued “Annual Improvements to IFRS Accounting Standards – Volume 11,” which amended paragraph 2.1(b)(ii) of IFRS 9 Financial Instruments. The amendment clarified how a lessee should account for the derecognition of a lease liability. Specifically, there was uncertainty about whether a lessee was required to recognize any resulting gain or loss in profit or loss. Paragraph BC2.44 in the Basis for Conclusions to the amendment notes that:

…The amendment clarifies that, when a lessee has determined that a lease liability has been extinguished in accordance with IFRS 9, the lessee is required
to apply paragraph 3.3.3 and recognise any resulting gain or loss in profit or loss.

Some interested and affected parties also asked the IASB to clarify the interaction between IFRS 9 and IFRS 16 Leases – specifically, how a lessee distinguishes between a lease modification as defined in IFRS 16 and an extinguishment (or partial extinguishment) of a lease liability. The IASB concluded that clarifying that interaction between IFRS 9 and IFRS 16 is beyond the scope of an annual improvement. Therefore, the Group discussed which standard applies (i.e., IFRS 9 or IFRS 16) when the consideration in a lease decreases because the lessor waives its right to a portion of the lease payments. The objective of this discussion is to raise awareness and determine whether there is diversity in the accounting for these transactions.

Fact Pattern 1

Restaurant A leases restaurant space within a shopping centre from Lessor B.
Fixed lease payments of $3,000 per month are due in advance on the first day of each month.
The lease term ends on December 31, 2025.
There are no extension, termination, or purchase options.
There are no non-lease components included in the contract.
On June 30, 2024, there are 18 months remaining in the lease term. The lease liability at that time is $54,000 (discounting is ignored for the purposes of this discussion).
Due to maintenance issues in the shopping centre, on July 1, 2024, Lessor B irrevocably waives the monthly payment of $3,000 that was otherwise due on that day (i.e., the July 1, 2024, lease payment of $3,000 becomes currently due and then is waived). All other future lease payments remain unchanged.

Issue 1: How should Restaurant A (the lessee) account for a modification that waives a monthly payment only?

Analysis

View 1A – Lease modification under IFRS 16

Proponents of this view think that forgiving a currently due lease payment is a change in the consideration for a lease that was not part of the original terms and conditions of the contract. Therefore, it meets the definition of a lease modification in IFRS 16. IFRS 16 provides guidance on the subsequent measurement of lease liabilities, including lease modifications. Accounting for modifications to lease contracts, including any impact to the related lease liabilities, is therefore within the scope of IFRS 16.

While the derecognition requirements in paragraph 3.3.1 of IFRS 9 may be considered to determine when the liability for the July 1, 2024 lease payment should be derecognized (i.e., when the obligation specified in the contract is discharged, cancelled, or expires), paragraph 3.3.3 (which requires that the de-recognition of a lease liability should be recognized in profit or loss) is not applicable because there is relevant guidance in IFRS 16. In accordance with paragraph 44(b) of IFRS 16, the lease modification is not accounted for as a separate lease because the consideration for the lease did not increase. In addition, the lease modification did not involve a decrease in the scope of the lease. Therefore, in accordance with paragraph 46 of IFRS 16, the lessee should account for the remeasurement of the lease liability by adjusting the carrying amount of the right-of-use asset.

View 1B – Extinguishment of a financial liability under IFRS 9

Proponents of this view think forgiving a currently due lease payment is an extinguishment of a financial liability as described in paragraph 3.3.1 of IFRS 9. Therefore, they think it should be recognized in profit or loss in accordance with paragraph 3.3.3. They note that this accounting treatment was clarified by the IASB in their July 2024 “Annual Improvements to IFRS Accounting Standards – Volume 11.” Paragraph BC2.44 in the Basis for Conclusions to those amendments states that:

As such, a lessee applying paragraph 3.3.1 of IFRS 9 should also apply paragraph 3.3.3.

Group members were also asked to consider whether their views on Issues 1, 2, and 3 would change if on July 1, 2024, Lessor B had waived past due amounts rather than currently due amounts (e.g., consider if Restaurant A had not made lease payments for the six months from January to June 2024, and Lessor B decided to waive these past due amounts).

The Group’s Discussion

Most Group members agreed that, depending on the facts and circumstances, it can be unclear whether an entity should apply IFRS 9 or IFRS 16 when a lessor waives its right to a portion of the lease payments in a contract. This is because the amendment made to IFRS 9 does not appear to resolve the tension between the scope of IFRS 9 versus IFRS 16. In this example, from the lessee’s perspective, the irrevocable waiver of a lease payment currently due could fall within the scope of IFRS 16 as it meets the definition of a lease modification which includes a change in the consideration for a lease, and could also fall within the scope of IFRS 9, paragraph 3.3.1 which applies to partial extinguishments of financial liabilities (including lease liabilities). They emphasized that an entity should consider all applicable facts and circumstances when determining which standard to apply. However, in this fact pattern, most Group members said they could not preclude either View.

One Group member favoured applying IFRS 9 in this fact pattern because the irrevocable waiver of a lease payment could qualify as a partial extinguishment of the lease liability in the scope of paragraph 3.3.1 of IFRS 9. However, since the definition of a lease modification in IFRS 16 includes changes in the consideration for a lease, it may be difficult to preclude Restaurant A from applying IFRS 16. Another Group member thought, depending on the fact pattern, an entity might apply the derecognition requirements in IFRS 9 when a lessor forgives past due amounts, and the lease modification requirements in IFRS 16 when a lessor agrees to reduce future lease payments. They noted that a lessor forgiving a currently due lease payment falls in between the past and the future, making it challenging to determine which standard to apply in this case.

Some Group members thought that determining which standard to apply is dependent on whether the whole lease contract or the individual lease payments is determined to be the unit of account for the transaction. If the whole lease contract is the unit of account, they thought the forgiveness of lease payments should be accounted for as a lease modification under IFRS 16. However, if the individual lease payments are the unit of account, they thought the forgiveness of past and currently due payments should be accounted for as an extinguishment of a lease liability under IFRS 9.

Several Group members noted that the amendments to IFRS 9 clarified that the gain or loss should be recognized in profit or loss if the lessee concludes that the forgiveness of the currently due lease payment is an extinguishment of the lease liability. One Group member raised that the lessee should consider whether the right of use asset is impaired if the forgiveness of the lease payment is recognized in profit or loss. Another Group member raised that if the forgiveness of the lease payment is material to the entity, it might need to disclose its accounting policy as a significant judgment.

Fact Pattern 2

Assume the same fact pattern as Fact Pattern 1, except Lessor B also agreed to extend the lease term by six months to June 30, 2026.

Issue 2: How should Restaurant A (the lessee) account for a modification that waives a monthly payment and extends the lease term?

Analysis

View 2A – Lease modification under IFRS 16

Like View 1A, proponents of this view think forgiving a currently due lease payment is a change in the consideration for a lease that was not part of the original terms and conditions of the contract. Therefore, it meets the definition of a lease modification in IFRS 16. They noted that extending the lease term also qualifies as a lease modification in IFRS 16 as it changes the scope of the lease. As such, the multiple changes to the lease contract are within the scope of the lease modification guidance in IFRS 16. The guidance in paragraph 3.3.3 of IFRS 9 on where the impact of derecognizing a financial liability should be recognized (i.e., in profit or loss) is not applicable because there is relevant guidance in IFRS 16.

View 2B – Partly an IFRS 9 extinguishment and partly an IFRS 16 lease modification

Like View 1B, proponents of this view think forgiving a currently due lease payment is an extinguishment of a financial liability as described in paragraph 3.3.1 of IFRS 9, even when the modification is part of a broader contract modification. Therefore, they think the forgiveness should be recognized in profit or loss in accordance with paragraph 3.3.3 of IFRS 9. However, the extension to the lease term is a lease modification that should be accounted for in accordance with the lease modification guidance in IFRS 16.

