IFRS® Accounting Standards Discussion Group Meeting Report – September 18, 2025

ITEMS PRESENTED AND DISCUSSED AT THE SEPTEMBER 18, 2025 MEETING

Application Issues with the Statement of Cash Flows

Background

IAS 7 Statement of Cash Flows specifies how entities report information about the historical changes in their cash and cash equivalents. This standard applies to all entities regardless of their business activities, including financial institutions. IAS 7 was issued in 1992 and modifications to the standard have been limited since it was published.

IAS 7 requires that inflows and outflows of cash and cash equivalents are classified and reported under three different headings: operating activities, investing activities and financing activities. The resulting information in the statement of cash flows provides insight into an entity’s ability to generate cash to fund its operations, reinvest its cash to maintain or expand its operating capacity, repay its debt and distribute dividends, and manage cash.

The definitions of operating, investing and financing activities in IAS 7 are broad. In recent years, investors and regulators have increasingly scrutinized the statement of cash flows, citing classification errors, misidentified cash components and inadequate disclosures as key concerns. In part, this may be because companies are increasingly relying on information from the statement of cash flows to generate key performance metrics and in their communications with current and potential investors.

For example, some of the regulators’ concerns associated with the preparation of the statement of cash flows include:

• unclear or incorrect classifications;
• inconsistent cash flow treatment;
• insufficient disclosure for reclassifications (such as the amount of each item or class of items that is reclassified);
• lack of detail regarding the nature and context of classifications or reclassifications; and
• inadequate disclosure of non-cash and complex items.

Issue 1: Defining cash, cash equivalents and restrictions on the use of cash

Analysis

The statement of cash flows analyzes changes in cash and cash equivalents. Therefore, understanding what qualifies as cash and cash equivalents is essential for its preparation.

Definition of cash

Paragraph 6 of IAS 7 defines “cash” as “cash on hand and demand deposits.” It does not provide additional guidance for determining whether an item qualifies as cash.

IAS 7 also does not clarify what is meant by “demand deposits”. With that said, the term is generally understood to refer to amounts that can be withdrawn on demand without needing prior notice or incurring a penalty.

Common forms of cash are currency on hand and demand deposits with financial institutions. In addition to being accessible on demand, some other common features of cash include that it:

• serves as the standard medium of exchange; and
• is the basis for measuring and accounting for all other elements in the financial statements.

Definition of cash equivalents

Paragraph 6 of IAS 7 defines cash equivalents as “short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.”

Paragraph 7 of IAS 7 states that “cash equivalents are held to meet short-term cash commitments rather than for investment or other purposes.” Therefore, it is important to understand the entity’s cash management policies, especially when assessing whether some balances, such as those beyond cash on hand or demand deposits, qualify as cash equivalents.

Cash management includes the investment of cash in excess of immediate needs into cash equivalents, such as short-term investments (see paragraph 9 of IAS 7). For investments to qualify as cash equivalents, they must be:

• short-term in maturity (generally three months or less from the date of acquisition);
• highly liquid;
• readily convertible into known amounts of cash; and
• subject to an insignificant risk of changes in value.

An investment with a maturity period of three months or less from the acquisition date normally qualifies as a cash equivalent, provided it is held to meet the entity’s short-term cash commitments (see paragraph 7 of IAS 7).

Common forms of cash equivalents include short-term investments such as treasury bills, commercial paper and money market funds. Items that are denominated in foreign currencies might also qualify as cash equivalents.

Bank overdrafts that are repayable on demand are included as cash and cash equivalents to the extent that they form an integral part of the entity’s cash management (see paragraph 8 of IAS 7). However, even though a bank overdraft might be netted against cash and cash equivalents in the statement of cash flows, netting is not permitted in the statement of financial position unless the offsetting criteria in paragraph 42 of IAS 32 Financial Instruments: Presentation are met.

Any investment (e.g., a government bond or certain deposit certificates) purchased with a maturity period of more than three months and without an early redemption option will likely not be a cash equivalent. This is because its maturity period exceeds the short-term period suggested by the standard. Moreover, such an investment will not become a cash equivalent when its remaining maturity period from a subsequent reporting date becomes three months or less because the maturity period is measured from the investment’s acquisition date.

The limit on maturity period reinforces that the amount of cash receivable should be known by the entity at the time of the initial investment and be subject to an insignificant risk of changes in value. However, there could be limited circumstances in which deposits with a term of more than three months may be classified as cash and cash equivalents. For example, consider a redeemable six-month fixed deposit with the following features:

• If held to maturity, the deposit bears interest at a fixed six-month rate determined at inception. The fixed rate is significantly higher than interest rates offered for a typical demand deposit account. The demand deposit rate is significantly higher than zero. If the entity redeems the fixed deposit at any time before the maturity date, the entity is entitled to interest based on the typical demand deposit rate from the initial deposit date to the date of redemption plus the original principal amount. The balance (if any) of interest at the fixed rate in excess of the demand deposit rate is forfeited as an early withdrawal penalty.
• Interest accrues daily based on the fixed rate.
• The entity can redeem the fixed deposit at any time before the maturity date and, if redeemed before the maturity date, it must be redeemed in full.
• The entity may not increase the deposit amount after the initial investment.
• The entity asserts that the investment is used to meet its short-term cash commitments, as supported by the entity’s cash management practices.

Based on the fact pattern above, the redeemable six-month fixed deposit would be classified as a cash equivalent. 

In determining whether an investment is a cash equivalent, the purpose for which the investment is held must also be determined. When an investment meets the four criteria above but is not held by the entity to meet its short-term cash commitments, it cannot be classified as a cash equivalent. Accordingly, in the example above, if the entity did not hold the redeemable six-month fixed deposit to meet its short-term cash commitments, the instrument could not be classified as a cash equivalent.

An investment that is redeemable at any time is a cash equivalent only if the amount of cash that would be received is known at the time of the initial investment and is subject to an insignificant risk of changes in value. In addition, the other criteria in paragraphs 7-9 of IAS 7 for cash equivalents must be met. The IFRS Interpretations Committee published an Agenda Decision “Determination of cash equivalents” in July 2009, which noted the fact that an investment can be converted at the market price at any time does not mean it is readily convertible to known amounts of cash.

Any restriction on instruments classified as a cash equivalent must be carefully evaluated to determine whether the instrument still meets the definition of cash equivalents. If an investment is restricted – either by its own contractual terms or by a separate contractual arrangement with a third party – and cannot be used to meet the entity’s short-term cash commitments, it does not qualify as a cash equivalent.

Restrictions on cash

In practice, an entity may hold cash for specific purposes, or its use may be restricted by the bank, the entity itself or a third party. To determine whether an instrument qualifies as cash under the standard, it is essential to carefully evaluate any restrictions on its use.

While IAS 7 does not define what a demand deposit is, a restriction on access to these deposits (i.e., such that it is not accessible immediately on demand) would result in that bank deposit failing to meet the definition of cash.

In April 2022, the IFRS Interpretations Committee published an Agenda Decision “Demand Deposits with Restrictions on Use arising from a Contract with a Third Party.” This Agenda Decision responded to a request about whether an entity should include a demand deposit as a component of cash and cash equivalents when the demand deposit is subject to contractual restrictions on use that were agreed to with a third party.

The IFRS Interpretations Committee concluded that a demand deposit remains classified as cash – even if there are restrictions on its use from a separate contract with a third party – as long as those restrictions do not prevent the deposit from being immediately accessible on demand.

• Example: An entity has a contractual obligation with a third party to keep a specific amount of cash in a separate demand deposit and to use it only for designated purposes. If the entity uses these funds for purposes other than those agreed upon with the third party, the entity would be in breach of its contractual obligation. Although the entity may breach its contract with the third party, there is no restriction on its access to the demand deposit. Therefore, the entity will classify the demand deposit as cash for purposes of the statement of cash flows.

Conversely, if the restrictions on use are not from a separate contractual arrangement with a third party but are instead part of the terms and conditions directly relating to the use of and access to the bank deposit, it is likely that the amount held in the bank deposit will not meet the definition of cash assuming it cannot be withdrawn on demand.

• Example: An entity has debt covenants that require a certain level of cash to be held in a separate account and requires the lender (i.e., the bank where the deposit is held) be notified and provide their approval prior to withdrawing funds. As this restriction prevents the entity from accessing its deposit on demand, the deposit cannot be classified as cash for purposes of the statement of cash flows.

A demand deposit with restrictions on its use that meets the definition of cash or cash equivalents may need to be separately presented in the statement of financial position to provide a clear understanding of the entity’s financial position (see paragraphs 54-55 of IAS 1 Presentation of Financial Statements). However, because it meets the definition of cash or cash equivalents, it should also be included as part of cash and cash equivalents in the statement of cash flows. The amount included in the statement of cash flows should be reconciled to the equivalent items in the statement of financial position (see paragraph 45 of IAS 7).

Paragraph 48 of IAS 7 requires disclosure of significant cash and cash equivalent balances held by the entity that are not available for use by the group.

The entity must also consider whether additional disclosure is needed under IFRS 7 Financial Instruments: Disclosures about liquidity risk and how that risk is managed.

If the information provided in accordance with IAS 7 and IFRS 7 is insufficient for users of financial statements to understand the impact of the restrictions on the entity’s financial position, the entity should consider whether additional disclosures are required (see paragraph 31 of IAS 1).

The entity also considers paragraph 66(d) of IAS 1 and assesses whether the restricted cash is current or non-current.

In practice, the term “restricted cash” on the statement of financial position can include cash that both does and does not meet the definition of cash and cash equivalents for purposes of the statement of cash flows. As a result, the disclosure requirement in paragraph 45 of IAS 7 (i.e., requiring the amount presented as part of cash and cash equivalents in the statement of cash flows to be reconciled to the equivalent items in the statement of financial position) may be material.

The Group’s Discussion

The Group agreed with the analysis presented.

One Group member reiterated that items meeting the definition of “cash” or “cash equivalents” in IAS 7 should be included in the statement of cash flows, irrespective of how these items are presented in the statement of financial position. They also emphasized the importance of properly assessing whether cash with restrictions on its use meets the definition of cash or cash equivalents and is therefore included in the statement of cash flows.

One Group member noted that judgment may need to be applied in determining whether bank overdrafts that are repayable on demand form an integral part of an entity’s cash management. In particular, judgment may need to be applied in assessing whether an entity’s bank balance often fluctuates from being positive to overdrawn as IAS 7 does not specify the specific time periods that should be considered as part of this assessment.

Issue 2: Classification of cash flows on business combinations and dispositions

Analysis

Cash flows related to acquiring or disposing of a subsidiary or business unit must be reported separately under investing activities in the statement of cash flows. The amounts paid or received should be shown net of any cash and cash equivalents acquired or disposed of as part of the transaction (see paragraphs 39 and 42 of IAS 7).

