IASB approves four agenda decisions on IFRS 18

Classification of a foreign exchange difference from an intragroup monetary liability (or asset)

The request related to the classification of a foreign exchange difference resulting from intragroup monetary liability (or asset), when the income or expenses that gave rise to this difference have been eliminated on consolidation. 

The IFRS IC felt that two approaches were possible: 

• classifying the difference in the operating category as the default category; or 
• classifying the difference in the category in which the income and expenses relating to the intragroup monetary liability (or asset) would have been classified if they had not been eliminated on consolidation, or, if this analysis would involve undue cost or effort, in the operating category. 

Thus, an entity should develop an accounting policy, by selecting one of these approaches, and apply it consistently. 

Assessing whether a “specified main business activity” exists for the purposes of the separate financial statements of a parent company

The request related to how to determine whether a parent company whose only activity is holding investments in subsidiaries (but which is not an investment entity as defined in IFRS 10) has a “specified main business activity” as defined in IFRS 18 for the purposes of its separate financial statements. The entity recognises these investments at cost in its separate financial statements. 

Readers will remember that a “specified main business activity” involves providing financing to customers or investing in particular types of assets. Entities that have a “specified main business activity” must classify certain items of income and expenses in the operating category, that would otherwise have been classified in the investing or financing categories. 

The IFRS IC pointed out that assessing whether an entity has a “specified main business activity” must be based on the facts and circumstances of the case, and may differ between the separate and consolidated financial statements. 

The absence of any other substantive activity was deemed to be sufficient to conclude that investment in unconsolidated subsidiaries is a “specified main business activity” for the purposes of the entity’s separate financial statements. This is the case even though the example indicators provided in IFRS 18 are absent, such as performance subtotals or segment reporting relating specifically to the activity of holding investments in subsidiaries. 

Thus, the entity should classify income and expenses relating to these investments in the operating category in its separate financial statements. 

Scope of the requirement to disclose expenses by nature

Having received a request about the scope of the requirement to disclose expenses by nature, the IFRS IC clarified that there are no exceptions to this requirement. It applies whenever an entity presents any expense line item by function in the operating category of the statement of profit or loss, including expenses that must be presented in the statement of profit or loss under IFRS 9 or IFRS 17. 

It also applies to amounts recognised as part of assets. In this case, the entity provides a qualitative explanation, identifying the assets involved. 

Classification of gains and losses on a derivative managing a foreign currency exposure

The IFRS IC considered a request relating to the classification of gains and losses on an external derivative used to manage an identified foreign currency exposure, without applying hedge accounting as set out in IFRS 9. 

In the fact pattern, an external derivative is used, in line with the group’s risk management policy, to manage the foreign currency risk related to the net liability exposure, rather than the group of gross exposures that make up the net exposure. 

If the derivative is used to manage a risk relating to a single category of the statement of profit or loss – in this case the financing category – it can be classified in that category without requiring grossing up gains or losses and without undue cost or effort. Accordingly, gains or losses on the external derivative must be classified in the same category.