The Group’s Discussion

Most Group members agreed with View 2A. They thought the forgiveness of the currently due lease payment combined with the extension of the lease term should be accounted for as a lease modification under IFRS 16. They noted these two amendments were likely negotiated together, making it challenging to account for them separately. For example, one Group member noted that the lessor might not have agreed to waive the currently due lease payment if the lessee did not agree to the six-month term extension. Another Group member noted that the market rate for leased space often fluctuates over time, and that the six-month term extension might not be at the current market rate and may be influenced by other factors, such as the forgiveness of currently due lease payments. If the rent for the extended term is above the market rate, even though the lessee benefits from the waiver, it will incur a higher cost for rent during the extension period. This raises the question as to whether this cost is part of the forgiveness under IFRS 9, is part of the future lease payments under IFRS 16, or both. Therefore, depending on the facts and circumstances, it might be challenging to allocate the revised consideration between the extinguishment of the lease liability under IFRS 9 and the lease modification under IFRS 16. One Group member also mentioned a recent discussion by the Group on the unit of account for lease modification accounting. They noted that this discussion highlighted some of the practical challenges associated with allocating revised lease consideration when there is a contract modification.

Some Group members noted their view on this issue depends on whether the whole lease contract or the individual lease payments are the unit of account. If the whole lease contract is the unit of account, they supported View 2A. If the individual lease payments are the unit of account, they would consider splitting the amendment to the contract between IFRS 9 and IFRS 16. However, they acknowledged the practical challenges associated with doing so.

Fact Pattern 3

Assume the same fact pattern as Fact Pattern 1, except Lessor B also agrees to reduce the monthly payment that will be due on August 1, 2024, to $2500. All other future lease payments remain unchanged.

Issue 3: How should Restaurant A (the lessee) account for a contract modification that waives a monthly payment and reduces a future monthly payment?

Analysis

View 3A – Lease modification under IFRS 16

Proponents of this view think forgiving a currently due lease payment and reducing a future lease payment are both changes in the consideration for a lease that was not part of the original terms and conditions of the contract. Therefore, they both meet the definition of a lease modification in IFRS 16. Since both modifications are decreases in the consideration for the lease, the change is not accounted for as a separate lease. The modifications also do not decrease the scope of the lease. Per paragraph 46 of IFRS 16, the modification is accounted for as an adjustment to the lease liability and the right-of-use asset.

View 3B – Partly an IFRS 9 extinguishment and partly an IFRS 16 lease modification

Like View 1B, proponents of this view think forgiving a currently due lease payment is an extinguishment of a financial liability as described in paragraph 3.3.1 of IFRS 9, even when the modification is part of a broader contract modification. However, the reduction of the future lease payment is a lease modification that should be accounted for in accordance with the lease modification guidance under IFRS 16.

The Group’s Discussion

Most Group members agreed with View 3A. They thought the reduction of a future lease payment was within the scope of the lease modification guidance in IFRS 16. They also noted that the agreement to waive the currently due lease payment and reduce the future payment were likely negotiated together. Therefore, it could be challenging to account for them separately for the reasons highlighted in the Group’s discussion on Issue 2.

Some Group members raised that there might be an additional view which is applying the derecognition guidance in IFRS 9 to both the waiver of the currently due lease payment and the reduction of the future payment. They thought this additional view might also be supportable as the reduction in cash outflows is a partial derecognition of the lease liability within the scope of IFRS 9. As noted in the discussion on Issue 1, some might find this more supportable if the entity determines that the unit of account is the individual lease payments rather than the whole contract.

The Group noted that the IASB is conducting its post-implementation review of IFRS 16 and expects to issue its Request for Information in the first half of 2025. Therefore, the Group recommended that the AcSB consider highlighting observations from this discussion in its response to the IASB’s Request for Information.

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IFRS 18: Education Session

The Group received an overview ¹ of the key requirements in IFRS 18 Presentation and Disclosure in Financial Statements.

¹ These materials are for informational and educational purposes only and should not be relied upon as professional or investment advice.

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IFRS 18: Implementation Issues

Background

In April 2024, the IASB released IFRS 18 Presentation and Disclosure in Financial Statements, which will replace IAS 1 Presentation of Financial Statements and consequentially amend several other IFRS Accounting Standards. While IFRS 18 will not change how entities recognize and measure items in the financial statements, it will affect how they present and disclose those items, particularly in the income statement.

The IASB developed IFRS 18 in response to requests from investors for more comparable subtotals and better disaggregation of information in the financial statements. This is intended to help investors better understand an entity’s performance and to make it easier to compare the performance of different entities. The new standard is also expected to bridge the gap between some of the non-generally accepted accounting principles (non-GAAP) performance measures used by entities to explain their financial performance outside the financial statements and the nearest IFRS-defined subtotal.

IFRS 18 represents a substantial shift in financial reporting requirements, primarily affecting the presentation of information in the income statement and the extent of disclosures in the notes to the financial statements. Entities might need to update their financial reporting systems, processes, and controls to comply with the new requirements. The impact of IFRS 18 will likely vary depending on an entity’s current reporting practices and the maturity of their reporting systems.

IFRS 18 will require entities to classify income and expenses into three new categories on the income statement: operating, investing, and financing. It will also require entities to present two new subtotals on the face of the income statement: Operating profit or loss, and Profit or loss before financing and income tax². In addition to these new categories, entities will continue to present income taxes and discontinued operations (when applicable) separately.

The operating category in the income statement will generally capture income and expenses arising from the entity’s main business activities. The investing category will include the performance results of the entity’s investments in associates and joint ventures, as well as assets that generate a return largely independent of other resources and returns on cash and cash equivalents. The financing category will include returns on liabilities related to raising funds, and interest expense on these liabilities, and other financial liabilities, such as lease liabilities. IFRS 18 includes specific requirements for entities that invest in assets and entities that provide financing to customers as a main business activity, such as banks.

Entities that already present an “Operating profit or loss” subtotal may need to change how they calculate it. Significant time and effort might be required for entities to identify into which categories their income and expenses should map within the income statement. The nature of an entity’s business activities could also determine the extent of the impact. For example, entities with multiple business activities might need to exercise greater judgment to determine if income and expenses from all their activities should be classified within the operating category.

IFRS 18 also introduces updated guidance regarding an entity’s analysis of operating expenses (e.g., presentation by function, by nature, or mixed), including additional note disclosures for any expenses presented by function in the income statement. There is also enhanced guidance on aggregation and disaggregation (or “grouping” of information) in the financial statements (i.e., all of the primary financial statements and the notes).

The new standard also introduces disclosures about management-defined performance measures (MPMs). MPMs are subtotals of income and expenses used in public disclosures to communicate management’s view of the entity’s financial performance. The new requirements on MPMs may impact current communication practices with investors and other interested and affected parties. Entities will need to determine how to explain the different presentation and disclosure changes resulting from the adoption of IFRS 18.

IFRS 18 is effective for annual reporting periods beginning on or after January 1, 2027, with early application permitted, and it should be applied retrospectively. Therefore, entities with December 31^st year-ends will need to make any necessary changes to systems, processes, and controls by January 1, 2026. Additionally, entities will be required to present any new income statement headings and subtotals arising from the application of IFRS 18 in their interim financial statements in the first year of adoption.

Given the significant impact IFRS 18 is expected to have on many Canadian entities, the Group discussed some of the more substantive implementation challenges to help entities prepare for this change.

Issue 1: IFRS 18 may require new judgments and assessments

Analysis

Level of aggregation and disaggregation

IFRS 18 may require entities to apply judgment in deciding the appropriate level of aggregation and disaggregation across the financial statements. This includes deciding when information should be included in the primary financial statements or disaggregated in the notes, based on the new requirements and guidance.