Paragraph 41 of IAS 7 allows the aggregation of cash flows from acquisitions or from disposals. However, the cash flow from disposals should be presented separately from the cash flow from acquisitions. The cash flow effects of losing control are not deducted from those associated with gaining control.

Cash flows arising from changes in ownership interests in a subsidiary that do not result in a loss of control are classified as cash flows from financing activities, unless the subsidiary is held by an investment entity (as defined in IFRS 10 Consolidated Financial Statements) and is measured at fair value through profit or loss (see paragraph 42A of IAS 7).

If an entity obtains or loses control of subsidiaries or other businesses during the period, the following disclosures are required, in aggregate (see paragraph 40 of IAS 7):

• the total consideration paid or received;
• the portion of the consideration consisting of cash and cash equivalents;
• the amount of cash and cash equivalents in the subsidiaries or other businesses over which control is obtained or lost; and
• the amount of assets and liabilities, other than cash or cash equivalents, in the subsidiaries or other businesses over which control is obtained or lost, summarized by each major category.

Paragraph 43 of IAS 7 also requires disclosure of the non-cash element of the acquisition or disposal of subsidiaries or other businesses. For example, if a subsidiary is acquired for consideration that is paid partly in cash, and partly in shares, only the portion paid in cash would be reflected in the statement of cash flows. The portion paid in shares would not be reflected in the statement of cash flows but would be subject to disclosure (see paragraph 43 of IAS 7).

Contingent consideration paid on business combinations

When the purchase price in a business combination agreement allows for adjustments to the cost of the combination that are contingent on one or more future events, IFRS 3 Business Combinations requires the acquirer to:

• recognize the acquisition-date fair value of the contingent consideration (see paragraph 39 of IFRS 3); and
• classify an obligation to pay contingent consideration that meets the definition of a financial instrument as a liability or as equity in accordance with the provisions of IAS 32 Financial Instruments: Presentation (see paragraph 40 of IFRS 3).

Changes in the measurement of a contingent consideration liability resulting from events after the acquisition date, such as meeting a performance target, are not reflected by adjusting the recorded cost of the business combination. When a liability has been recognized for the contingent consideration payable, any subsequent payment in excess of or below the carrying amount of the liability is recognized in profit or loss, except in limited circumstances when changes relate to measurement period adjustments (see paragraph 58 of IFRS 3).

Cash flow classification depends on the nature of the activity – whether it is operating, investing or financing – as defined in the standard. While this may suggest that all payments related to a business combination should be classified as investing activities, paragraph 16 of IAS 7 specifies that only expenditures resulting in a recognized asset qualify for that classification.

In most cases, cash payments up to the amount recognized for the acquisition-date fair value of the contingent consideration (and thereby included in the carrying value of the acquired assets, including goodwill) are classified as investing activities. This is because these are cash flows arising from obtaining control of subsidiaries and result in the recognition of an asset.

IAS 7 states that investing cash flows should arise only when an asset is recognized. However, remeasurements of contingent consideration other than measurement period adjustments are recognized in profit or loss. As a result, since contingent consideration typically arises for reasons other than to finance the acquirer, payments for additional contingent consideration in excess of the amount recognized at the acquisition date or resulting from measurement period adjustments are normally classified as operating cash flows.

If a subsequent remeasurement of the liability reduces the total cash payable below the amount recognized at the acquisition date for the acquired assets, the resulting payment of the liability is classified as investing in its entirety.

In practice, some arrangements may, in substance, represent a financing activity (that is, the arrangement represents the entity borrowing from the vendor to finance the acquisition). In such cases, when there is a very high probability of the payments being made, the entity should consider the classification in a similar way to deferred consideration (discussed below). As a result, the settlement of the initial amount and subsequent contingent consideration payments may be classified as a financing outflow. When assessing the substance of the arrangement, it is important to consider the purpose and structure of the contingent consideration, including the nature and probability of future events or conditions that will determine the contingent consideration amount paid.

Contingent consideration conditional on continuing employment

Contingent payments that are linked to continued employment of the acquiree’s employees, or former owners that may become employees, are generally recognized as an employee compensation expense in the post-combination period (see paragraph 52 of IFRS 3). Subsequent payment of contingent amounts that are recognized as an employee compensation expense should be classified as an operating cash outflow in the statement of cash flows (see paragraph B55(a) of IFRS 3).

Contingent consideration received on disposal of a subsidiary

When an entity disposes of a subsidiary, it presents the related cash flows separately within investing activities. This applies even for the receipt of contingent consideration because the cash inflow is still an investing cash flow (i.e., as it is the receipt from the sale of equity or debt instruments of another entity) (see paragraph 16 of IAS 7).

The Group’s Discussion

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

Some Group members recognized that the outcome of applying the requirements in paragraph 16 of IAS 7 to the remeasurement of contingent consideration paid on a business combination may be surprising to some preparers. They acknowledged that preparation of the statement of cash flows can be challenging and encouraged preparers to carefully assess whether certain items (e.g., payments related to the purchase of assets on deferred payment terms) can be classified as investing activities. Some Group members also encouraged individuals to stay informed of the IASB’s Statement of Cash Flows and Related Matters project.

Some Group members also raised the following points:

• Acquisition costs that are expensed through the statement of profit and loss should not be classified as investing activities in the statement of cash flows. This is because, in accordance with paragraph 16 of IAS 7, these expenditures do not result in a recognized asset in the statement of financial position.

• Entities should carefully assess the classification of payments relating to the liabilities of an acquired business in the statement of cash flows. For example, if an acquired business has a liability (e.g., a trade payable) that is not settled until after the acquisition date, this payment may need to be classified as an operating activity in the acquirer’s cash flow statement.

Issue 3: Payments to settle deferred consideration liability

Analysis

The purchase of assets on deferred payment terms can be complex, as it may not be clear whether to classify the associated cash flows as investing activities (i.e., purchasing an asset) or financing activities (i.e., repayment of borrowings). Therefore, judgment is required when determining the appropriate classification of deferred payments in the statement of cash flows. In making this determination, an entity might consider the purpose and structure of the deferred consideration, including the period of time before the amounts are due and any explicit or implicit financing terms. These same principles apply on the acquisition of a business involving deferred consideration.

If the period between the acquisition and payment is not significant, it is generally not appropriate to classify any part of the payment as a financing cash flow. Conversely, if the deferral period is significant, judgment must be applied to determine whether payments to reduce this liability should be regarded as financing cash flows.

When deferred consideration is measured at amortized cost and effectively represents a financing activity, any cash paid in excess of the initial fair value represents a finance cost. This amount should be classified consistently with other interest paid (i.e., it should be classified as an operating or financing activity depending on the entity’s current accounting policy regarding the cash flow classification of interest paid in accordance with paragraph 33 of IAS 7). In addition, disclosures regarding changes in liabilities from financing activities should be considered as outlined in paragraphs 44A-44E of IAS 7.

The classification of deferred consideration in the statement of cash flows should be clearly disclosed, if material.

The Group’s Discussion

The Group agreed with the analysis presented. However, one Group member noted that IFRS 18 Presentation and Disclosure in the Financial Statements introduced consequential amendments to IAS 7 that change how interest paid is required to be classified in the statement of cash flows. As a result, the accounting conclusions related to the classification of interest paid outlined in the analysis may no longer be relevant when IFRS 18 becomes effective.¹

Issue 4: Lessee cash flows from leasing transactions

Analysis

When an entity enters into a lease, the acquisition of the right-of-use (ROU) asset and the incurrence of the lease liability is a non-cash transaction, and, therefore, is excluded from the statement of cash flows. However, leasing transactions can give rise to cash flows that impact the statement of cash flows.

As indicated in IAS 7, a single transaction entered into by an entity could result in several cash flows that can be classified differently. These cash flows should be separated and presented under their respective headings according to their nature (see paragraph 12 of IAS 7).

In relation to the classification of cash flows in the statement of cash flows, a lessee classifies:

• Cash payments for the principal portion of the lease liability within financing activities.
• Cash payments for the interest portion of the lease liability in a consistent manner to the presentation of other interest paid. Depending on the entity’s accounting policy adopted for the classification of interest paid, these payments may be classified as either financing or operating activities in accordance with paragraph 33 of IAS 7.
• Variable lease payments not included in the lease liability within operating activities.
• Short-term lease payments and payments for leases of low-value assets to which the recognition exemptions in IFRS 16 are applied within operating activities (see paragraph 50 of IFRS 16 Leases).

IFRS 16 also requires disclosure of the total cash outflow for leases (see paragraph 53(g) of IFRS 16). This includes the principal and interest paid on lease liabilities as well as lease payments for short-term leases, leases of low-value assets and variable lease payments.

A lessee must also include lease liabilities and the related cash and non-cash movements in the disclosures required by paragraphs 44A-44E of IAS 7.

Payments made by the lessee before the commencement date

If a lessee makes payments at or before the commencement date of the lease, these payments are included in the initial measurement of the ROU asset (see paragraph 24(b) of IFRS 16). Since these cash outflows are seen as consideration for the acquisition of the ROU asset, they should be classified as an investing activity.

Conversely, if the payment is the first of the periodic lease payments that the lessee will make and is financing in nature (meaning it reduces the lease liability), this cash outflow would be classified as a financing activity, according to paragraph 17(e) of IAS 7.

Lease incentives

Lease incentives are defined in Appendix A of IFRS 16 as payments made by a lessor to a lessee associated with a lease, or the reimbursement or assumption by a lessor of costs incurred by the lessee.

While neither IFRS 16 nor IAS 7 provide specific guidance on the classification of cash inflows from lease incentives, paragraph 17(e) of IAS 7 considers a lease transaction as the provision of finance by the lessor to the lessee.

Appendix A of IFRS 16 defines lease payments as payments made by a lessee to a lessor relating to the right to use an underlying asset during the lease term, less any lease incentives. Therefore, lease incentives receivable by lessees (e.g., a reimbursement of the cost of leasehold improvements) are included in the measurement of the lease liability as a reduction in lease payments.

The most appropriate presentation of cash flows from lease incentives may be to treat such incentives as part of financing activities in the statement of cash flows, regardless of whether they are received before or after the commencement date of the lease, as the receipt of the lease incentive may change the size of the lessee’s borrowings.

Initial direct costs

Initial direct costs are incremental costs of obtaining a lease that otherwise would not have been incurred. A lessee includes these costs in the cost of the ROU asset at the commencement date (see paragraph 24(c) of IFRS 16). A lessee should classify initial direct costs within investing activities because the nature of the activity to which this cash outflow relates is the acquisition of the ROU asset.

The Group’s Discussion

The Group agreed with the analysis presented. One Group member noted that the classification of lease-related payments in the statement of cash flows changed significantly for lessees upon the adoption of IFRS 16. As outlined in the analysis, under IFRS 16, different types and components of lease payments made by the lessee should be classified as either operating, investing or financing activities in the statement of cash flows based on their nature.

