We bring two interesting final agenda decisions issued by IFRS Interpretations Committee in 2021.
IFRS Interpretations Committee (Committee) is an interpretative body of the International Accounting Standards Board (IASB) which works with the Board in supporting the application of IFRS Standards.
Agenda decisions are a way of making a statement about why a change of an IFRS Standard requirement or an interpretation of that requirement is not necessary. They often include explanatory information that is intended to provide guidance for the consistent application of IFRS Standards. The Board expects entities to implement accounting policy changes in a timely manner if their policies are inconsistent with an agenda decision.
Costs Necessary to Sell Inventories (IAS 2 Inventories)
Published in June 2021
The Committee received a request about the costs an entity includes as the ‘estimated costs necessary to make the sale’ when determining the net realisable value of inventories. In particular, the request asked whether an entity includes all costs necessary to make the sale or only those that are incremental to the sale.
IAS 2 Inventories paragraph 6 defines net realisable value as ‘the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make a sale’. Paragraphs 28–33 of IAS 2 include further requirements about how an entity estimates the net realisable value of inventories. Those paragraphs do not identify which specific costs are ‘necessary to make the sale’ of inventories. However, paragraph 28 of IAS 2 describes the objective of writing inventories down to their net realisable value—that objective is to avoid inventories being carried ‘in excess of amounts expected to be realised from their sale’.
The Committee observed that, when determining the net realisable value of inventories, IAS 2 requires an entity to estimate the costs necessary to make the sale. This requirement does not allow an entity to limit such costs to only those that are incremental, thereby potentially excluding costs the entity must incur to sell its inventories but that are not incremental to a particular sale. Including only incremental costs could fail to achieve the objective set out in paragraph 28 of IAS 2.
The Committee concluded that, when determining the net realisable value of inventories, an entity estimates the costs necessary to make the sale in the ordinary course of business. An entity will need to use its judgement to determine which costs are necessary to make the sale considering its specific facts and circumstances, including the nature of inventories. Costs could include advertising campaign costs, salaries of sales staff, distribution costs etc.
The Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for an entity to determine whether the estimated costs necessary to make the sale are limited to incremental costs when determining the net realisable value of inventories. Consequently, the Committee decided not to add a standard-setting project to the work plan.
Preparation of Financial Statements when an Entity is No Longer a Going Concern (IAS 10 Events after the Reporting Period)
Published in June 2021
The Committee received a request about the accounting applied by an entity that is no longer a going concern (as described in paragraph 25 of IAS 1 Presentation of Financial Statements).
The submitter included two variations of a fact pattern in their submission to IFRIC. In all instances the entity has either ceased trading or intends to liquidate after reporting date – but before the financial statements are finalised (signed). The following are the two scenarios presented:
- Scenario A: Financial statements for the last three years have not been finalised. At the end of each of the three years, the management concluded that the entity would continue as a going concern. It is now eight months after the most recent year-end and management have decided to voluntarily liquidate the entity.
- Scenario B: Financial statements for the most recent reporting date have yet to be finalised. All prior-year financial statements have been finalised. It is now eight months after the most recent year-end and management have decided to voluntarily liquidate the entity.
IAS 10 Events after the Reporting Period paragraph 14 states ‘an entity shall not prepare its financial statements on a going concern basis if management determines after the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so’.
The Committee has observed the following for each the above scenarios:
- The principles and requirements in IAS 10 provide an adequate basis for an entity that is no longer a going concern to determine whether it prepares its financial statements on a going concern basis.
- In the fact pattern described, the 2017, 2018 and 2019 financial statements are all authorised for issue after the decision to liquidate the entity – which is an adjusting event after reporting date.
- An entity that is no longer a going concern cannot prepare financial statements (i.e. for all three years) on a going concern basis.
- IFRIC research noted that there was no diversity in application of IFRS Standards to this scenario – i.e. entities do not restate comparatives.
- Therefore, IFRIC will not comment further on this scenario.
For the reasons noted above, the Committee decided not to add a standard-setting project on these matters to the work plan.
Sources: IFRS – IFRIC Update June 2021