Identifying an entity’s main business activities

IFRS 18 may also require entities to make new assessments to identify their main business activities. For entities with diverse operations, this process will involve evaluating their various revenue streams and determining the significance of each to the overall business, which could require extensive analysis and judgment. For group entities with specified main business activities, such as a manufacturer that provides financing to customers, the income statement classification at the consolidated level may differ from that at the operating company level if all activities are not considered main business activities for the group as a whole (paragraphs B37 and BC98-BC99 of IFRS 18).

Consider, for example, a scenario when a car manufacturer's group reporting includes several subsidiaries in the car manufacturing business, along with one subsidiary that holds investment property. In the group's consolidated financial statements, the business activity of property investment does not constitute a separate operating segment and as such may not be a main business activity. However, in the subsidiary’s stand-alone financial statements, investing in property may be a specified main business activity. Therefore, if investing in property is a main business activity only at the subsidiary level, adjustments will be necessary when presenting the consolidated income statement to reclassify rental income from the operating category in the subsidiary’s income statement to the investing category at the consolidated level.

Classifying income and expenses

Another area where new assessments may arise is in identifying the categories in which income and expenses should be classified. This assessment may be more onerous for income and expenses that have specific classification requirements in IFRS 18, such as foreign exchange differences, gains and losses on derivatives, and income and expenses on hybrid contracts.

When applying IFRS 18, foreign exchange differences will be classified in the same category as the income and expenses from the items that resulted in the difference. For example, foreign exchange differences arising on a foreign currency–denominated trade receivable will be classified in the operating category, while those from a foreign currency–denominated bank loan will be classified in the financing category. However, if this classification exercise would involve undue cost or effort, then the affected foreign exchange differences should be classified in the operating category (paragraphs B65-B66 and B68 of IFRS 18).

One change that may be particularly relevant for Canadian entities across multiple sectors is presentation involving joint ventures. IFRS 18 does not allow income and expenses from investments in associates, joint ventures, and unconsolidated subsidiaries that are accounted for using the equity method to be classified in the operating category, even if investing in these entities is an entity’s main business activity (paragraph 55(a) of IFRS 18).

Equity method or fair value through profit or loss

IFRS 18 provides eligible entities (e.g., venture capital organizations, mutual funds, and some insurers) with an option to change their election from measuring an investment in an associate or joint venture using the equity method to fair value through profit or loss when they first apply IFRS 18. Consequently, this may be a key judgment for these entities (paragraph C7 of IFRS 18).

Method for presenting operating expenses

Entities may need to reassess which method for presenting operating expenses (i.e., by nature, by function, or using a mixed presentation) provides the most useful information about operating expenses on the face of the income statement (paragraphs 78 and B80 of IFRS 18). Given that this decision impacts how interested and affected parties perceive an entity’s financial health and operational efficiency, selecting the most appropriate method to convey this in the context of these changes may require careful consideration. Even if the analysis results in retaining a mixed presentation, for example, the entity will still need to document why this approach is appropriate under IFRS 18, based on their specific facts and circumstances.

The Group’s Discussion

The Group agreed with the analysis of significant new judgments and assessments that entities may need to make when adopting IFRS 18. Some Group members noted that while IFRS 18 will lead to a more standardized structure for income statements, it will still require entities to apply significant judgment. These judgments, like those outlined above, may vary among entities dependent on several factors, including their size, complexity and the nature of their operations. Some members noted that adopting IFRS 18 will require a substantial amount of work for entities even if the impact on their financial statement is minimal. That is because all preparers will be required to document their key judgments and assessments to demonstrate their compliance with the new requirements of IFRS 18. Entities are further encouraged to engage early with their auditors on aspects of their analyses that require significant judgment.

One Group member thought that the new disclosure requirements for MPMs will provide an opportunity for entities to review the performance measures that they currently disclose and reconsider which measures remain relevant to their investors. Another Group member noted that it might be unclear which performance measures need to be disclosed under the MPM requirements in IFRS 18 and indicated that this could be another area requiring judgment.

Issue 2: Changes to processes and systems

Analysis

Disclosures about management defined performance measures

Entities using performance measures in their public communications (including management discussion and analysis (MD&A), press releases, and investor presentations) that meet the definition of MPMs in IFRS 18 will need to establish a process to capture and analyze these key performance metrics to ensure consistency with financial statement disclosures. For example, entities will need to capture relevant financial information to disclose reconciliations of MPMs to the most directly comparable IFRS subtotals, including tax effects and effects on non-controlling interests. Determining which key performance metrics constitute MPMs under IFRS 18 and deciding where they will be disclosed in the financial statements will likely involve multiple interested and affected parties and may take some time. Furthermore, since MPMs will be included in audited financial statements with requisite disclosures for the first time, entities will need to document their process for identifying which performance measures qualify as MPMs, their rationale, and how they comply with the requisite disclosure requirements in IFRS 18.

Aggregation and disaggregation

Companies may need to further disaggregate the information disclosed in existing notes. Entities must ensure they can gather, process, and report data at the level of detail required by IFRS 18, which may necessitate changes to existing workflow processes and controls. Some entities might need to adapt their financial reporting systems to track and collate the more disaggregated information and classify income and expenses into new categories. This could involve significant investments in new software or upgrades to existing systems to ensure they can capture and report the necessary information accurately. The system implications may be particularly significant for companies presenting an analysis of operating expenses by function or using a mixed presentation on the face of the income statement.

Other system implications

The adoption of IFRS 18 might also result in other system implications. For example:

For groups of companies, the output of one company within the group might be the input for another. In some cases, the nature of expenses is lost or not tracked at the consolidated level. This may be more significant when the standard costing method for inventories is used. There might also be more than one set of business activities in the group, and the classification of items of income and expenses may be different at the consolidated level compared to the operating company level.
IFRS 18 includes specific classification requirements for certain items, such as foreign exchange differences, fair value gains and losses on derivatives, and income and expenses from hybrid contracts. Such income and expenses may therefore need to be classified into different income statement categories. Some companies may also have separate treasury management systems to record information on financial instruments at a more granular level compared with the enterprise resource planning systems, which may also require updates.
Entities may need to review charts of accounts, update transaction recording systems, revise consolidation processes, add new data points for disclosures, or design revised control procedures to ensure compliance. This may mean entities will need to redefine account classifications and ensure consistency across different entities within a group.

The Group’s Discussion

The Group agreed with the analysis of changes to processes and systems that entities might need to consider when adopting IFRS 18. Some group members thought the changes to processes and systems might be particularly substantial for larger and more complex entities, such as those with multiple enterprise resource planning systems, and those that operate in multiple jurisdictions. They noted that entities might need to implement manual workarounds if they are unable to implement the necessary system changes in a timely manner, which will also require adequate controls to reduce the risk of errors. Although IFRS 18 only impacts presentation and disclosure, Group members think it may take a significant amount of time and effort for most entities to implement. Therefore, they encourage entities to begin this process early to ensure the changes can properly flow through the necessary processes and controls. One Group member also noted that auditors should engage with their clients early in the process of implementing IFRS 18 so that they are comfortable with their clients’ key judgments, system changes, and controls. Some Group members raised that since MPMs will be included in audited financial statements for the first time, entities will need to carefully consider which performance measures are within the scope of the IFRS 18 disclosure requirements and document their rationale and disclosure considerations.

Issue 3: Changes to contractual arrangements linked to financial performance

Analysis

Currently, some companies present self-defined subtotals in their income statements, which will likely need to change to align with the new defined subtotals in IFRS 18. For example, the introduction of the mandatory defined subtotal for operating profit under IFRS 18 may require companies that currently present an “operating profit” subtotal to change how they calculate this subtotal.

Employee compensation arrangements, bonus programs, covenant tests, or performance-based contracts that link to or use existing self-defined subtotals, such as operating profit or loss as a starting point for the relevant assessment, will need to be reviewed for any potential impact under IFRS 18. Depending on the specific arrangements in place, it may be necessary to amend existing terms and conditions. In such cases, entities should identify the required changes, communicate them to relevant counterparties, and assess the implications of the new terms.