Issue 5: Other statement of cash flow matters

Analysis

Several other topics impact the statement of cash flows, including:

• gross versus net presentation;
• non-cash transactions;
• foreign currency implications;
• non-operating changes in working capital; and
• other situations not included in this paper when the classification of cash flows can involve judgment.

As a result, entities are reminded that the preparation of the statement of cash flows requires careful consideration. Considerable non-authoritative guidance exists, (e.g., published cash flow statement guidance by several accounting firms) that may be useful when assessing the treatment of cash flows in the statement of cash flows.

The Group’s Discussion

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

Some Group members reiterated the need for entities to apply careful thought and consideration when preparing the statement of cash flows. They noted that this important statement is used extensively by regulators and investors to gain insight into an entity’s business model and overall liquidity. Accordingly, entities should invest the appropriate time to prepare the statement of cash flows and involve individuals with the appropriate level of seniority and expertise.

Some Group members also raised the following points relating to the preparation of the statement of cash flows:

• Determining the impact of foreign currency on the statement of cash flows can be complex, particularly for entities with significant foreign subsidiaries.
• It is important to carefully assess how working capital accounts are classified in the statement of cash flows. Specifically, entities should evaluate whether any of these amounts are related to capital expenditures. If so, classifying them as investing activities may be required. This consideration is especially relevant for capital-intensive entities or those that have made significant capital investments during the period.
• Careful consideration may need to be applied in determining whether cash held in escrow meets the definition of cash or cash equivalents in IAS 7. In making this assessment, entities will need to consider whether an entity has control over the cash held in these accounts, as well as whether access to the cash is restricted. Refer to the Group’s discussion at its June 20, 2019 meeting, “Client Money”, for further details. Entities may also need to consider whether amounts held in escrow relate to the issuance of subscription receipts. Refer to the Group’s discussion at its May 20, 2021, meeting, “IAS 7, IAS 32 and IAS 33: Issuer’s Accounting for Subscription Receipts,” for further details.
• Entities should exercise caution in classifying amounts associated with supplier finance arrangements in the statement of cash flows.² This is because, while payments to suppliers for goods or services are typically classified as operating activities, amounts payable to finance providers under these arrangements may be considered financing activities.
• Challenges may arise in classifying amounts received in association with government grants in the statement of cash flows. In determining the appropriate classification for these amounts, entities will need to consider whether the government grant has been received for an asset or to support operating activities, as well as the timing of when amounts are received.
• Judgment may need to be applied in determining whether amounts held in a margin account meet the definition of cash or cash equivalents in IAS 7. This is because certain amounts held in these accounts (e.g., the funding provided to maintain minimum required balances) may not be used to meet an entity’s short-term cash commitments. A Group member noted that an Agenda Decision, “Classification of Cash Flows related to Variation Margin Calls on ‘Collateralised-to-Market’ Contracts,” published in February 2025, summarized the IFRS Interpretations Committee’s conclusion on this matter based on staff outreach.
• The aggregation and disaggregation requirements IFRS 18 introduced will apply to the statement of cash flows. As a result, entities will need to consider how these requirements may impact the statement of cash flows when IFRS 18 becomes effective.³
• Entities should consider implementing additional controls (e.g., using a completeness checklist) when preparing the statement of cash flows to ensure that cash flows are appropriately classified as operating, investing or financing activities.

Overall, the Group’s discussion raised awareness of application issues related to the statement of cash flows. The Group also encouraged the AcSB to closely follow the IASB’s project on Statement of Cash Flows and Related Matters.

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IFRS 18: Classification of Foreign Exchange Differences

Background

IFRS 18 Presentation and Disclosure in Financial Statements is effective for annual reporting periods beginning on or after January 1, 2027, with retroactive application to the comparative period. It requires entities to classify income and expenses into one of five categories in the statement of profit or loss: operating, investing, financing, income taxes and discontinued operations.

Paragraph B65 of IFRS 18 specifies how entities should classify foreign exchange gains and losses on the statement of profit or loss. It says, “an entity shall classify foreign exchange differences included in the statement of profit or loss applying IAS 21 [The Effects of Changes in Foreign Exchange Rates] in the same category as the income and expenses from the items that gave rise to the foreign exchange differences, unless doing so would involve undue cost or effort.” For example, if an entity classifies income and expenses relating to a receivable in the operating category, it should also classify foreign exchange gains or losses relating to that receivable in the operating category. Similarly, if an entity classifies income and expenses relating to an issued debt instrument in the financing category, it should also classify the foreign exchange gains or losses relating to that debt instrument in the financing category.

Sometimes a transaction can give rise to income and expenses that are classified in more than one category (e.g., in both the financing and operating category). In these cases, paragraph B67 of IFRS 18 requires the entity to use judgment to determine whether the foreign exchange difference relates to the amount classified in the financing or operating category. Entities should not allocate foreign exchange differences arising from a single transaction to multiple categories. For example, all the foreign exchange differences arising from the translation of a lease liability to an entity’s functional currency must be classified in a single category in the statement of profit or loss. Entities should assess each foreign exchange difference to determine whether it would involve undue cost or effort to classify it based on principles described above. If such classification would involve undue cost or effort, the foreign exchange gain or loss should be recognized in the operating category.

Fact Pattern 1

• Entity A is based in Canada but has a functional currency of US dollars (USD).
• There is a long-term lease for Entity A’s head office, which is denominated in Canadian dollars (CAD). Entity A has recognized a lease liability and a right-of-use (ROU) asset for the head office lease.
• Since the lease liability is a monetary liability, Entity A remeasures it at each balance sheet date using the current exchange rate in accordance with IAS 21.
• Since the ROU asset is a non-monetary asset, Entity A does not remeasure it to its functional currency at the balance sheet date.
• The lease liability arises from a transaction that involves more than the raising of finance, as Entity A receives an ROU asset for the head office building rather than cash, own equity or the extinguishment of a financial liability.

Issue 1: Where should Entity A classify the foreign exchange gains and losses that arise on the translation of the lease liability to Entity A’s functional currency in the statement of profit or loss?

Analysis

Classification of income and expenses related to the lease liability and ROU asset

Paragraph 61 of IFRS 18 requires interest income and expenses relating to a lease liability and income and expenses arising from changes in interest rates to be recognized in the financing category. Other changes to the lease liability, such as those that arise from remeasurements or modifications in accordance with IFRS 16 Leases should not be recognized directly in the statement of profit or loss. Instead, they should adjust the ROU asset, which impacts profit and loss through amortization.⁴ Entities recognize amortization expense in the operating category of the statement of profit or loss.

View 1A – Entity A should recognize the foreign exchange gains and losses in the financing category, consistent with the classification of interest expense on the lease liability.

Paragraph B65 of IFRS 18 requires entities to classify foreign exchange differences included in the statement of profit or loss in the same category as the income and expenses of the item that gave rise to the foreign exchange differences. Interest is the only income and expense item included in the statement of profit or loss related to the lease liability.

Per paragraph 30(b) of IFRS 16, entities should record other remeasurements as adjustments to the ROU asset. These adjustments are not income and expenses. Although they eventually affect profit and loss through amortization, this expense pertains to a non-monetary asset that is not remeasured at the balance sheet date.

Proponents of this view think foreign exchange differences are attributable solely to the lease liability and not to the ROU asset. Since interest is the only item of income and expenses related to the lease liability, and it is categorized as a financing item, proponents of this view think foreign exchange gains and losses arising from translation of the lease liability should also be recognized in the financing category.

View 1B – Entity A could recognize the foreign exchange gains and losses in either the operating or financing category

Proponents of this view note that a lessee translates the present value of lease payments in a foreign-currency denominated lease into its own functional currency at the foreign exchange rate in effect at lease commencement. The lessee recognizes the foreign exchange effects of such translation in the initial recognition of the lease liability and ROU asset. IFRS 16 also requires entities to recognize certain remeasurements of the lease liability in the ROU asset (e.g., lease modifications that do not result in a separate lease or a reduction in the scope of the lease), presumably with the related foreign exchange effects. As a result, the initial recognition of the lease liability and changes in the lease liability impact the entity’s income and expenses through amortization of the ROU asset, which is classified in the operating category. In contrast, interest expense on the lease liability is classified in the financing category.

Therefore, they think Entity A recognizes income and expenses related to the lease liability in both the operating and financing category. Under this view, the lease liability and the ROU asset are inseparable, and therefore, the impacts on the statement of profit and loss should be considered together.

When an entity recognizes income and expenses relating to a single item in more than one category on the statement of profit and loss, paragraph B67 of IFRS 18 indicates that entities should apply judgment to determine the appropriate classification of foreign exchange differences. Therefore, proponents of this view think Entity A should assess whether the foreign exchange differences should be presented in the operating or financing category. Entity A should apply judgment based on the facts and circumstances surrounding the transaction.

Under this view, Entity A might recognize the foreign exchange gains and losses in either the operating or financing category, depending on the specific facts and circumstances. Group members who support this view were asked to discuss the facts and circumstances they might consider when making this judgment.

The Group’s Discussion

Several Group members supported View 1A as they think the foreign exchange differences arise from the translation of the lease liability only. While they acknowledge that the initial recognition of the lease liability results in the recognition of a ROU asset, and some changes to the lease liability adjust the ROU asset, they still view the lease liability and the ROU asset as separate items. To further support this view, one Group member noted that the ROU asset could be impaired while the lease liability remains on the balance sheet. In this case, the asset would no longer be amortized in the statement of profit and loss, meaning there would be no further operating expense related to it. Some Group members noted that this view results in more consistent and comparable information among entities, which is one of the objectives of IFRS 18.

While many Group members supported View 1A, several noted that they could not preclude View 1B. One Group member noted that paragraph B53(c) lists lease liabilities as an example of a liability that arises from a transaction that does not involve only the raising of finance. They noted that paragraph B67 clearly indicates that an entity might classify income and expenses from such transactions in more than one category. Therefore, the entity would need to apply judgment to determine whether the foreign exchange differences relate to the amount classified in the financing or operating category. They also noted that paragraph BC218 in the Basis for Conclusions explains that foreign exchange differences on a liability payable in a foreign currency might be viewed as arising from the entity’s financing decisions (classified in the financing category) or the entity's purchasing decisions (classified in the operating category). They also noted that paragraph BC219 further emphasizes the need to apply judgment to determine the classification of foreign exchange differences. Some Group members who support View 1B think in most cases entities would still end up classifying the foreign exchange differences in the financing category as it could be challenging to support a view that they relate to the ROU asset.

Fact Pattern 2

• Parent P presents its consolidated financial statements in CAD, which is its functional currency.
• Parent P owns a wholly owned subsidiary (Subsidiary S), whose functional currency is USD.
• Parent P has advanced amounts to Subsidiary S through a demand loan arrangement, denominated in USD. The loan is not considered to represent part of Parent P’s net investment in Subsidiary S under paragraph 32 of IAS 21.
• While the loan arrangement is eliminated upon consolidation, Parent P recognizes the exchange gains and losses that arise from translating the loan to CAD in accordance with paragraph 45 of IAS 21.

