The Committee and observers in the meeting room were shown a short video of the proposed development of a large, multi-ore mine in Australia, which is one of the world's largest ore bodies containing copper, gold, silver and uranium. The video demonstrated some of the issues related to the topic that followed - the continuing re-deliberation of the proposed Interpretation on stripping costs. The Chairman provided some commentary, noting in particular that the current estimate of the economic ore body was about 25% of the total amount of rock to be removed.

The Committee continued its re-deliberations. In particular, it discussed the staff's revised principle for capitalising production stripping costs, including proposed guidance on the apportionment of those costs between current (inventory/expense) and future benefit (defer/capitalise). In addition, the Committee discussed a revised approach to depreciation and amortisation of the capitalised component.

Principle for capitalisation

The Committee discussed the following proposed principle and related application of the principle:

Committee members agreed with the principle (it was hard not to, as many observed), but the application proved more controversial. Most agreed that identifying components was critical in this case. However, many were unhappy about the use of 'section' (hence it appearing in [square brackets] above. The sense of the meeting was that they were too open to misinterpretation and introduced a concept that was unhelpful in the context of IAS 16. Retaining the idea of a component (already a feature of IAS 16) was thought more helpful.

A few Committee members were concerned that the principle and application were an open invitation to capitalise 'every scoop of dirt; every bit of rock' and that the revised principle seemed to have lost the feel of an aggressive stripping activity. Hence, these Committee members would want feel more comfortable with a stripping campaign approach. However, there seemed to be consensus that the member's fear cited above was over-stated and that all Committee members thought that the stripping activity within the scope of the Interpretation would always be 'non-routine'.

Basis for measurement

The staff introduced two methodologies for allocating the production stripping costs between the inventory component and the long-term asset component: (i) the 'relative benefit approach', which would be based on the following formula:

or (ii) the 'residual cost approach', which would be based on standard cost theory.

Opinions were mixed. Some saw the relative benefit approach as the 'better measure' because it was a value-based measure and gave a better allocation; while the residual cost basis was easier to apply in a long-life mine and could be seen as more consistent with IAS 16, the standard being interpreted.

After a long and tortuous debate, the Committee agreed that there should be a cost allocation approach. As to which method should be used, the staff and the Committee were split, and the staff will conduct further outreach with constituents.

Depreciation

The Committee agreed with the proposed depreciation principle:

The 'stripping cost asset' shall be depreciated or amortised in a rational and systematic manner over the expected useful life of the ore body (or component of the ore body) in the section of the mine that becomes more accessible as a result of the stripping activity. The units of production method is applied unless another method is more appropriate.

Next steps

The staff will conduct further outreach on both the capitalisation principle and the cost allocation methods before preparing a revised Interpretation to be discussed in May 2011. At that meeting the Committee will also discuss

The Committee then had a debate about whether an Interpretation was necessary at all, given the likely direction and content. Several Committee members (and the Chairman, rather forcefully) thought that an Interpretation was necessary because there was diversity in practice that would only get worse as more 'mining-heavy' jurisdictions came into the IFRS family and (in particular) because of the scope exception in IAS 16 for the extractive activities. In the end, it was agreed to continue work on the project and reassess at a later stage.

The Committee continued its discussion on the accounting for written put options over non-controlling interests. An education session was held during the January 2011 Committee meeting where the staff on the financial instruments with characteristics of equity (FICE) project team discussed their views on the possible direction and timing of the FICE project.

The Committee also discussed possible short-term solutions including a scope exception to IAS 32 so that written puts over non-controlling interests would be accounted for similar to other derivative contracts (i.e., fair value through profit or loss).

During the April Committee meeting, the staff recommended the Committee support a scope exception in IAS 32 for written puts over non-controlling interests and refer the matter to the Board for consideration.

The Committee generally agreed with the staff recommendations. However, certain committee members discussed why written puts over non-controlling interests would be specifically scoped out while similar economic contracts would not (examples cited were puts embedded in other contracts and forward contracts).