The Group’s Discussion

The Group agreed that entities should consider changes to contractual arrangements, including employee compensation arrangements, as a result of the new IFRS 18 defined subtotals in the income statement. Some Group members also raised that some employee compensation arrangements are linked to MPMs, which will now be included within audited financial statements with requisite disclosures. They thought this will improve transparency and increase comprehension of how compensation-linked MPMs are prepared, which will help facilitate conversations about employee and executive compensation arrangements.

Issue 4: Communication to investors and other interested and affected parties, and next steps

Analysis

The annual report is a key aspect of a company’s communication with its interested and affected parties. It is common to use non-GAAP or alternative performance measures, such as adjusted operating profit or earnings before interest, taxes, depreciation, and amortization (EBITDA), to assess progress against strategic objectives and measure business performance in the MD&A. IFRS 18 may cause companies to revisit these non-GAAP performance measures discussed in the front-half of their annual report. Additionally, ensuring that investors and other interested and affected parties understand how the income statement and disclosures will change before the release of the first interim financial statements and annual report after adopting IFRS 18 will be critical. Involving investor relations teams early will be important so that, when mandatory reporting under IFRS 18 begins, all key interested and affected parties already understand the impact of the new standard, helping to avoid potential misinterpretations. Similarly, companies will need to educate their staff members on the requirements of IFRS 18 and changes to processes, systems, and controls.

Developing a robust communication strategy is essential. Companies should assess how IFRS 18 will affect their key performance indicators (KPIs) and consider developing transitional KPIs to bridge the gap between the old and new reporting standards. This approach can help maintain consistency in performance evaluations and external reporting during the transition period. To manage the transition effectively, companies should form cross-functional teams that include representatives from finance, information technology, operations, and investor relations. These teams can collaborate to address the various aspects of IFRS 18 implementation, ensuring a coordinated approach across the organization.

Canadian entities should begin preparing for IFRS 18 implementation as early as possible. Conducting a comprehensive gap analysis to identify areas of significant change is a crucial first step. This analysis should cover financial statement presentation, systems capabilities, data collection processes, and potential impacts on KPIs. Entities will need to allocate time to prepare for required reconciliations comparing IAS 1 presentation to IFRS 18 restated amounts for each line item presented in the interim income statement for the comparative periods immediately preceding the current and cumulative periods in which IFRS 18 is first applied.

The Group’s Discussion

The Group agreed that entities should communicate the impact of IFRS 18 to their investors and other interested and affected parties as early as possible so that they have time to process and understand the changes. One Group member also noted that entities will need to comply with regulatory requirements to disclose in their MD&A the impact of adopting a new accounting standard on their financial statements and business practices. Some Group members raised that the Canadian Securities Administrators are assessing the impact of IFRS 18 on regulatory requirements, including their guidance on non-GAAP measures. One Group member noted that, since regulators are still evaluating potential regulatory changes related to IFRS 18, entities opting for early adoption should be aware that further regulatory changes may occur after they have adopted the standard.

Overall, the Group’s discussion raised awareness of the more substantive implementation challenges associated with the adoption of IFRS 18. Since entities are still in the process of planning their implementation of the standard, the Group plans to discuss additional implementation challenges at future meetings.

² The sub-total “Profit or loss before financing and income taxes” is not permitted for an entity that provides financing to customers as a main business activity and chooses to classify income and expenses as operating for all liabilities that involve only the raising of finance (IFRS 18, BC189).

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IFRS 9: Derecognition of Financial Liabilities Settled Using Electronic Payment Systems

Background

In September 2021, the IFRS Interpretations Committee issued a tentative agenda decision to address a request it received about the recognition of cash received via an electronic transfer system as settlement for a financial asset. The submission asked whether an entity could derecognize a trade receivable and recognize cash on the date an electronic cash payment is initiated by the counterparty (e.g., its reporting date), rather than on the date the electronic cash payment is received when there is a multi-day settlement period. The Group discussed the Committee’s tentative agenda decision at its December 2021 and September 2022 meetings. At its meeting in September 2022, the IASB determined that they would not approve the issuance of the Committee’s tentative agenda decision due to concerns raised by respondents of the potential broader implications that finalization of the tentative agenda decision could have for the derecognition of financial liabilities. Instead, the IASB undertook a standard-setting project to address the issue with a specific focus on the derecognition of financial liabilities settled through electronic payment systems.

In May 2024, the IASB published “Amendments to the Classification and Measurement of Financial Instruments – Amendments to IFRS 9 and IFRS 7,” which includes amendments to address how an entity would determine the date of derecognition of financial assets and financial liabilities, such as trade receivables and trade payables, respectively.

The new paragraph B3.1.2A in the amendment clarifies that a financial asset is derecognized on the date that the contractual rights to the cash flows expire or the asset is transferred. Similarly, the amendment states that a financial liability is derecognized on the settlement date, which is the date on which the liability is extinguished because the obligation specified in the contract is discharged or cancelled or expires unless an entity is eligible for, and elects to apply, the exception also added to IFRS 9 as part of the amendments. Specifically, paragraph B3.1.2A of IFRS 9 states:

Unless paragraph 3.1.2 applies, an entity shall recognise a financial asset or financial liability on the date on which the entity becomes party to the
contractual provisions of the instrument (see paragraph 3.1.1). A financial asset is derecognised on the date on which the contractual rights to the cash
flows expire or the asset is transferred (see paragraph 3.2.3). Unless an entity elects to apply paragraph B3.3.8, a financial liability is derecognised on the settlement date, which is the date on which the liability is extinguished because the obligation specified in the contract is discharged or cancelled or
expires (see paragraph 3.3.1) or the liability otherwise qualifies for derecognition (see paragraph 3.3.2).

The purpose of this agenda item is to discuss the high-level implications of the amendments to IFRS 9 related to the derecognition of financial liabilities, and the criteria which an entity would need to meet in order to derecognize a financial liability on a date earlier than the settlement date.

Consider the following example of current practice for the derecognition of a financial liability settled through electronic payment:

A Canadian entity has a material trade payable due to a third party.
The entity initiates an electronic payment to settle the trade payable one day before its period end.
Once the electronic payment is initiated, the entity’s bank account balance is reduced to reflect the transfer of cash.
The entity’s current accounting practice is to credit cash and debit (reduce) trade payables for the same amount on the date electronic payments to third parties are initiated.
The electronic payment system used by the entity takes three days to settle the transaction.

Applying its current accounting practice, the entity’s period-end financial statements would reflect the fact that the trade payable has been settled via the electronic payment initiated the previous day. However, if the electronic payment system used by the entity takes three days to settle the transaction, the counterparty will only receive the cash in their bank account two days after the entity’s period end.

The practice of derecognizing financial instruments when a payment is initiated using an electronic payment system instead of when the payment is received by the counterparty is consistent with the concept of applying trade date accounting to the derecognition of financial assets and financial liabilities. However, the Committee’s discussion and tentative agenda decision clarified that trade date accounting only applies to the regular way purchase and sales of financial assets and not broadly to the derecognition of financial assets and financial liabilities. Specifically, the Committee’s discussion noted that in the submitted fact pattern, the entity is neither purchasing nor selling a financial asset. Therefore, paragraph 3.1.2 of IFRS 9, which specifies requirements for a regular way purchase or sale of a financial asset, is not applicable. The Committee staff also noted the following in their paper analyzing the comment letters on the tentative agenda decision:

We continue to agree with the Committee that, in the submitted fact pattern, the entity is neither purchasing nor selling a financial asset. Instead, the entity receives cash as settlement for an existing financial asset—the trade receivable from the customer. In our view, the settlement of a trade receivable cannot
be characterised as either the ‘purchase’ of cash or the ‘sale’ of that trade receivable.

We also note that paragraph BA.4 of IFRS 9 states ‘a regular way purchase or sale gives rise to a fixed price commitment between trade date and
settlement date that meets the definition of a derivative’. The receipt of cash as settlement for a trade receivable gives rise to no such fixed price
commitment.