Issue 2: Where should entities recognize foreign exchange gains or losses arising from intercompany loans (that do not form part of the net investment of the parent) in the statement of profit and loss under IFRS 18?

Analysis

Paragraph B65 of IFRS 18 requires entities to classify foreign exchange differences included in the statement of profit or loss in the same category as the income and expenses from the items that gave rise to the foreign exchange differences. However, interest income and expenses, and gains and losses on extinguishment of intercompany loans, are eliminated upon consolidation.

A similar issue has been submitted to the IFRS Interpretations Committee (the Interpretations Committee). The Interpretations Committee discussed this submission at its September 2025 meeting after this IFRS Accounting Standards Discussion Group’s agenda paper was prepared. At that meeting, the Interpretations Committee concluded that two of the views in this agenda paper are not permissible (View 2B and View 2C). The Interpretations Committee ultimately reached consensus to issue a tentative Agenda Decision that indicates that it did not come to a majority view between two views (that are similar to View 2A and View 2D in this agenda paper) and further tentatively agreed that they would not recommend the matter to the International Accounting Standards Board for standard-setting.

While all four views were presented to the Group, Group members only discussed the merits of View 2A and View 2D as the Interpretations Committee already indicated that View 2B and View 2C are not permissible. At the time of the Group’s discussion and the preparation of the meeting report, the Interpretation Committee’s decisions were tentative and still subject to public consultation. On September 26, 2025, following the Interpretations Committee meeting, the Interpretations Committee issued its tentative agenda decision on this matter which outlines the views presented to the Committee and the outcome of the discussion.

View 2A – The classification depends on the classification of the gains and losses in the separate financial statements of the entity in which the gains and losses arise by applying IFRS 18.

The foreign exchange gains and losses arise in Parent P from the translation of a monetary item (loan to Subsidiary S) from USD to CAD. Under this view, Parent P would consider the classification of these gains or losses in the separate financial statements of Parent P. For example, assuming Parent P does not have a main business activity of investing in financial assets such as loans, Parent P would classify the interest income from the loan to Subsidiary S in the investing category. This is because the loan generates a return individually and largely independently of the entity’s other resources. The interest income of Parent P is eliminated upon consolidation, but the foreign exchange gains remain in the investing category. Proponents of this view note that this is consistent with the principles in IFRS 18 because the foreign exchange arises on an investing activity of the parent that is not eliminated through the consolidation process.

If the intercompany loan was denominated in CAD, then there would be no exchange gains or losses that arise in the separate financial statements of Parent P. However, they would arise in the separate financial statements of Subsidiary S. If the transaction meets the definition in paragraph B50 of IFRS 18 of a “transaction that involves only the raising of finance,” Subsidiary S would recognize all the gains and losses, including foreign exchange gains and losses, relating to this loan payable in its financing category under IFRS 18. This classification would therefore be retained upon consolidation.

View 2B – The foreign exchange gains and losses should be recognized in the financing category because the nature of the arrangement is primarily related to intergroup financing.

Proponents of this view note that the purpose of the underlying transaction is to provide financing between Parent P and Subsidiary S. Since the purpose of the intercompany loan is only to provide financing to the subsidiary (even though the loan is eliminated upon consolidation), the foreign exchange gains or losses should be recorded in the financing category. This view differs from View 2A because it looks to the nature of the transaction from a consolidated group level, rather than from the perspective of the issuer or recipient of the financing in separate financial statements. As noted earlier, the Interpretations Committee reached a consensus that this view does not have technical merit.

View 2C – The foreign exchange gains and losses follow the classification of other gains and losses relating to cash and cash equivalents in the consolidated financial statements.

Proponents of this view note that the foreign exchange gains and losses arise from the movement of cash and cash equivalents around the group. They note that while the loan is eliminated upon consolidation, the foreign exchange gains and losses are not eliminated because they represent a commitment to convert one currency into another and expose the reporting entity to a gain or loss through currency fluctuations.

Since these foreign exchange gains and losses arise fundamentally from movements in cash balances between group entities, proponents of this view think they should be recognized in the same category as other income and expenses related to cash and cash equivalents.

This would typically place them in the investing category. However, if Parent P manages financial assets as a main business activity in its consolidated financial statements, the classification would shift to the operating category. As noted above, the Interpretations Committee reached a consensus that this view does not have technical merit.

View 2D – The foreign exchange gains or losses are recognized in the operating category, which is the residual category under IFRS 18.

Proponents of this view think the general principle in paragraph B65 of IFRS 18 does not apply to this fact pattern because there are no other items of income and expenses on the consolidated financial statements that relate to the item giving rise to the foreign exchange gain or loss. Therefore, they think it should be classified in the operating category, which is the residual category under IFRS 18.

Proponents of this view think the presentation of income and expenses in the separate financial statements of the parent or the subsidiary is irrelevant to this assessment because the consolidated financial statements represent a distinct reporting entity. They also note that in other aspects of applying IFRS 18, such as the determination of whether there are specified main business activities, the determination must be made at the level of the reporting entity (paragraph B37 of IFRS 18). They think this reinforces that the presentation and disclosure requirements of IFRS 18 are intended to be applied from the perspective of the consolidated entity. They think presentation determinations made in the separate financial statements are not relevant because they are different from the consolidated reporting entity.

Supporters of View 2D may also refer to the “undue cost and effort” clause in paragraph B65 of IFRS 18. They suggest that since there are no other gains and losses recognized for the intercompany loan, undue cost and effort is required to determine where foreign exchange gains and losses should be classified. This undue cost and effort would also result in classification of foreign exchange gains and losses in the operating category.

The Group’s Discussion

Several Group members supported View 2D as they think that the assessment of the category of foreign exchange gains and losses should be done at the consolidated reporting entity level. They note that the intercompany loan is eliminated on consolidation, and therefore, there are no items of income and expense on the consolidated financial statements related to the item giving rise to the foreign exchange gains or losses. Therefore, the entity would classify foreign exchange gains or losses on intercompany loans in the operating category, which is the residual category.

While some Group members think View 2A has merit, they also noted that it could be challenging to apply. The fact pattern in this meeting report is relatively simple. However, some Group members noted that many entities have more complicated intercompany loan structures. They think in such situations it can be onerous to assess the category of income and expense related to each intercompany financing transaction. Therefore, an entity might apply the “undue cost and effort” clause in paragraph B65 of IFRS 18 and classify the foreign exchange gains and losses in the operating category.

The Group noted that other types of foreign currency transactions exist in practice that may also require an entity to apply judgment. Therefore, it encouraged entities to begin their analysis of their foreign currency transactions as soon as possible to determine their classification under IFRS 18.

The Group also encouraged the AcSB and other Canadians to respond to the Interpretations Committee’s tentative Agenda Decision on the Classification of a Foreign Exchange Difference from an Intragroup Monetary Liability (or Asset). This will ensure Canadian perspectives are considered as the tentative agenda decision flows through the Interpretations Committee’s process.

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IFRS 18: Classification of Income and Expenses from “Other Assets”

Background

IFRS 18 Presentation and Disclosure in Financial Statements will replace IAS 1 Presentation of Financial Statements. 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, especially in the statement of profit and loss. Paragraph 47 of IFRS 18 notes that entities should classify income and expenses included in the statement of profit or loss in one of five categories:

1. the operating category;
2. the investing category;
3. the financing category;
4. the income taxes category; and
5. the discontinued operations category.

Paragraph 52 of IFRS 18 notes that an entity should classify in the operating category all income and expenses included in the statement of profit or loss that are not classified in one of the other categories. Therefore, the operating category is a residual category that should include all income and expenses arising from an entity’s main business activities.

Paragraph 53 of IFRS 18 outlines the general requirements for the investing category, which includes all income and expenses (as specified in paragraph 54 of IFRS 18) arising from:

1. investments in associates, joint ventures and unconsolidated subsidiaries;
2. cash and cash equivalents; and
3. other assets if they generate a return individually and largely independently of the entity's other resources.

This discussion focused on paragraph 53(c) of IFRS 18 and the classification of specified income and expenses related to other assets if they generate a return individually and largely independently of the entity’s other resources. The standard provides limited guidance on how to interpret the terms individually and largely independently, which are used in paragraph 53(c). However, paragraph B46 of IFRS 18 identifies typical examples:

1. debt or equity investments; and
2. investment properties and receivables for rent generated by those properties.

Paragraph B48 of IFRS 18 notes that assets that an entity uses in combination to produce or supply goods or services do not generate a return individually and largely independently of the entity's other resources. Such assets typically include:

1. property, plant and equipment;
2. assets that arise from the production or supply of goods and services for which the income and expenses are classified in the operating category (e.g., receivables for such goods and services); and
3. if the entity provides financing to customers as a main business activity, any loans to a customer.

There are some exceptions to the general requirements of paragraph 53 of IFRS 18 noted above for entities with a specified main business activity of investing in assets. The standard requires an entity to assess whether it has a main business activity of either (or both): (i) investing in assets or (ii) providing financing to customers.

Paragraph 58 of IFRS 18 states for the assets specified in paragraph 53(c) (i.e., other assets if they generate a return individually and largely independently of the entity’s other resources) that an entity invests in as a main business activity (see paragraph B40), the entity shall classify the income and expenses specified in paragraph 54 in the operating category.

Figure 3.1 in the Illustrative Examples of IFRS 18 illustrates the guidance noted above.

In summary, when assessing the classification of specified income and expenses generated from “other assets,” an entity must first determine if those assets generate a return individually and largely independently of the entity’s other resources. If they do, they should be included within the scope of paragraph 53(c) of IFRS 18 and classified in the investing category; otherwise, they should be recorded within the operating category.

When assessing classification in relation to paragraph 53(c) of IFRS 18, determining whether assets generate a return individually is often straightforward, as such assets may be separable and their related income and expenses can be isolated. However, assessing whether they generate a return largely independently may require more judgment. The entity must consider whether the assets are used in combination with other resources to produce or supply goods and services.

Issue 1: In applying IFRS 18 and the classification requirements for the investing category, do “other assets” generate a return individually and largely independently of an entity’s other resources?

Analysis

Some entities are subject to contractual or regulatory requirements related to their normal operating activities, which require them to set funds aside. Entities are often permitted to invest these funds in certain types of other assets that generate a return individually. Some examples of such requirements include:

• a manufacturing entity has an asset retirement obligation and is required under legislation to set aside a certain level of funds;
• a travel agent entity is required to set aside deposits from customers;
• a lending arrangement that requires the entity as borrower to maintain a certain level of funds on deposit; and
• a retailer lessee entity that is required under its lease to maintain a certain level of funds on deposit.

For this discussion, the Group assumed that the funds set aside are invested in similar types of debt securities, which earn interest income, the interest income accrues to the entity and those debt securities are on the entity’s balance sheet. The Group also assumed that the entity does not engage in a main business activity of investing or providing finance to customers.