Another committee member raised the issue that a fixed-for-fixed written put that would otherwise meet the definition of equity would be scoped out of IAS 32 and accounted for as a derivative, introducing significant profit or loss volatility for an instrument that would otherwise not be remeasured. One Committee member reminded the Committee that the original submission to the Committee was not to address the profit or loss volatility but the counterintuitive result from recognising the 'gross' liability which was difficult to explain to investors.

Another Committee member agreed that other financial contracts could have similar economic characteristics to written put options, but agreed that the scope exclusion recommendation represented an improvement to the current accounting and therefore supported it. He also mentioned that the analogising the discussion to other instruments would result in the same difficulties the FICE project has experienced and would stall this improvement from being made.

The Committee ultimately agreed to support the scope exclusion proposal. The staff will work on drafting the amendments to IAS 32 and the consequential amendments to IAS 27 and IAS 39 which will be distributed to the Committee. The staff will then schedule time on the Board's agenda to present the recommendation of the Committee.

The Committee held its first substantive debate on possible guidance on how to account for contingent payments agreed for the separate purchases of property, plant and equipment (PPE) or intangible assets.

The staff noted that contingent prices might arise from the outright purchase of long-term assets or inventory or from licensing agreements. In some cases, the contingent price is variable and based on future sales or future volumes; in other instances, the contingent price is fixed and payable upon the achievement of milestones specified in the purchase agreement. Alternatively it is fixed and payable upon the buyer obtaining an approval from a regulatory body.

Scope

The staff sought to restrict the scope of the project to those transactions in which the contingent pricing gave rise to a financial liability. A significant portion of the Committee disagreed and wanted a broader scope, one potentially including non-financial liabilities. Others were very vocal in their support of a financial liability approach (i.e., estimate the contingency on the acquisition date at its fair value and any subsequent movements go to profit or loss). Another Committee member wanted to analogise (in part) to IFRS 3's treatment of contingent consideration, or to the accounting treatment in IFRIC 1.

Others on the Committee wanted to develop an Interpretation that would go beyond the current IFRSs and develop guidance that would be more intuitive. This suggestion was deemed by the Chairman to be beyond the competence of the Committee and was not developed further.

There was no conclusion on the scope and the Committee will return to this issue later.

Possible accounting treatments

The Committee discussed possible accounting treatments. If the liability related to the contingent pricing is a financial liability, staff were of the view that IAS 39/ IFRS 9 should prevail subsequent to initial measurement.

Other potential accounting treatments were presented, each presenting challenges. An analogy to IFRS 3 was tempting but problematic because the measurement basis in IFRS 3 is not the same as in IAS 16, which uses the cost model. In particular the issues of transaction-related costs and deferred tax issues would need to be resolved.

An analogy to IFRIC 1 would be even more difficult, since there is explicit guidance in IFRSs when the liability resulting from the transaction is a financial liability (IFRIC 1 addresses the debit entry when accounting for an IAS 37 non-financial liability).

A Committee member noted that the Basis for Conclusions accompanying IFRS 3 (2008) has useful guidance on contingent consideration that could form the basis for an Interpretation. The staff will review this and return to a subsequent meeting.

IAS 37 Provisions, Contingent Liabilities and Contingent Assets - Discount rate

The Committee reviewed the comments received on the revised tentative agenda decision on this issue issued in January 2011. Ten comment letters had been received, three from international audit networks and seven from entities and individuals in Canada.

The Committee had a short but heated debate on the issue. The Committee agreed to confirm its decision not to add the topic to its Agenda. The Agenda Decision is likely to include the comment that 'predominant practice today is to exclude own credit risk which is generally viewed as a risk of the entity rather than a risk specific to the liability'.

The Chairman noted that the objections seemed to stem from an industry in one country adopting IFRS in 2011 and opined that the objections were not persuasive to overturn the assertion that predominant practice among those already using IFRSs was to exclude own credit risk from 'risks specific to the liability' in IAS 37 paragraph 47.