We therefore conclude that, in the submitted fact pattern, the requirements in paragraph 3.1.2 of IFRS 9 for a regular way purchase or sale of a financial
asset are not applicable³.

The Committee’s discussion and tentative agenda decision highlighted that the current practice of applying derecognition accounting on the transaction initiation date for electronic payments that do not settle on the same day was not supported by IFRS 9. Instead, under the current IFRS 9 liability derecognition guidance, in the simple example above, the financial liability can only be extinguished at the settlement date, three days after the transaction is initiated, when the counterparty receives the cash in their bank account. Although current accounting practice would be for the entity to derecognize the trade payable when the cash leaves the entity’s bank account, this will be three days before the counterparty will receive the cash and three days before the conditions are met for the extinguishment of a financial liability under IFRS 9 before the amendment. Paragraph B3.3.1 of IFRS 9 provides the following guidance on when a financial liability, such as a trade payable, is considered to be extinguished:

A financial liability (or part of it) is extinguished when the debtor either:

(a) discharges the liability (or part of it) by paying the creditor, normally with cash, other financial assets, goods or services; or

(b) is legally released from primary responsibility for the liability (or part of it) either by process of law or by the creditor. (If the debtor has given a
guarantee this condition may still be met.)

Generally, despite the Committee discussions and tentative agenda decision, it is acceptable for entities to continue to follow their current practice of derecognizing financial liabilities settled using electronic payments systems while the IASB undertook standard setting. This is because the outcome of the standard-setting project was unknown until it was completed, and there was an expectation that transition relief would be provided once any amendments were effective.

Exception introduced by the amendments to IFRS 9

The amendments to IFRS 9 introduced an exception to the derecognition rules for liabilities settled through an electronic payment system. The goal of this amendment was to provide practical relief from waiting until settlement to derecognize financial liabilities for entities that use electronic payment systems. However, the exception is not mandatory and entities that wish to avail themselves of the exception need to meet certain requirements.

Paragraph B3.3.8 of IFRS 9 (i.e., the exception) only applies to financial liabilities that are settled in cash using an electronic payment system. If this is the case, entities are permitted to deem the financial liability discharged before the settlement date (i.e., before cash is received by the counterparty) only if the entity has started a payment instruction that resulted in:

(a) the entity having no practical ability to withdraw, stop or cancel the payment instruction;

(b) the entity having no practical ability to access the cash to be used for settlement as a result of the payment instruction; and

In other words, paragraph B.3.3.8(c) requires that the risk of the payee not getting funds as a result of failure by the payment system to honour its commitment to be very small.

Effective date and transition

Entities are required to apply the amendments for annual reporting periods beginning on or after January 1, 2026, with early application permitted.

Issue 1: Implications of the amendments to the derecognition of financial liabilities settled through electronic payment systems and practical challenges should entities want to apply the exception

Analysis

As noted above, the amendments to IFRS 9 clarified that financial liabilities, such as trade payables, can only be derecognized at the settlement date (i.e., when the cash is received by the payee from the payer). However, when the financial liability is settled in cash through an electronic payment system, the entity can elect to apply an exception that would allow the financial liability (or part of it) to be derecognized before the settlement date only if certain conditions are met. The conditions in paragraph B3.3.8 of IFRS 9 are that:

(a) the entity has no practical ability to withdraw, stop or cancel the payment instruction;

(b) the entity has no practical ability to access the cash to be used for settlement as a result of the payment instruction; and

For settlement risk to be insignificant, the payment system must have both of the following characteristics:

completion of the payment instruction follows a standard administrative process; and
there is only a short time between the entity (i) ceasing to have the practical ability to withdraw, stop or cancel the instruction and to access the cash and (ii) when the cash is delivered to the counterparty (see paragraph B3.3.9 of IFRS 9).

Settlement risk would not be insignificant if completion of the payment instruction is subject to the entity’s ability to deliver cash on the settlement date.

If the entity elects to apply this exception, it is required to apply it to all financial liabilities settled through the same electronic payment system. While the application of the exception is intended to be a practical solution, applying the exception is not automatic. Entities will need to conduct an analysis to prove they can qualify for use of the exception. While the level of analysis that entities need to conduct will depend on the specific circumstances of each entity (e.g., countries in which it operates, level of sophistication of banking system, type of electronic payment system used, etc.), some consideration points could include:

understanding an entity’s use of electronic payment systems to settle liabilities, which could be an inventory of payment systems used. This inventory could include a description of each electronic payment system and the jurisdictions in which the payment system is used;
understanding the particular payment system’s, bank’s, or other financial institution’s policies that dictate the cut-off time at which a payment instruction can no longer be withdrawn. In practice, the Canadian payment system network includes multiple ways an electronic payment can be made (e.g., Society for Worldwide Interbank Financial Telecommunication (SWIFT) transfers, large value transfer wire payments, electronic transfer pre-authorized payments, etc.). Obtaining an understanding of each of these payment methods, the specific rules surrounding stop-payment, and the timing of settlement will be crucial;
understanding the specific settlement risk associated with the electronic payment system. While settlement risk within Canadian banking institutions may not be significant, entities operating in developing nations where payment systems are not as sophisticated will need to understand the settlement risk to prove it is insignificant. This practically could result in entities that operate multi-jurisdictionally with different derecognition policies;
understanding the specific payment system’s, bank’s, or other financial institution’s standard administrative processes including the time frame between meeting the criteria described in paragraph B3.3.8(c)(i) and (ii) of IFRS 9 above to determine whether any possible delay in delivery of cash to the counterparty is of a short duration. Similar to what is discussed above, understanding the different conventions for the different payment methods will also be important.

Some practical challenges associated with applying the exception include:

Multiple electronic payment systems and/or cross-border payments. Entities that operate in multiple jurisdictions or make cross-border electronic payments may find the exercise of determining whether it is eligible to apply the exception for each electronic payment system challenging at first. Such entities might consider prioritizing the analysis of those electronic payment systems that handle the most volume for the entity, are inherently complex, and/or are in foreign jurisdictions to allow sufficient time to determine whether the conditions to apply the exception are met and identify any issues.
Areas of judgment. While the exception is intended to provide relief to entities, determining whether the conditions to apply the exception are met may require the application of judgment and conclusions about whether the exception can be applied may differ across various payment systems. For example, determining whether an entity has no practical ability to withdraw, stop, or cancel the payment instruction, aside from protective rights (e.g., to prevent a fraudulent transaction), will likely require an understanding of the bank’s protocols and the capabilities of the electronic payment system. To the extent there is uncertainty about an entity’s rights or how the electronic payment system works, an entity may consider whether specialists (e.g., legal) need to be engaged to assist with the analysis.
Intercompany balances. Entities applying the exception should be aware that this could lead to inconsistencies in the accounting for intercompany payables and receivables because the derecognition exception applies only to financial liabilities and not to financial assets. As a result, additional adjustments may be required to eliminate intragroup balances on consolidation.

The Group’s Discussion

The Group agreed with the analysis. Several Group members noted that it may be challenging for entities to demonstrate that their electronic payment systems qualify for the new exception. Assessing the functionality of these systems and determining whether each system meets the exception criteria could be onerous, particularly for entities operating in multiple jurisdictions or using various electronic payment systems. Some Group members raised that certain terminology used in the exception paragraph, such as “electronic payment system”, “insignificant settlement risk”, and “short time” are not clearly defined, requiring judgment as to their interpretation and application.