View 1A – No, the other assets cannot generate a return individually and largely independently of the entity’s other resources (i.e., classify as operating)

While these assets can generate a return individually, proponents of this view think that they do not generate a return largely independently of an entity’s other resources. They note that these assets arise from activities related to the supply of goods and services or result directly from arrangements that are integral to the core business operations.

Therefore, they think the assets should be considered part of the entity’s operating activities. Paragraph B48 of IFRS 18 notes that assets that arise from the production or supply of goods and services classified in the operating category are typically considered used in combination and are not considered independent of the entity’s other resources.

Proponents of this view emphasize the importance of considering the purpose for holding the investments. These assets do not produce returns largely independently of the entity’s other resources as the entity is required to set aside the funds as part of its normal operating activities.

View 1B – Yes, the other assets can generate a return individually and largely independently of the entity’s other resources (i.e., classify as investing).

Proponents of this view note that the return on these assets is unaffected by the entity’s other resources. Although the funds that the entity sets aside originate from the entity’s operating activities, once invested the actual returns generated from the other assets in the reporting period are not affected by the entity’s other resources. Therefore, they think these funds set aside and invested in debt securities are economically similar to returns generated from investing excess operating cash in debt securities.

Paragraph B46 of IFRS 18 identifies debt securities as an example of an “other asset” that typically generates a return individually and largely independently of the entity’s other resources. Proponents of this view interpret the guidance in this paragraph to mean that the debt securities discussed in this issue meet that criterion, regardless of the source of the invested funds.

Proponents of this view also note that these debt securities are not used in combination with the entities’ other assets to produce goods or services as contemplated by paragraph B48 of IFRS 18. The example in paragraph B48(b) for assets that arise from the production or supply of goods and services is “receivables for such goods and services” where such a receivable itself arises directly from the production or supply of goods and services. Paragraph B48(b) does not also include a separate investment in debt securities funded with the cash collected from such receivables.

Although the examples highlighted in this issue require funds be set aside and permit (or require) investment thereof in certain types of assets (i.e., the debt securities in question), proponents of this view maintain the assets generate a return individually and largely independently of the entity’s other resources. This is because once invested, the returns generated from the assets in the reporting period are unaffected by the entity’s other resources. Consequently, proponents of this view think the examples highlighted in this issue are not integral to the entities’ core business operations. Therefore, they think the income and expenses from the assets should be classified as investing.

The Group discussed this issue and contemplated whether their views would change depending on whether the other assets are held for contractual purposes versus for regulatory purposes.

The Group’s Discussion

Some Group members emphasized that it is important to consider all the facts and circumstances to determine whether funds set aside to meet contractual or regulatory requirements generate a return individually and largely independently of an entity’s other resources. In this fact pattern most Group members supported View 1B because the entity is only required to set aside funds to meet the requirements; it is not required to invest those funds. Therefore, any returns generated from investing those funds is the result of an independent business decision by the entity rather than to meet a contractual or regulatory requirement. While some Group members thought an entity should consider the source of the funds when making this determination, most thought it was irrelevant in this case. Several Group members noted that their views would not change regardless of whether the other assets are held for contractual or regulatory purposes.

Fact Pattern for Issue 2

• A consolidated reporting entity (i.e., a group) has two reportable segments: one that manufactures furniture and another that provides short-term insurance contracts through a regulated insurance subsidiary.
• The group has three pools of investments in securities:

• Pool 1 – Investments held by the manufacturing segment

The group’s manufacturing segment invests its excess cash generated from its operations in debt securities.

• Pool 2 – Investments backing insurance liabilities

In the insurance segment, the group collects premiums from policyholders and invests those premiums in debt securities, using the related returns to
pay out any liabilities to policyholders upon the occurrence of an insured event.

• Pool 3 – Investments held for regulatory capital purposes

The insurance segment is required by its regulator to maintain a minimum capital balance (which the group invests in debt securities) for solvency
purposes. The group also maintains an “excess” of the minimum level based on internal targets to ensure a healthy capital level.

• All three pools fully invest in a similar type of fixed income investment such as debt securities.
• All are measured using the same model (e.g., fair value through profit or loss) in the consolidated financial statements.
• To explain operating performance externally and monitor operating performance internally, the group uses a subtotal similar to gross profit called “net insurance finance result.” This subtotal includes the returns on the investments in Pool 2 and Pool 3 (but not Pool 1). Therefore, the group has determined it has a specified main business activity of investing. The investments in Pool 2 and Pool 3 (but not Pool 1) are part of this main business activity.

Issue 2: In applying IFRS 18 and the classification requirements for the investing category, are the “other assets” held by the entity generating a return individually and largely independently of the entity’s other resources?

Analysis

While the group of entities in this fact pattern has a manufacturing segment and an insurance segment, a similar issue could apply to entities in different industries when entities engage in investing activities as both a non-main business activity (i.e., main business operations other than investing or providing financing to customers) and a main business activity. Therefore, this issue is not limited to insurance entities.

Pool 1

The manufacturing segment in this fact pattern invests excess cash generated from its operations in debt securities. Per paragraph B46 in IFRS 18, the investment in a debt or equity security is considered an example of “other assets” that generate returns individually and largely independently of the entity’s other resources. Therefore, it would be reasonable to conclude that the group should classify the specified income and expenses from Pool 1 in the investing category.

This classification is reasonable regardless of the analysis made on the similar investments in Pool 2 and Pool 3, which are part of the group’s main business activity of investing. Paragraph B40 of IFRS 18 refers to assessing “an individual asset or groups of assets with shared characteristics” when determining whether it has a main business activity of investing in other assets.

Additionally, paragraphs BC146-BC147 in the Basis for Conclusions of IFRS 18 clarify that the requirement to classify income and expenses in the operating category is only relevant for assets in which the entity invests as a main business activity.

The Group’s Discussion

The Group agreed with the analysis.

Pool 2

View 2A – No, the other assets in Pool 2 cannot generate a return individually and largely independently of the entity’s other resources (i.e., classify as operating)

Like the views expressed in View 1A, while these assets can generate a return individually, they do not generate a return largely independently of the entity’s other resources. This is because they arise from activities related to the supply of services in the insurance business (i.e., collecting premiums and investing them to pay claims). Therefore, these assets do not meet the scope for the general requirements of paragraph 53(c) of IFRS 18 and the related returns must be classified in the operating category.

View 2B – Yes, the other assets in Pool 2 can generate a return individually and largely independently of the entity’s other resources. However, due to the main business activity of investing in this type of asset, they cannot be classified within the investing category (i.e., classify as operating)

Like the views expressed in View 1B, these assets can generate a return both individually and largely independently of the entity’s other resources as the return on these assets is unaffected by the entity’s other resources. Additionally, paragraph B46 of IFRS 18 lists debt securities as an example of assets that would typically generate a return individually and largely independently of the entity’s other resources.

However, as shown in Figure 3.1 of the Illustrative Examples of IFRS 18, the entity must consider whether investing in these assets is a main business activity. In this fact pattern, the entity does have a main business activity of investing in these assets. Therefore, the specified income and expenses related to these other assets would be classified in the operating category.

The Group’s Discussion

The Group discussed the relationship between assessing whether an asset generates a return individually and largely independently of the entity's other resources and assessing whether it has a specified main business activity of investing in assets. One Group member noted that this meeting report highlights the order in which these assessments should be performed. They said that assessing whether assets generate a return individually and largely independently of an entity’s other resources is the primary assessment. If the entity concludes that the assets do not generate a return individually and largely independently of its other resources, it should classify the returns in the operating category and skip the assessment of whether it has a main business activity of investing in assets. However, if the entity concludes that the assets do generate a return individually and largely independently of its other resources, it should then assess whether it has a main business activity of investing in assets to determine whether it should classify the returns in the investing or operating category. They noted that the main business activity assessment is a secondary assessment.

Some Group members noted that their view on Pool 2 depends on the specific facts and circumstances as there are often nuances to consider with insurance contracts. Factors such as the nature of the policy, the type of insurer and the type of insurance being issued would all factor into their assessment of whether the assets generate a return individually and largely independently of the entity’s other resources and whether the entity has a main business activity of investing.

Pool 3

View 3A – No, the other assets in Pool 3 cannot generate a return individually and largely independently of the entity’s other resources (i.e., classify as operating)

Like the views expressed in View 2A, while these assets can generate a return individually, they do not generate a return largely independently of the entity’s other resources. This is because they arise from activities related to the supply of services in the insurance business (i.e., the insurance segment needs to hold capital to operate as an insurer). Therefore, these assets do not meet the scope for the general requirements of paragraph 53(c) of IFRS 18 and the related returns must be classified in the operating category.

View 3B – Yes, the other assets in Pool 3 can generate a return individually and largely independently of the entity’s other resources. However, due to the main business activity of investing in this type of asset, they cannot be classified within the investing category (i.e., classify as operating).

Like the views expressed in View 2B, while these assets can generate a return individually and largely independently of the entity’s other resources, the entity must consider whether investing in these assets is a main business activity. In this fact pattern, the entity does have a main business activity of investing in these assets. Therefore, the specified income and expenses related to these other assets would be classified in the operating category. The Group was also asked whether it would assess the other assets held for minimum capital requirements differently than those held “in excess.”

The Group’s Discussion

Like Pool 2, several Group members noted that their view on Pool 3 depends on the specific facts and circumstances. They also said they would not assess the assets held for minimum capital requirements differently than those held in excess. They noted that the standard requires entities to consider the nature of the asset to determine how to classify its returns and that the regulatory requirements do not change the nature of the asset.

Overall, the Group’s discussion raised awareness of challenges entities might face when assessing whether its assets generate a return individually and largely independently of its other resources. It also highlighted when and how to apply the assessment of whether an entity invests in assets as a main business activity. The Group encouraged entities to begin the process of performing these assessments for assets in their portfolio as soon as possible. No further actions were recommended to the AcSB.

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IFRS 19: Subsidiaries without Public Accountability: Disclosures

Background

In May 2024, the IASB issued IFRS 19 Subsidiaries without Public Accountability: Disclosures. This standard is effective for reporting periods beginning on or after January 1, 2027, with earlier application permitted. It allows eligible subsidiaries to apply IFRS Accounting Standards with reduced disclosures, instead of the full disclosure requirements in other IFRS Accounting Standards.

Issue 1: Objective of IFRS 19

Analysis

When a parent entity applies IFRS Accounting Standards, its subsidiaries might also apply these standards to align their accounting policies for group reporting purposes. A subsidiary applying IFRS Accounting Standards must meet all relevant disclosure requirements. However, complying with all these requirements can be onerous, and for some subsidiaries, it might not be necessary to meet the needs of financial statement users.

Some subsidiaries of parent entities applying IFRS Accounting Standards are eligible to use another framework, such as Accounting Standards for Private Enterprises (ASPE), in their individual general purpose financial statements. However, differences in recognition and measurement requirements between the frameworks used by a parent and its subsidiary create additional costs and complexities. For example, the subsidiary might need to maintain dual accounting records to provide IFRS Accounting Standards compliant information for the parent’s consolidated financial statements.