The Committee continued its discussions from the November 2010 Committee meeting on the topic of whether amounts paid by entities on employers behalf directly to taxing authorities for withholding on share-based payment awards represents cash-settled or equity-settled shares under IFRS 2 Share-based Payment. During the November meeting, the Committee requested the staff to develop illustrative examples on the classification of share-based payments under these scenarios.

In the agenda request originally received by the Committee, 1) the entity is required to withhold from an employee's compensation an amount to satisfy the employee's tax liability incurred as a result of the share-based payment transaction and pay to the tax authority in cash the amount withheld from the employee's compensation and 2) the employee will receive shares net of the number of shares needed to equal the monetary value of the employee's tax liability rather than the gross number of shares of the share-based payment award.

In the example developed by the staff, the entity has the legal obligation to pay income tax on the employee awards when exercised based on the intrinsic value of the options at the exercise date. The entity has elected to withhold a number of shares equivalent to the value of the tax obligation due and will settle the transaction net by receiving the strike price from the employee for all share awards granted (i.e., 100) and issuing the net number of shares to the employee in order to meet the tax obligation (i.e., 66 shares issued, 34 shares withheld). The entity will pay the amount of the employee's tax obligation from its own cash resources.

The staff analysis for this example is driven by the manner of settlement. The staff believes that the component of the share-based payment award that is settled by the issuance of equity instruments (66 shares) is classified as equity-settled while the component settled in cash to satisfy the tax withholding is separately identified as a cash-settled share-based payment award.

The staff also proposed wording in the Committee agenda decision that included "the Committee noted that IFRS 2 provides sufficient guidance to address this issue and that it does not expect diversity in practice. Consequently, the Committee decided not to add the issue to its agenda."

Several of the Committee members expressed concerns with the staff conclusion on the example and the proposed drafting of the agenda decision. One of the Committee members also raised concerns with the example on how the liability component would be measured as there is an 'implied' strike price based on the number of shares actually received by the employee. Another Committee member her support for the conclusions the staff had reached but was troubled over the accounting implications and the significant difference in compensation expense which results. She stated that perhaps this is the rational for the FASB's providing of an exception for these arrangements. Another Committee member had concern with the agenda decision stating the Committee does not expect diversity in practice when they know there is currently diversity in practice. Another Committee member stated her belief that the tentative agenda decision in reality is an interpretation.

The Committee ultimately decided to refer the matter to the Board and to soften the language in the proposed agenda decision. Rather than stating the references for the staff conclusion on the fact pattern, stating the guidance is sufficiently clear and that diversity in practice is not expected (which may have led to a significant change in practice) the agenda decision was proposed to say the Committee agreed not to take on the agenda item and instead refer it to the Board for consideration.

Review of requests received in relation to IFRS 2 by the Committee

At its September 2010 meeting, the Board discussed the Interpretations Committee's recommendations regarding vesting and non-vesting conditions relating to IFRS 2 Share-based Payment. After doing so, the Board asked the Interpretations Committee to review the other requests that it had received in relation to IFRS 2 with a view to helping the staff to develop an agenda proposal that could be considered as part of the setting of the new agenda in 2011.

The staff brought to the Committee a summary of various IFRS 2 issues that had been received since 2005. A summary of the issues and the staff recommendations are as follows:

One Committee member mentioned that the issue of incremental fair value to employees as a result of unexpected capital restructuring is something that is becoming more and more common. The Committee Chairman responded that plan agreements which do not contain provisions for capital restructurings are a matter for the company's legal counsel moreso than an accounting issue.

Certain Committee members were somewhat confused on the Board's process for addressing issues associated with IFRS 2. The staff clarified that the Board is not currently planning a post-implementation review of IFRS 2 but has a separate consultation process ongoing on the post-implementation review process. However, these issues may be raised as a separate project to amend IFRS 2 rather than through the post implementation review process.