Some Group members suggested that a centralized analysis of common electronic payment systems used by Canadian entities, including an evaluation of whether each system meets the exception criteria, would be helpful. This would prevent multiple entities from duplicating the same analysis. However, one Group member cautioned that payment systems undergo regular upgrades as technology advances, which could render the analysis of whether any payment system meets the exception criteria obsolete. To avoid this, the analysis should be updated on a timely basis to address any changes made to the underlying electronic payment system(s) that could impact one or more of the conditions required to apply the exception. Another Group member highlighted that the amendments might require significant process or system changes if entities need to alter their accounting practices. Therefore, entities should assess the impact of these amendments to IFRS 9 as early as possible to ensure they have sufficient time to implement any necessary changes to their systems, processes and controls before the effective date.

Issue 2: Implications of the amendments to the derecognition of financial liabilities settled through means other than electronic payment systems

Analysis

The amendments to IFRS 9 consist of two elements:

(1) Paragraph B3.1.2A of IFRS 9, which clarifies the general requirements for the derecognition of financial assets and financial liabilities in the scope of IFRS 9, except for those which qualify as regular way purchases and sales; and

(2) the introduction of an optional exception to specifically address the timing of derecognition of financial liabilities settled by an electronic payment
system.

The first component of the amendments, because it broadly addresses all financial assets and financial liabilities, also clarifies the general requirements for the derecognition of financial liabilities settled through other payment methods (e.g., cheques). In contrast, paragraph B3.3.8 has a narrower scope and only introduces an exception to permit the early derecognition of financial liabilities settled through electronic payment methods. Therefore, once the amendments to IFRS 9 are adopted, an entity that does not apply the exception will only be able to derecognize a financial liability at the date of settlement, which is the date when the payee receives the cash from the payer.

Fact pattern

Entity A owes Supplier B $100, which is due for payment on January 4, 20X7.
Entity A has a calendar year-end.
On December 30, 20X6, Entity A writes a cheque to Supplier B for $100.
In accordance with Canadian banking convention rules, Entity A has the ability to issue a stop-payment at any point prior to cash being credited to Supplier’s B bank account.
Once Supplier B deposits its cheque, it may take additional business days for Supplier B’s bank to obtain confirmation from Entity A’s bank that there are sufficient funds to settle the amount. Until that confirmation is obtained, Supplier B’s bank is essentially advancing the funds to Supplier B.

Paragraph B3.1.2A, which is a newly added paragraph to IFRS 9, is relevant to determining when financial liabilities should be derecognized. It states that:

Unless an entity elects to apply paragraph B3.3.8, a financial liability is derecognised on the settlement date, which is the date on which the liability is extinguished because the obligation specified in the contact is discharged or cancelled or expires (see paragraph 3.3.1) or the liability otherwise qualifies
for derecognition (see paragraph 3.3.2).

The exception in paragraph B3.3.8 does not apply in this fact pattern as Entity A is not settling its obligation via an electronic cash payment. Furthermore, Entity A has the ability to issue a stop-payment until the cash is credited to Supplier’s B bank account, and clearing of the cheque is not automatic. Therefore, Entity A has only extinguished its obligation when cash is credited to Supplier B’s bank account. Until then, Entity A should continue to recognize its payable and cash of $100. This is supported by the Basis for Conclusions to the amendments to IFRS 9, where the IASB acknowledged that cheques are subject to settlement risk and would not meet the exception in paragraph B3.3.8 created for financial liabilities. The cheque to Supplier B would not “clear” if Entity A lacked sufficient funds to settle the obligation, leaving Entity A with a liability to the supplier until the cash is delivered (i.e., transferred from the payer’s account).

Paragraph BC3.55 in the Basis for Conclusions explains that a financial liability that is settled by cheque is subject to more than insignificant settlement risk until the cash is delivered. It states that:

Electronic payment systems establish a controlled environment for cash transfers so that the risk of the cash not being delivered to the creditor is minimal
(or de minimis). This is because these electronic payment systems follow a standard administrative process to complete transactions. For other payment methods, such as cheques, completion of the payment remains subject to settlement risk that is more than insignificant until the cash is delivered (that
is, transferred from the payer’s account). Consequently, the IASB decided not to expand the scope of the requirements beyond electronic payment
systems. (bold added)

Therefore, Entity A would continue to recognize its liability to Supplier B until the cash is delivered (i.e., transferred to Supplier B’s bank account) and Supplier B’s bank has received confirmation that Entity A has sufficient funds to cover the cheque payment. At that point, the liability to Supplier B is extinguished as the payment is complete and the settlement risk is eliminated.

The Group’s Discussion

Group members thought the amendments will result in a significant change in practice for most Canadian entities regarding the derecognition of financial liabilities settled using cheque payments. Most Canadian entities currently derecognize financial liabilities when a cheque is issued. Following the amendment, entities will be required to defer derecognition until the payee receives the funds in their bank account and the settlement process is complete. This process may take several days from the point at which the payee presents the cheque to their bank. Some Group members also noted that the payor may not have visibility into when the cash from the payor’s bank account has been deposited into the payee’s bank account, which may present challenges in determining the date on which the payor’s liability has been settled. In addition, some Group members noted that this will also impact entities’ bank reconciliations, as outstanding cheques will no longer be a reconciling item. These changes might require entities to implement significant changes to their existing systems and processes. One Group member cautioned that referring to the amendment as a “clarification” of existing requirements might give the impression that this amendment will have minimal impact on Canadian entities, which is likely not the case.

Overall, the Group’s discussion raised awareness of the impact of the May 2024 amendments to the derecognition requirements for financial liabilities in IFRS 9. During its discussion on Issue 1, the Group recommended that the AcSB consider initiating or facilitating the preparation of a centralized analysis of common electronic payment systems used in Canada, including an evaluation of whether each system meets the new exception criteria. They thought this would prevent different entities from needing to duplicate the same analysis.

³ IFRS Interpretations Committee Staff Paper, AP3, Cash Received via Electronic Transfer as Settlement for a Financial Asset (IFRS 9), June 2022, paragraphs
20-22.

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IFRS 8: Disclosure of Revenue and Expenses for Reportable Segments

Background

In November 2023, the IFRS Interpretations Committee discussed a submission about how an entity applies the requirements in paragraph 23 of IFRS 8 Operating Segments to disclose specified amounts related to segment profit or loss for each reportable segment. Following this discussion, the Committee published a tentative agenda decision. 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 are two main aspects to the questions asked in the submission:

(a) 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 (CODM); and

(b) 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.

The Group’s discussion 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).

Background on the agenda decision addressing “material items of income and expense” when applying paragraph 23(f) of IFRS 8

The Committee observed that paragraph 23 of IFRS 8 requires an entity to disclose specified amounts for each reportable segment when those amounts are:

included in the measure of segment profit or loss reviewed by the CODM, even if they are not separately provided to or reviewed by the CODM, or
regularly provided to the CODM, even if they are not included in the measure of segment profit or loss.

In summary, the Committee observed that, in applying paragraph 23(f) of IFRS 8 by disclosing, for each reportable segment, material items of income and expense disclosed in accordance with paragraph 97 of IAS 1, an entity:

(a) applies paragraph 7 of IAS 1 and assesses whether information about an item of income and expense is material in the context of its financial
statements taken as a whole;

(b) applies the requirements in paragraphs 30-31 of IAS 1 in considering how to aggregate information in its financial statements;

(c) considers the nature or magnitude of information—in other words, qualitative or quantitative factors, or both—in assessing whether information about
an item of income and expense is material; and

(d) considers circumstances including, but not limited to, those in paragraph 98 of IAS 1.

The Committee further observed that paragraph 23(f) of IFRS 8 does not require an entity to disclose by reportable segment each item of income and expense presented in its statement of profit or loss or disclosed in the notes. This observation was absent in the tentative agenda decision and was added to the final agenda decision.

Summary of feedback on the tentative agenda decision

As noted above, in November 2023, the Committee published its tentative agenda decision. The IASB Staff Paper 2 from the June 2024 Committee meeting summarizes the feedback on the tentative agenda decision into four main areas:

(1) Evidence of diversity in application

Certain respondents indicated that there was no significant diversity in the application of these requirements in their jurisdiction, and thus disagreed with
the need for the Committee to address the question. The staff commented that through their outreach and analysis of comment letters, there was
sufficient evidence of diversity in practice.