The IASB designed IFRS 19 to address both the excessive costs of maintaining dual accounting records and the potentially unnecessary disclosure requirements in IFRS Accounting Standards for eligible subsidiaries.

IFRS 19 sits alongside other IFRS Accounting Standards. An eligible entity that elects to apply IFRS 19 must still comply with the recognition, measurement and presentation requirements of other IFRS Accounting Standards. However, it may apply the reduced disclosure requirements specified in IFRS 19. For example, paragraph 17 of IAS 24 Related Party Disclosures, states:

An entity shall disclose key management personnel compensation in total and for each of the following categories:

1. short-term employee benefits;
2. post-employment benefits;
3. other long-term benefits;
4. termination benefits; and
5. share-based payment.

However, paragraph 227 of IFRS 19 states: “An entity shall disclose key management personnel compensation in total.” Evidently, the disclosure requirement in IFRS 19 is less onerous.

Another example of a reduced disclosure requirement in IFRS 19 pertains to the nature and extent of risks arising from financial instruments. Paragraphs 31-42 of IFRS 7 Financial Instruments: Disclosures require detailed disclosures of credit risk, liquidity risk and market risk. However, an eligible subsidiary applying IFRS 19 is only required to disclose information about its credit risk and liquidity risk.

IFRS 19 requires entities to apply the full disclosure requirements relating to operating segments, earnings per share or insurance contracts, if applicable. Paragraph 4(b) states: “if an entity applying this Standard applies IFRS 8 Operating Segments, IFRS 17 Insurance Contracts or IAS 33 Earnings per Share, it shall apply all the disclosure requirements in those Standards.”

Additionally, paragraph 6 of IFRS 19 requires an eligible subsidiary to provide further disclosures if the reduced disclosure requirements in IFRS 19 are insufficient to help users of the financial statements understand the effects of transactions and other events and conditions on the subsidiary’s financial position or performance. This depends on the individual entity’s specific facts and circumstances.

Issue 2: Scope of IFRS 19

Analysis

Paragraph 7 of IFRS 19 states:

An entity may elect to apply this Standard in its consolidated, separate or individual financial statements if, and only if, at the end of the reporting period:

1. it is a subsidiary;
2. it does not have public accountability (see paragraphs 11–12); and
3. it has an ultimate or intermediate parent that produces consolidated financial statements available for public use that comply with IFRS Accounting Standards.

Regarding criterion (a), IFRS 19 applies the same definition of a subsidiary as the one in Appendix A of IFRS 10 Consolidated Financial Statements (i.e., an entity that is controlled by another entity) and can include intermediate parents within a group.

Regarding criterion (b), paragraph 11 of IFRS 19 says:

An entity has public accountability if:

1. its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); or
2. it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses (for example, banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks often meet this second criterion).

Determining whether an entity holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses may require judgment. Paragraph 11(b) of IFRS 19 provides some examples of when this is often the case.

However, some entities may hold and manage financial resources on behalf of a broad group of outsiders for reasons incidental to primary business activities. For example, this may be the case for travel or real estate agents, schools, charitable organizations, cooperative enterprises requiring nominal membership deposits and sellers that receive payment in advance of delivery of goods or services such as utility companies.

Paragraph 12 of IFRS 19 clarifies that these arrangements do not, in themselves, make an entity publicly accountable. The assessment of whether the holding of assets in a fiduciary capacity is incidental to a primary business depends on an entity’s individual facts and circumstances.

Regarding criterion (c), the phrase “available for public use” is not defined within IFRS Accounting Standards. However, this phrase is also used in paragraph 4 of IFRS 10. In the context of IFRS 10, one might interpret it to mean that a member of the public should be able to obtain the financial statements without undue cost or effort. For example, the financial statements are available on the company’s website shortly after the year-end and are not subsequently removed until the entity is listed or the financial statements can be obtained for a negligible fee.

Entities that want to apply IFRS 19 must assess whether they meet the criteria in paragraph 7 at the end of the reporting period. If a subsidiary does not meet the criteria at the end of its reporting period, it cannot apply IFRS 19, regardless of whether it met the criteria at the start of, anytime during, for the majority of or even close to the end of, its reporting period.

Additionally, when an intermediate parent meets the criteria in paragraph 7, it is eligible to apply IFRS 19 in its separate financial statements, irrespective of whether other group entities, or the whole group, have public accountability. An eligible intermediate parent may also make separate elections on whether to apply IFRS 19 for its separate financial statements and its consolidated financial statements.

Issue 3: Benefits of Applying IFRS 19

Analysis

Examples of entities that, if eligible, might benefit from applying IFRS 19 include:

1. private enterprises currently applying ASPE that are subsidiaries of publicly traded companies producing consolidated financial statements in compliance with IFRS Accounting Standards; and
2. Canadian subsidiaries applying either ASPE or IFRS Accounting Standards, of an international group, when the parent produces publicly available consolidated financial statements in compliance with IFRS Accounting Standards.

These scenarios could arise, for example, in a group that has been growing through acquisitions.

The benefits of applying IFRS 19 will vary by entity, but might include:

1. centralizing and standardizing reporting processes throughout a group, which may reduce the time needed to prepare subsidiaries’ financial statements;
2. minimizing the need to maintain local accounting manuals and reconciliation tables or consolidation packages (e.g., between IFRS Accounting Standards and ASPE); and
3. facilitating a centralized audit process focused on information prepared in accordance with IFRS Accounting Standards that may reduce audit fees.

The Group’s Discussion

The Group agreed with the analysis and acknowledged that many subsidiaries that meet the scoping criteria in IFRS 19 could benefit from its application. Some Group members also raised examples of other types of entities that could benefit from applying IFRS 19 if its scope were expanded. For example, one Group member noted that entities that are private equity investments do not qualify to apply IFRS 19 when the parent’s financial statements are not available for public use. Therefore, they normally choose not to obtain an audit report on financial statements prepared in accordance with IFRS Accounting Standards. Instead, they normally only prepare a consolidation package for their parent company. They noted that these types of entities often plan to complete an initial public offering (IPO), and using IFRS Accounting Standards with the IFRS 19 disclosure requirements ahead of their IPO could facilitate the preparation of full IFRS Accounting Standards financial statements in due course. By adopting IFRS Accounting Standards prior to going public, these entities can establish a longer track record of audited financial statements prepared in accordance with IFRS Accounting Standards. This historical continuity simplifies the transition to public company reporting, as the entity would only need to supplement their existing disclosures to fully align with all IFRS Accounting Standards requirements. Group members also mentioned that expanding the scope of IFRS 19 could benefit other types of entities, such as certain joint ventures and insurance companies.

Some Group members cautioned that entities should consider whether IFRS 19 would meet contractual reporting requirements before applying it. Representatives of the Canadian Securities Administrators noted that IFRS 19 would not meet securities regulatory requirements except for some limited situations.

Overall, the Group’s discussion raised awareness of the objective, scope and benefits of applying IFRS 19. The Group will continue to monitor the standard’s adoption and consider if further action is warranted in the future.

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IFRS 9: Amendments to the Derecognition of Financial Liabilities

Background

In May 2024, the IASB published “Amendments to the Classification and Measurement of Financial Instruments – Amendments to IFRS 9 and 7,” which includes amendments to address how an entity determines the date of derecognition of financial assets and financial liabilities.

Paragraph B3.1.2A of the IFRS 9 amendments clarify that “a financial asset is derecognized on the date on which the contractual rights to the cash flows expire or the asset is transferred.” Similarly, this paragraph 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 added to paragraph B3.3.8 of IFRS 9 as part of the amendments.

The exception in paragraph B3.3.8 of IFRS 9 only applies to financial liabilities that are settled in cash using an electronic payment system. In such cases, entities may 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 has resulted in:

1. the entity having no practical ability to withdraw, stop or cancel the payment instruction;
2. the entity having no practical ability to access the cash to be used for settlement as a result of the payment instruction; and
3. the settlement risk associated with the electronic payment system being insignificant.

The amendments to IFRS 9 are effective for annual reporting periods beginning on or after January 1, 2026, with earlier application permitted. They are expected to change practice for many Canadian entities that currently derecognize financial liabilities before the settlement date.

The amendments to IFRS 9 were also previously discussed at the Group’s September 2024 meeting. The focus of that discussion was to understand the implications of the amendments for the derecognition of financial liabilities settled using electronic payment systems versus those settled through other means, and the challenges in applying the exception.

The below agenda item focuses on the following questions:

• Once the amendments to IFRS 9 are effective, when should financial liabilities within the scope of IFRS 9 be derecognized?
• When an electronic payment is initiated before the balance sheet date, but the settlement is not completed until after the balance sheet date, what are the presentation and disclosure implications for the unsettled cash payment?
• How should a reporting entity account for an intercompany transaction in its consolidated financial statements when one entity within the reporting group uses the exception to derecognize financial liabilities before the settlement date?
• Do the amendments to IFRS 9 impact the timing for the derecognition of cash-settled liabilities that are outside of the scope of IFRS 9?

Issue 1: Once the amendments to IFRS 9 are effective, when should financial liabilities within the scope of IFRS 9 be derecognized?

Fact Pattern 1: Financial liabilities settled by cheque

• Entity A’s year-end is December 31.
• Entity A has a trade payable to Entity B of currency units (CU) 100.
• On December 29, Entity A issues a cheque to Entity B to settle the trade payable of CU100. On January 2, the cheque is cleared in Entity B’s bank account – meaning that cash is deposited into Entity B’s bank account and has been withdrawn from the bank account of Entity A.

When should Entity A derecognize its trade payable?

Analysis

In this case, the exception does not apply because the trade payable is not being settled by an electronic payment system. As a result, in accordance with paragraph B3.1.2A of IFRS 9, the trade payable should be derecognized on the settlement date, which is the date the liability is extinguished because the obligation specified in the contract is discharged, cancelled or expires. On January 2, the obligation specified in the contract is discharged when the cheque is cleared in the payee’s (Entity B’s) bank account (i.e., the payee receives the cash in its bank account from the payer as consideration for the amount owed and the cash has been withdrawn from the payer’s bank account). Therefore, on January 2, Entity A derecognizes the trade payable and the corresponding cash.

Fact Pattern 2: Financial liabilities settled by an electronic payment system (exception is not applied)

• Entity A’s year-end is December 31.
• Entity A has a trade payable to Entity B of CU100.
• On December 29, Entity A instructs its bank to make a payment of CU100 to Entity B via an electronic payment system. As the electronic payment system does not settle on the date of the instruction (i.e., it is not an intraday system but rather settles at T+3 days), Entity B receives the cash from Entity A in its bank account on January 2. Entity A does not apply the exception in paragraph B3.3.8 of IFRS 9 because it elects not to or the specified criteria are not met.

When should Entity A derecognize its trade payable?