A summary of the current status of issues that have yet to be discussed by the Committee, and the progress made by the staff to date on such issues, was provided to the Committee.

While a number of topics were outlined, it was noted that several outstanding items are inter-related to projects recently converged or currently being deliberated by the Boards. The staff will consider such outstanding issues, in relation to recently converged or currently deliberated projects, in defining the need for further assessment of certain outstanding issues in a future meeting.

This concluded the March IFRS Interpretation Committee meeting.

The Committee received a request asking for clarification on the meaning of the term, 'continuous transfer' in paragraph 17 of IFRIC 15 Agreements for the Construction of Real Estate. In this context, the objective of this discussion was to determine if the Committee planned to take the issue onto its Agenda.

IFRIC 15 prescribes the accounting for revenue from the construction of real estate in situations where the agreement is (a) a construction contract, (b) an agreement for the rendering of services; or (c) an agreement for the sale of goods. Paragraphs 17 and 18 of IFRIC 15 provide for an accounting treatment for the recognition of revenue where the seller transfers to the buyer control and significant risks and rewards of ownership (and where all other criteria in paragraph 14 of IAS are met): (a) if the seller transfers to the buyer control and significant risks and rewards of ownership continuously as construction progresses: revenue should be recognised by reference to the stage of completion; (b) if the seller transfers to the buyer control and significant risks and rewards of ownership in their entirety at a single point in time: revenue should be recognised upon or after delivery of the goods sold. The constituent requesting clarification was aware that whether transfer is continuous or at a single point in time is a matter of judgement requiring appropriate analysis of facts and circumstances; however, the constituent noted that significant divergence exists in practice in interpreting the meaning of a continuous transfer. In addition, such divergences are not limited to certain unique jurisdictions; they occur in several regions, including Asia and South America.

In consideration of any plan to take this issue to its Agenda, the staff noted that the meaning of control is a major issue currently being addressed by the Board. The meaning of continuous transfer is, under IFRSs, an issue that is specific to off-plan sales within IFRIC 15, and in this context, Committee members were asked to limit the scope of this possible project to determine if it is necessary to describe continuous transfer more clearly and to define the unit of account to which continuous transfer applies.

In debating this topic, the majority of the Committee noted the dangers involved in bringing this issue to its Agenda, including the following:

• The issue described herein is expected to be considered in the scope of the Exposure Draft Revenue from Contracts with Customers, and in applying any interpretive guidance, it would require careful consideration in bridging the revenue recognition environment currently outlined within IAS 18 to that of the Exposure Draft.
• Application of specific interpretation guidance at individual jurisdictions would serve to obscure the objective of the revenue-related Exposure Draft from its principles-based approach.
• The local regulatory requirements specific to the construction of real estate are unique to different regulatory jurisdictions, whereby any practical interpretation offered at the Committee-level would be specific to the circumstances offered in the constituent request for clarity, as opposed to the broader principle of application.

Opposition to the above, expressing a view that this particular issue should be brought to the Committee's Agenda, noted the following:

• The concept of control is only referred to in IAS 18 in paragraph 14(b), with no further guidance as to how to assess that notion of control. The notion of continuous transfer does not exist as such in IAS 18, as the concept is only mentioned in IFRIC 15.
• The concept of continuous transfer is not defined in such a way as to be helpful in determining whether transfer of control occurs at a point in time only or is instead on a continuous basis.
• Application of local interpretations, if left open to interpretation, could result in unique application in practice around the world.

The Committee considered the current project on revenue recognition, citing the definition of control specified in paragraphs 25 to 31 of the Exposure Draft, inclusive of specific indicators to help determine that a customer has obtained control of a good. While the Exposure Draft does not refer to the transfer of risks and rewards when providing guidance for revenue recognition, the Committee considered recent deliberations of the Boards in the area of control for revenue recognition purposes, including:

As a result of deliberations, and in primary consideration of (1) the specificity of interpretations which would be required in practice at individual jurisdictions and (2) the impending revenue recognition project completion, the Committee confirmed a decision not to add this issue to its Agenda, citing that application principles are set forth in IAS 18 and IFRIC 15.