(2) Interaction between paragraphs 97 and 98 of IAS 1

Paragraph 97 of IAS 1 requires that “When items of income and expense are material, an entity shall disclose their nature and amount separately.”
Paragraph 98 notes that:

Circumstances that would give rise to the separate disclosure of items of income and expense include:

(a) write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount, as well as reversals of such
write‑downs;

(b) restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring;

(d) disposals of investments;

(e) discontinued operations;

(f) litigation settlements; and

(g) other reversals of provisions.

Many respondents thought that paragraph 97 of IAS 1 should be applied in the context of paragraph 98 of IAS 1, but noted that the tentative agenda
decision failed to explain this interaction. These respondents said that paragraph 98 of IAS 1 provides examples of when an item is a “material item” in
paragraph 97 of IAS 1. Some of these respondents indicated that, in the context of those examples in paragraph 98 of IAS 1, the reference to “material
items” in paragraph 23(f) of IFRS 8 should be read as “unusual items” or items that are not normal in an entity’s day-to-day operations.

The Committee staff indicated that the circumstances in paragraph 98 of IAS 1 are examples and not an exhaustive list that overrides or limits the
requirement in paragraph 97 of IAS 1. The use of the word “include” in paragraph 98 of IAS 1 does not mean “are limited to.” Moreover, some of those circumstances are expected to occur at least once for all or most entities, and so would not be “unusual.” For example, many entities write down
inventories, dispose of items of property, plant, and equipment or dispose of investments.

(3) Segment-level statement of profit or loss

Many respondents thought that the tentative agenda decision could be interpreted as requiring an entity to disclose a full statement of profit or loss for each reportable segment. Staff noted that this would not have been intended by the IASB because such a “wide interpretation” of paragraph 23(f) of IFRS 8
would make disclosure of the other specified amounts in paragraph 23 redundant. Consequently, an observation was added to the final agenda decision
that paragraph 23(f) of IFRS 8 does not require an entity to disaggregate by reportable segment each item of income and expense presented in the entity’s statement of profit or loss or disclosed in the notes.

(4) Suggestions for standard setting

Many respondents suggested referring the submitter’s questions about paragraph 23(f) of IFRS 8 to the IASB for further consideration given the ambiguity
in the requirement. Staff noted that the need for standard setting seemed to stem from the above comments on the tentative agenda decision, notably
about having to provide a full statement of profit or loss for each reportable segment. Therefore, the Committee concluded that addressing those
comments removed the need for standard setting.

Group members discussed two fact patterns illustrating possible application of the final agenda decision, along with a general question on the expected impacts of the final agenda decision.

Fact Pattern 1

An entity presents its income statement by function.
Applying paragraph 104 of IAS 1, it discloses expenses by nature in the notes. As part of this disclosure, it provides a breakdown of costs which include, among others, transportation costs, advertising and marketing expenses, and maintenance expenditures.
All of these expenses relate to normal operations and have not arisen as a result of a specific circumstance or event.
All of these expenses are also included in the measure of segment profit/loss reported to the CODM, but are not separately disclosed in the management package reviewed by the CODM.
These expenses are individually quantitatively material to the overall financial statements.

Issue 1: Are the transportation costs, advertising and marketing expenses, and maintenance expenditures “material items of income and expense” applying paragraph 23(f) of IFRS 8?

Analysis

View 1A – No, since the expenses are being provided in the context of paragraph 104 of IAS 1 rather than paragraph 97 of IAS 1

Proponents of this view think these expenses would not be considered items of income and expense in the scope of paragraph 97 of IAS 1 as they are provided in the context of paragraph 104 of IAS 1. As a result, the entity would not be required to disclose them per reportable segment based on the requirements of paragraph 23(f) of IFRS 8.

View 1B – No, the expenses are normal operating expenses of the entity and do not result from qualitatively material/significant circumstances or events

Similar to View 1A, proponents of this view think these expenses are normal operating expenses and would therefore not be considered items of income and expense in the scope of paragraph 97 of IAS 1, and the entity would not be required to disclose them per reportable segment under paragraph 23(f) of IFRS 8.

View 1C – Yes, since they are considered material in the context of paragraph 97 of IAS 1, regardless of other specific disclosure requirements

Proponents of this view note that management applies paragraph 97 of IAS 1 and considers that these expenses are material in the context of the financial statements. This includes assessing both qualitative and quantitative factors, representing the nature or magnitude of information associated with these expenses. Proponents of this view think that paragraph 97 of IAS 1 is not a top-up requirement capturing items beyond other disclosure requirements (such as paragraph 104 of IAS 1 in this case). Rather, paragraph 97 of IAS 1 is assessed independently of those other disclosure requirements.

The Group’s Discussion

Group members thought that determining whether these expenses are “material items of income and expense” applying paragraph 23(f) of IFRS 8 would be a matter of judgment based on the entity’s facts and circumstances. One view (View 1A, 1B, or 1C) would not necessarily apply in all cases. One Group member commented that they disagreed with View 1B because the IFRS Interpretations Committee discussion clarified that paragraph 23(f) of IFRS 8 would not be limited to “unusual items” on the basis that paragraph 97 of IAS 1 refers to “material” items of income and expense and not “unusual” items, and paragraph 98 of IAS 1 is a non-exhaustive list of examples that do not override the requirements of paragraph 97. A few Group members disagreed with View 1A because they thought an expense could fall into the scope of both paragraphs 104 and 97 of IAS 1. They also disagreed with View 1C because they thought disclosing the expenses by reportable segment may not necessarily be material in all cases. For example, it is possible that only a subset of the expenses in question are material (e.g., transportation costs could be material even if advertising and marketing expenses and maintenance expenditures are not material). Group members also highlighted that 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.

Group members discussed that an entity would apply judgment in determining what is material based on whether the information could reasonably be expected to influence the decisions of primary users of the financial statements. This could vary depending on the nature of the entity’s business and its reportable segments.

Fact Pattern 2

An entity has announced a major corporate restructuring during the year, the costs of which are expected to be significant.
The entity incurred some costs during the current year and has recognized a provision for costs expected to be incurred in the future.
The total of these costs is material to the entity.

Issue 2: Are the major corporate restructuring costs “material items of income and expense” applying paragraph 23(f) of IFRS 8?

Analysis

View 2A – Yes, paragraph 97 of IAS 1 captures these items when not otherwise required by another IFRS

Proponents of this view think these costs are “material items of expense” that might not otherwise require disclosure. Only the movement in the provision would be captured by other IFRS disclosure requirements (paragraph 84 of IAS 37 Provisions, Contingent Liabilities and Contingent Assets).

The total restructuring costs are therefore in the scope of paragraph 97 of IAS 1. As a result, the entity would disclose them per reportable segment in accordance with paragraph 23(f) of IFRS 8.

View 2B – Yes, since this is a circumstance covered in paragraph 98 of IAS 1

Proponents of this view think these costs are in the scope of paragraph 97 of IAS 1 since they are an example of a circumstance giving rise to separate disclosure under paragraph 98(b) of IAS 1. As a result, the entity would disclose them per reportable segment in accordance with paragraph 23(f) of IFRS 8.

View 2C – It depends on the materiality of the information

Proponents of this view note that while restructurings are listed in paragraph 98 of IAS 1 as an example of a circumstance that may warrant disclosure under paragraph 97 of IAS 1, the application of paragraph 97 of IAS 1 remains based on the materiality of the information. Consistent with the agenda decision, the entity would evaluate the nature or magnitude of information—in other words, qualitative or quantitative factors—or both for this specific restructuring. For example, while quantitatively material, the entity may have undertaken recurring restructurings over the years if it operates in a very competitive or challenging industry.

Moreover, application of paragraph 97 of IAS 1 may determine that the restructuring expenses are not material to all reportable segments of the entity, so disclosure may not be required for all reportable segments.