Analysis

In accordance with paragraph B3.1.2A of IFRS 9, because the exception in paragraph B3.3.8 is not being applied, Entity A is required to derecognize its financial liability (i.e., trade payable) on the settlement date. This is the date the liability is extinguished because the obligation specified in the contract is discharged, cancelled or expires. On January 2, the obligation specified in the contract is discharged upon receipt of cash by Entity B as consideration for giving up its rights to the cash flows from Entity A. As a result, on that date, Entity A derecognizes its trade payable because the settlement period is complete.

Fact Pattern 3: Financial liabilities settled by an electronic payment system (exception is applied)

Same facts as Fact Pattern 2 above, except Entity A elects to apply the exception and, on December 29, meets the three criteria specified in paragraph B3.3.8 of IFRS 9.

When should Entity A derecognize its trade payable?

Analysis

Entity A has elected to apply the exception and has met the three criteria in paragraph B3.3.8 of IFRS 9. Therefore, in accordance with paragraph B3.3.8, the entity can deem the financial liability to be discharged before the settlement date when the electronic payment is initiated and the criteria to apply the exception are met. Accordingly, on December 29, when the criteria to apply the exception are met, Entity A would derecognize its trade payable and the corresponding cash.

With respect to the derecognition of cash, paragraph BC3.61 of the Basis for Conclusions to IFRS 9 explains that “by deeming the liability to be discharged, an entity also deems its right to the cash used to discharge the liability to be expired once it loses the practical ability to access that cash.” As a result, the cash would be derecognized on the same date as the liability.

The Group’s Discussion

The Group agreed with the analysis presented and raised several other considerations.

Some Group members acknowledged that there may be a time lag between when cash sent by cheque or electronic payment leaves an entity’s bank account and is subsequently deposited into the account of its counterparty. As a result, it will be important for entities not applying the exception in paragraph B3.3.8 of IFRS 9 to establish processes and controls around the derecognition of their financial liabilities. This is particularly relevant for material payments which occur around period end.

Two Group members reminded entities that the amendments to paragraph B3.1.2A of IFRS 9 also apply to the derecognition of financial assets. They encouraged entities to ensure that their practice for derecognizing trade receivables is consistent with the requirements in IFRS 9.

Other Group members noted that it may be challenging for entities to determine whether they meet the criteria to apply the exemption in paragraph B3.3.8 of IFRS 9 for each of their electronic payment systems. Entities will need to apply careful consideration in making this assessment by ensuring that they obtain an understanding of the terms and conditions of the major electronic payment systems they use.

Issue 2: When an electronic payment is initiated before the balance sheet date, but the settlement is not complete until after the balance sheet date, what are the presentation and disclosure implications for the unsettled cash payment?

Analysis

In some cases, an entity will initiate an electronic transfer payment before a reporting period end to settle a financial liability, but completion of the electronic payment processing is not complete until after the reporting period end (i.e., it crosses a balance sheet date).

In such cases, if the entity elects not to apply the exception in paragraph B3.3.8 of IFRS 9, or does not meet the criteria, the financial liability is not derecognized until the settlement date, as discussed above.

This raises the question of whether there are any implications for the unsettled cash payment at the reporting period end. Two different scenarios could arise depending on the nature of the electronic payment system:

• the cash is withdrawn from the payer’s account on the initiation date/prior to the settlement date; or
• the cash is withdrawn from the payer’s account on the settlement date.

We consider the following example where the cash is not withdrawn from the payer’s (Entity A’s) bank account until the settlement date.

Fact Pattern

• Entity A’s year-end is December 31.
• Entity A instructs Bank B to make a payment to Entity C for its trade payable of CU2,000.
• Entity A can cancel the instruction for payment without penalty until December 30. After December 30, the payment instruction is non-cancellable. Assume this means the payment is cancellable up to 11:59PM on December 29.
• In Entity A’s legal jurisdiction, if Bank B collapses mid-payment cycle (before January 2), the payment would not be completed, and the cash balance Entity A holds in Bank B would be CU2,000.
• Entity A’s banking services agreement provides that when an electronic transfer is initiated, the cash is withdrawn from Entity A’s bank account and deposited into the recipient’s bank account three business days after the transfer is initiated (on January 2).
• The CU2,000 appears in Entity A’s bank statement as cash held subject to a pending transaction until January 2.
• Entity A earns interest on CU2,000 until January 2.
• Entity A elects not to, or does not meet the criteria, to apply the exception in paragraph B3.3.8 of IFRS 9.

How should the CU2,000 unsettled cash payment be presented at December 31?

View 2A(i) – Present as cash

Proponents of this view think that even if the cash is required for future settlement, or access to the cash is somehow limited, the nature of the unsettled cash payment is still “cash” as defined in IAS 7 Statement of Cash Flows until derecognition.

Paragraph 6 of IAS 7 states that cash comprises “cash on hand and demand deposits.” Proponents of this view think the CU2,000 represents cash of Entity A until the settlement date when it becomes cash of Entity C. This interpretation is supported by the fact that, while the CU2,000 can no longer be cancelled as of December 30, it remains visible on Entity A’s bank statement and continues to accrue interest until the settlement date.

They think that the nature of the cash has not changed – it has merely been committed by Entity A for payment. Proponents of this view think that the cash and the financial liability should be derecognized at the same time on the settlement date (January 2).

View 2A(ii) – Present as cash, with consideration of additional disclosure in the notes and/or disaggregation on the face of the statement of financial position

Proponents of this view think the balance should be presented as cash as in View 2A(i).

However, they think that when an entity has initiated an electronic transfer payment that has not been settled at the balance sheet date, the related cash has notionally been “set aside” for a specific use. As a result, the entity would consider providing disclosure to this effect. This is consistent with paragraphs BC 3.62-BC 3.63 in the Basis for Conclusions to IFRS 9:

Disclosure requirements for an entity that does not apply paragraph B3.3.8

BC3.62 A few respondents to the 2023 Exposure Draft were concerned that users of financial statements could be misled about the amount of cash held
by an entity at the reporting date if an entity initiated payment instructions before the reporting date but did not elect to apply the requirements in
paragraph B3.3.8 of IFRS 9. In such a case, the entity could show a large cash balance at the reporting date that could be depleted shortly after
the reporting date, when the payment instructions were completed.

BC3.63 The IASB noted that paragraph 48 of IAS 7 requires disclosure of significant cash balances held by an entity that are not available for use by the 
group to help users of financial statements to understand the status of cash balances at that date. Other requirements in IFRS 7 and IFRS 18
Presentation and Disclosure in Financial Statements also require an entity to disclose information necessary for users of financial statements
to understand the nature, amount and timing of future cash flows. Therefore, the IASB decided not to add disclosure requirements.

Considering the above, relevant disclosure requirements for an entity to consider include:

• paragraph 48 of IAS 7, which requires an entity to disclose, together with a commentary by management, the amount of significant cash and cash equivalent balances held by the entity that are not available for use by the group; and
• paragraph 112(c) of IAS 1, which requires an entity to disclose information that is not presented elsewhere in the financial statements but is relevant to their understanding.

The entity should also consider whether to disaggregate the components of cash on the face of the statement of financial position, or in the notes, by applying paragraphs 55 and 77 of IAS 1.

View 2B – Present as cash equivalent

Proponents of this view think that once the payment becomes non-cancellable (on December 30), it can no longer be cash as defined in paragraph 6 of IAS 7.

However, they think that it can be presented as a cash equivalent if:

• the definition of cash equivalents in paragraph 6 of IAS 7 is met. Paragraph 6 defines cash equivalents as “short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value”; and
• the “purpose test” in paragraph 7 of IAS 7 is met. Paragraph 7 notes that “cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes.”

Proponents of this view think that the “purpose test” in paragraph 7 is met because settling trade payable financial liabilities is part of meeting short-term cash commitments.

View 2C - Present as another financial asset (not part of cash and cash equivalents)

Proponents of this view think that once the payment becomes non-cancellable it cannot be cash as defined in paragraph 6 of IAS 7.

They also think that it cannot be presented as cash equivalents because an amount that can only be used for a single purpose (in this case, the specific obligation to pay Entity C by January 2) cannot be considered as being held to meet the entity’s short-term cash commitments. In other words, the “purpose test” is failed. Certain other aspects of the cash equivalents definition may also not be met at December 31.

The Group discussed this issue and considered whether its views would change if, under some electronic payment systems, the cash leaves Entity A’s bank account either at initiation of the electronic payment or prior to the settlement date.

The Group’s Discussion

Several Group members agreed with View 2A(i) or View 2A(ii). They noted that, based on the fact pattern presented, cash related to the initiation of the electronic payment system remains in Entity A’s bank account at year-end and continues to earn interest, which indicates that the entity retains control over this amount. They also thought that additional disclosure or disaggregation (as outlined in View 2A(ii)) should be considered by Entity A if cash related to the initiation of the electronic payment system was material.

Alternatively, one Group member noted that View 2C may be appropriate depending on the nature of the cancellation option. For example, if Entity A does not have the ability to cancel the payment after December 30 with a penalty, it may not meet the definition of cash or cash equivalents in IAS 7 as the cash set aside for payment may not be immediately accessible on demand to Entity A. In these cases, it may be more appropriate to present this amount as another financial asset in its financial statements.

Group members also discussed whether their views would change if the cash left Entity A’s bank account at an earlier date (e.g., on December 30) but had not yet been received by Entity C at year-end (December 31). In these cases, some Group members thought that the accounting conclusion outlined in View 2C would be the most supportable, noting that the cash which had not yet been received by Entity C could be considered a type of receivable by Entity A prior to its settlement.

Some Group members also encouraged entities to obtain an understanding of the major electronic payment systems they use to determine whether there could be any significant time lags between when cash leaves their bank account and is subsequently delivered to their counterparties. This will help entities to determine the extent they need to consider the accounting impacts of this fact pattern in practice when the amendments to IFRS 9 become effective.

Issue 3: How should a reporting entity account for an intercompany transaction in its consolidated financial statements when one entity within the reporting group uses the exception to derecognize financial liabilities before the settlement date?

Analysis

The exception in paragraph B3.3.8 of IFRS 9 is only applicable to the derecognition of financial liabilities. It does not apply to the derecognition of financial assets. This can present a challenge when an entity undertakes an intercompany transaction and the exception is only applied to derecognize the intercompany payable before the settlement date, and not the intercompany receivable.