Targeted consultation on post-implementation review framework

The staff sought advice on a draft general work plan for a post-implementation review, as the staff intend to bring the feedback received on the draft general work plan for a post-implementation review to a Board meeting in the second quarter of 2011. Such feedback, in addition to the Committee, will include feedback from the IFRS Advisory Council, the IASB's Global Preparers Forum and Analyst Representative Group, and a meeting of national standard-setters.

The staff described responsibilities of a post-implementation review as set out in the Due Process Handbook for the International Accounting Standards Board ("Handbook"), in which the objectives of a post-implementation review, according to the Handbook, are:

• to review the important issues that had been identified as contentious during the development of the pronouncement; and
• to consider any unexpected costs or implementation problems that have been encountered.

The staff also outlined the first two IFRSs or amendments for which the IASB is scheduled to begin post-implementation reviews are IFRS 8 and Business Combinations: Phase II (the revised IFRS 3 Business Combinations and the amended IAS 27 Consolidated and Separate Financial Statements), which are scheduled to commence in 2011 and 2012, respectively. It should be noted that a post-implementation review is expected to be conducted two years after the new requirements have been implemented.

The post-implementation project will be distinguished into phases as follows:

Information gathering and outreach:

The Boards and the staff will research sources from a range of jurisdictions and functions to: (a) review how a requirement that was identified as a contentious issue during its development, is applied in practice, from the perspective of all those involved in the financial reporting supply chain (for example, preparers, auditors, users and regulators); and (b) identify any unexpected costs or implementation problems that have been encountered.

Preliminary report on the post-implementation review:

The tentative conclusions of the review and analysis described above will be included in a preliminary report for the post-implementation review on the pronouncement. The preliminary report will be published by the Board for public comment. This public consultation will allow interested parties to comment on any preliminary views reached by the Board. After receiving and considering those comments, the report will be finalised and published, inclusive of an indication of the Board's preliminary assessment of how it should respond to each issue reviewed, as appropriate.

In deliberation on the post-implementation review process set forth by the staff, the Committee cited the concerns of the current post-implementation review framework, as follows:

• The scope of the project. A minority of the Committee cited the necessary inclusion of certain other standards (beyond IFRS 8 and Business Combinations: Phase II, as described above) in which diversity in practice has been cited in the past, including that of IFRS 2. The staff noted that since the Boards are currently deliberating on a number of projects, the staff has currently excluded from its scope currently effective guidance which is expected to be amended as a result of project developments. Further, for the initial stages of review, the intended focus of the reviews was on relatively newly effective standards.
• The objective of the original standard. Members of the Committee generally felt the objectives of a post-implementation review should include an assessment as to whether the original objective of the standard has been achieved, in addition to assessment around contentious issues and unexpected costs and implementation problems, as described above.
• The completeness of the information gathering and outreach phase of the project, as described above. Members of the Committee cited the need to ensure that the initial phase of the post-implementation review be considered with a variety of research sources, including users, preparers, auditors, regulators, standard-setters and other parties.
• Timeliness of reviews. A number of concerns were raised regarding the timing of relevant reviews, citing the following considerations:
  • One of the objectives identified in the performance of post-implementation reviews was the identification of unexpected costs or implementation problems. Committee members noted that a two-year post-implementation review period would not serve to identify costing issues in a timely manner; suggesting instead that further diligence should be considered in pre-implementation reviews.
  • Certain Committee members highlighted concern that a two-year post-implementation review period provided too short of an assessment period; not allowing for the application of market mechanisms to appear (e.g., market movement as a result of clarity offered to financial statement users following the effective date of new standards).

No consensus was sought regarding the above project, but the staff will consider feedback outlined above, in conjunction with feedback from other outreach activities, before bringing such information to the Boards in a future Board meeting.