The Group’s Discussion

Similar to Issue 1, Group members thought that determining whether major corporate restructuring costs are “material items of income and expense” applying paragraph 23(f) of IFRS 8 would be a matter of judgment based on the entity’s facts and circumstances. Accordingly, Group members generally agreed with View 2C. Even if the costs are related to a circumstance covered in paragraph 98 of IAS 1 and are material to the entity on a total basis, that does not necessarily mean that disclosing them for each reportable segment would be material to the users of the financial statements. As per the agenda decision, an entity applies judgment and considers the core principle of IFRS 8 in determining information to disclose for each reportable segment.

Issue 3: What impact do you think the agenda decision will have on the application of paragraph 23(f) of IFRS 8?

Analysis

View 3A – There will be no impact

Proponents of this view think that there is sufficient room for judgment in the agenda decision wording so that entities that previously complied with IFRS 8 can continue to report as before. Specifically:

Proponents of this view interpret the linking of paragraphs 97 and 98 of IAS 1 in the agenda decision to help support a view that there will be no change. Proponents of this view think paragraph 98 of IAS 1 is a non-exhaustive list of “unusual” items in the scope of paragraph 97 of IAS 1. That is, the agenda decision is simply acknowledging that there could be other types of material “unusual” items, rather than stating that day-to-day items should be included.
The agenda decision explicitly states that paragraph 23(f) of IFRS 8 does not require an entity to disclose by reportable segment each item of income and expense presented in its statement of profit or loss or disclosed in the notes. This supports the view that entities are not required to provide a full statement of profit or loss for each reportable segment. Further, it is clear that some items need to be considered for disclosure but not each and every item.

View 3B – There will be some impact

Proponents of this view think it is clear that entities are not required to provide a full statement of profit or loss for each reportable segment, and that each item of income or expense presented or disclosed does not need to be shown by segment. However, entities may need to disclose more than just the material and “unusual” items listed in paragraph 98 of IAS 1 because the agenda decision states that an entity considers circumstances including, but not limited to, those listed in that paragraph. This could include some day-to-day items that are otherwise disclosed or included in totals. While identifying how many items and which to include would be subject to judgment, day-to-day items cannot be overlooked.

Proponents of this view also think the agenda decision does not limit the required disclosures to only those items considered by the CODM (sometimes referred to as a management approach). This is because paragraph 23 of IFRS 8 requires disclosure of specified items when they are included in the measure of segment profit or loss reviewed by the CODM, or are otherwise regularly provided to the CODM even if not included in that measure of segment profit or loss. This means that the specified items are not required to be “separately reviewed” by the CODM for those amounts to be disclosed. For example, an entity may now be required to disclose employee benefits by reportable segment if the total is disclosed in the notes and is considered material in the context of the financial statements when applying paragraph 97 of IAS 1. Previously, the entity may have asserted that disclosing employee benefits by reportable segment was not captured by paragraph 23(f) of IFRS 8.

View 3C – There will be significant impacts

Proponents of this view think the agenda decision will require entities to report on a much more granular level going forward. While the agenda decision indicates that each item presented or disclosed would not need to be shown by segment (i.e., a full statement of profit or loss and notes for each reportable segment is not required), it suggests that disclosures up to but excluding that level of granularity may be required and need to be considered by entities.

The Group’s Discussion

Group members discussed that the impact would vary depending on how an entity has been interpreting and applying the requirements to date. For example, an entity that previously interpreted paragraph 23(f) of IFRS 8 to only require disclosure of the “unusual” items listed in paragraph 98 of IAS 1 may have more to consider than an entity that had interpreted it more broadly. Even if there is no impact, the agenda decision will likely bring more attention to segment disclosures. As such, entities may want to revisit their segment disclosures and related materiality judgments and documentation thereof in light of the clarifications in the agenda decision.

Overall, the Group’s discussion raised awareness of the agenda decision, “Disclosure of Revenues and Expenses for Reportable Segments (IFRS 8)” and its potential impacts. No further actions were recommended to the AcSB.

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OTHER MATTERS

Translation to a Hyperinflationary Presentation Currency

In July 2024, the IASB issued the Exposure Draft, “Translation to a Hyperinflationary Presentation Currency.” The Exposure Draft proposes to require an entity to translate amounts from a functional currency that is the currency of a non-hyperinflationary economy to a presentation currency that is the currency of a hyperinflationary economy using the closing rate at the date of the most recent statement of financial position. Canadians are encouraged to submit comment letters to the IASB by November 22, 2024.

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Amendments to IFRS 19 Subsidiaries without Public Accountability: Disclosures

In July 2024, the IASB issued the Exposure Draft, “Amendments to IFRS 19 Subsidiaries without Public Accountability: Disclosures.” IFRS 19, which was issued in May 2024, permits eligible subsidiaries to apply IFRS Accounting Standards with reduced disclosure requirements. In developing the reduced disclosure requirements in IFRS 19, the IASB considered the disclosure requirements in other IFRS Accounting Standards as at February 28, 2021. In this Exposure Draft, the IASB is proposing to reduce or simplify the disclosure requirements of new or amended IFRS Accounting Standards issued between February 28, 2021 and May 1, 2024. The IASB is also asking for views on whether to reduce the disclosure requirements from the prospective IFRS Accounting Standard Regulatory Assets and Regulatory Liabilities. Canadians are encouraged to submit comment letters to the IASB by November 27, 2024.

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Climate-related and Other Uncertainties in the Financial Statements

In July 2024, the IASB issued the Exposure Draft, “Climate-related and Other Uncertainties in the Financial Statements.” The Exposure Draft proposes eight examples illustrating how an entity applies the requirements in IFRS Accounting Standards to report the effects of climate-related and other uncertainties in its financial statements. The examples aim to improve transparency of information in financial statements and strengthen the connection between financial statements and other parts of a company’s reporting, such as sustainability disclosures. The principles and requirements illustrated in these examples mostly focus on climate-related uncertainties but apply equally to other types of uncertainties. Canadians are encouraged to submit comment letters to the IASB by November 28, 2024.

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Recent IFRS Interpretations Committee Agenda Decisions

Disclosure of Revenues and Expenses for Reportable Segments (IFRS 8)

In July 2024, the IASB ratified the IFRS Interpretations Committee’s agenda decision on Disclosure of Revenues and Expenses for Reportable Segments. The agenda decision clarifies:

a. 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 (CODM); and

b. 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.

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Recent Amendments Made to IFRS Accounting Standards

Amendments to the Classification and Measurement of Financial Instruments – Amendments to IFRS 9 and IFRS 7

In May 2024, the IASB issued “Amendments to the Classification and Measurement of Financial Instruments – Amendments to IFRS 9 and IFRS 7” in response to feedback received as part of the post-implementation review of the classification and measurement requirements in IFRS 9 and related requirements in IFRS 7. The IASB amended the requirements related to:

a. settling financial liabilities using an electronic payment system; and

b. assessing contractual cash flow characteristics of financial assets, including those with environmental, social, and governance (ESG)–linked features.

The IASB also amended disclosure requirements relating to investments in equity instruments designated at fair value through other comprehensive income and added disclosure requirements for financial instruments with contingent features that do not relate directly to basic lending risks and costs. The amendments are effective for annual reporting periods beginning on or after January 1, 2026.

Annual Improvements to IFRS Accounting Standards – Volume 11

In July 2024, the IASB issued, “Annual Improvements to IFRS Accounting Standards – Volume 11,” which contains narrow-scope amendments to various IFRS Accounting Standards and accompanying guidance as part of its periodic maintenance of the Accounting Standards. The amendments are effective for annual reporting periods beginning on or after January 1, 2026.

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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 September 2024 meeting, the Group provided input on the IASB’s Exposure Draft, “Climate-related and Other Uncertainties in the Financial Statements” to assist in the development of the AcSB’s response letter.

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