Fact Pattern

• Entity A applies the exception in paragraph B3.3.8 of IFRS 9 to a particular electronic payment system which Entity A uses to settle liabilities due to third parties as well as liabilities due to its subsidiaries.
• In accordance with paragraph B3.3.10 of IFRS 9, if an entity elects to apply the exception for the derecognition of financial liabilities settled through an electronic payment system, it applies the exception to all settlements made through the same electronic system. Therefore, Entity A must apply the exception consistently to all intercompany and external payments processed through the system.
• On December 30, Entity A initiates an electronic payment to its subsidiary to settle an intercompany payable. Because the electronic payment system does not settle transactions intraday, the subsidiary does not receive the cash until January 2. Entity A’s year-end is December 31.
• In accordance with paragraph B3.3.8 of IFRS 9, Entity A applies the exception and derecognizes the intercompany payable and cash before the settlement date. This is done when the electronic payment instruction is initiated and the criteria are met on December 30.
• In contrast, the subsidiary cannot apply the exception to its intercompany receivable as the exception does not apply to financial assets. In accordance with paragraph B3.1.2A of IFRS 9, a financial asset is derecognized when the rights to the cash flows expire or the asset is transferred.⁵
• As a result, at the consolidated level, the intercompany payable has been derecognized, but not the intercompany receivable, leading to a “mismatch” on December 31.

How should Entity A account for the intercompany transaction in its consolidated financial statements at December 31?

Analysis

For purposes of Entity A’s consolidated financial statements, Entity A should record a journal entry on consolidation to unwind the application of the exception. This results in a reinstatement of the intercompany payable and cash. The intercompany payable is then eliminated against the intercompany receivable at December 31 in accordance with paragraph B86(c) of IFRS 10 Consolidated Financial Statements. The cash used to settle the intercompany transaction is reported in the consolidated balance sheet at December 31.

The Group’s Discussion

The Group agreed with the analysis presented.

Issue 4: Do the amendments to IFRS 9 impact the timing for the derecognition of cash-settled liabilities that are outside of the scope of IFRS 9?

Analysis

The amendments made to IFRS 9 did not include consequential amendments to other IFRS Accounting Standards. As a result, entities might question whether the amendments to IFRS 9 relating to the derecognition of financial liabilities impact the timing of derecognition of cash-settled liabilities that are outside the scope of IFRS 9. For example, this includes insurance contract liabilities in scope of IFRS 17 Insurance Contracts, employers’ obligation under employee benefit plans in scope of IAS 19 Employee Benefits and cash-settled share-based payment liabilities in scope of IFRS 2 Share-based Payment.

Issue 4 raises awareness about whether the amendments to IFRS 9 relating to the derecognition of financial liabilities might impact financial liabilities outside the scope of IFRS 9 and how an entity might approach this assessment.

In assessing whether the amendments to IFRS 9 impact the derecognition of financial liabilities that are not in the scope of IFRS 9, an entity might start by asking the following questions:

1. Does the financial liability arise from an IFRS Accounting Standard other than IFRS 9 that has specific or distinct derecognition requirements relating to the liability?

An entity would need to consider the specific requirements of each IFRS Accounting Standard for which it has recognized material liabilities. The requirements may differ from one IFRS Accounting Standard to the other as to whether it explicitly deals with derecognition of liabilities within their scope and/or the specificity of any such derecognition requirements.

1. Does that IFRS Accounting Standard cross-reference to, or use language, that indicates that the IFRS 9 derecognition requirements should be applied?

For example, IFRS 17 applies to the accounting for insurance contracts. Paragraph 2.1(e) of IFRS 9 scopes out rights and obligations arising under an insurance contract as defined in IFRS 17. However, IFRS 17 contains guidance which indicates that the requirements for derecognizing an insurance contract liability are consistent with the derecognition requirements for financial liabilities in IFRS 9. Specifically, paragraph B3.1.2A of IFRS 9 states:

…Unless an entity elects to apply paragraph B3.3.8, 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 (see paragraph 3.3.1) or the liability otherwise qualifies
for derecognition (see paragraph 3.3.2).

Paragraph 74 of IFRS 17 states:

An entity shall derecognize an insurance contract when, and only when:

(a) it is extinguished, ie when the obligation specified in the insurance contract expires or is discharged or cancelled; or

(b) any of the conditions in paragraph 72 are met.

In addition, paragraph BC321 in the Basis for Conclusions to IFRS 17 states:

IFRS 17 requires an entity to derecognize an insurance contract liability from its statement of financial position only when it is extinguished or modified in
the way discussed in paragraph BC317. An insurance contract is extinguished when the obligation specified in the insurance contract expires or is
discharged or cancelled. This requirement is consistent with the requirements in other IFRS Standards, including the derecognition requirements for
financial liabilities in IFRS 9. This requirement also provides symmetrical treatment for the recognition and derecognition of insurance contracts.

As a result, while IFRS 9 scopes out insurance contract liabilities, IFRS 17 contains specific language, which indicates that the requirement for derecognizing an insurance contract liability in IFRS 17 is consistent with the derecognition requirements for financial liabilities in IFRS 9.

In contrast, IFRS 2 does not cross-reference nor provide specific language that the derecognition requirements in IFRS 9 should be applied to the derecognition of liabilities within the scope of IFRS 2. For example, paragraph 30 of IFRS 2 states:

For cash-settled share-based payment transactions, the entity shall measure the goods or services acquired and the liability incurred at the fair value of
the liability, subject to the requirements of paragraphs 31-33D. Until the liability is settled, the entity shall remeasure the fair value of the liability at the end
of each reporting period and at the date of settlement, with any changes in fair value recognised in profit or loss for the period.

IFRS 2 does not provide guidance on what is meant by “settled” (i.e., whether it arises on issuing a cheque or initiating an electronic payment instruction, or whether it is based on the timing of receipt of the share-based payment by the employee) nor what is the “date of settlement.”

IAS 19 also does not cross-reference nor provide specific language about whether the derecognition requirements in IFRS 9 should be applied to liabilities within its scope. IAS 19 acknowledges that an entity may enter a transaction that results in the settlement of a defined benefit plan, which would result in derecognition of both the plan assets and liabilities.

In accordance with paragraph 111 of IAS 19, settlement occurs when the entity has eliminated all further legal or constructive obligations for part or all benefits under the plan. However, settlement excludes the payment of benefits to employees in accordance with the terms of the plan.

Paragraph 111 of IAS 19 explains that:

A settlement occurs when an entity enters into a transaction that eliminates all further legal or constructive obligation for part or all of the benefits provided under a defined benefit plan (other than a payment of benefits to, or on behalf of, employees in accordance with the terms of the plan and included in the actuarial assumptions). For example, a one-off transfer of significant employer obligations under the plan to an insurance company through the purchase
of an insurance policy is a settlement; a lump sum cash payment, under the terms of the plan, to plan participants in exchange for their rights to receive
specified post-employment benefits is not.

Therefore, IAS 19 does not have explicit derecognition requirements for employee benefit obligations that reference IFRS 9 or use language similar to that in IFRS 9.

A related question is whether an entity is permitted to apply the exception in paragraph B3.3.8 of IFRS 9 to financial liabilities outside of the scope of IFRS 9. Some view the exception as providing relief from the requirement to derecognize financial liabilities on the settlement date for certain financial liabilities settled by an electronic payment system.

If an entity can apply the exception by analogy to financial liabilities outside of the scope of IFRS 9, a question may also arise as to whether it must apply the derecognition requirements in paragraph B3.1.2A of IFRS 9 to other financial liabilities not in the scope of IFRS 9.

3. Is it sufficiently clear from the IFRS Accounting Standard that an accounting policy different to that indicated by IFRS 9 would be supportable?

An entity might consider the following factors in its assessment:

• The specificity of the derecognition requirements provided for in the IFRS Accounting Standard.
• The nature of the liability and whether it may be different to financial liabilities that are in scope of IFRS 9. For example, as explained in paragraph AG12 of IAS 32 Financial Instruments: Presentation, liabilities arising from income taxes that are created because of statutory requirements imposed by governments, and constructive obligations as defined in IAS 37 Provisions, Contingent Liabilities and Contingent Assets, do not arise from contracts and therefore are not financial liabilities. As such, these liabilities are explicitly excluded from the scope of IFRS 9.
• The absence of any consequential amendments made to other IFRS Accounting Standards for the derecognition of liabilities because of the amendments to IFRS 9.
• Whether the entity’s accounting policy for the derecognition of liabilities outside of the scope of IFRS 9 was developed in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and was acceptable before the amendments to IFRS 9, and whether it continues to be acceptable.

Entities are encouraged to discuss the potential implications of the amendments to IFRS 9 with their accounting advisors and auditors, including any areas of judgment or interpretation that may arise in assessing the derecognition requirements in other IFRS Accounting Standards.

Entities are also encouraged to continue to monitor for any developments and/or interpretive guidance that may be issued on this matter.

The Group’s Discussion

The Group agreed with the analysis presented. Some Group members noted that significant judgment may need to be applied in determining whether the amendments to IFRS 9 could impact the derecognition of insurance contract liabilities in IFRS 17. Group members also highlighted varying perspectives on this matter. For example, some Group members noted that the derecognition requirements for insurance contract liabilities in IFRS 17 contain similar wording to the derecognition requirements for financial liabilities in IFRS 9, which may support using the requirements in IFRS 9 by analogy. However, other Group members acknowledged that standard setting was required to clarify the date of derecognition of financial liabilities in scope of IFRS 9, that IFRS 17 was not amended by the International Accounting Standards Board and that the nature and measurement models of insurance contract liabilities can vary significantly from financial liabilities in scope of IFRS 9.

Considering this discussion, the Group recommended that the AcSB be made aware of this issue and engage in ongoing monitoring to determine:

• whether there is diversity in practice in how insurance contract liabilities are derecognized and how that might change once the amendments to IFRS 9 become effective; and
• whether any further actions (e.g., discussions with IASB staff) are required.

Overall, the Group’s discussion raised awareness of the amendments made to IFRS 9 relating to the derecognition of financial liabilities.

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OTHER MATTERS

Recent Amendments Made to IFRS Accounting Standards

Amendments to IFRS 19 Subsidiaries without Public Accountability: Disclosures

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 August 2025, the IASB amended IFRS 19 to provide reduced disclosure requirements for new and amended IFRS Accounting Standards issued between February 2021 and May 2024. The IASB will consider amending IFRS 19 each time a new or amended IFRS Accounting Standard is issued.

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1 IFRS 18 is effective for annual reporting periods beginning on or after January 1, 2027, with earlier application permitted.

2 Supplier finance arrangements are described in paragraph 44G of IAS 7 as arrangements that are “characterised by one or more finance providers offering to pay amounts an entity owes its suppliers and the entity agreeing to pay according to the terms and conditions of the arrangements at the same date as, or a date later than, suppliers are paid.”

3 IFRS 18 is effective for annual reporting periods beginning on or after January 1, 2027, with earlier application permitted.

4 When an ROU asset has been reduced to zero, entities should recognize any further modifications in the statement of profit or loss.

5 Paragraph BC3.60 in the Basis for Conclusions to IFRS 9 explains that, in the context of electronic payment systems, absent having access to the cash, an entity’s right to cash flows do not expire when it receives notice from the debtor that it has initiated an electronic payment instruction. Rather, they expire only when the cash is received. As such, the subsidiary’s rights to cash flows from the receivable expire when it receives the cash on January 2 and, on that date, it derecognizes the receivable.