IFRS Interpretations Committee Discussions
IFRS Interpretations Committee update
The IASB received an update from the January 2012 meeting of the IFRS Interpretations Committee.
IFRS Interpretations Committee issues
IAS 2 Inventories – Long-term prepayments for inventory supply contracts
The IFRS Interpretations Committee (the "Committee") received a request seeking clarification on the accounting for long-term supply contracts of raw materials when the purchaser of the raw materials agrees to make prepayments to the supplier for the raw materials. The Committee was asked to clarify whether the purchaser/supplier should accrete interest on long-term prepayments by recognising interest income/expense, resulting in an increase of the cost of inventories/revenue. The Committee had mixed views and noted that there is mixed practice on the issue submitted, and that current IFRSs do not provide clear guidance on this issue. However, the Committee noted that the exposure draft Revenue from Contracts with Customers published in November 2011 states that a seller should consider the effect of the time value of money (whether there is a prepayment or a deferred payment). The Committee observed that considerations regarding accounting for the time value of money in the seller’s financial statements are similar to those in the purchaser’s financial statements.
The Committee asked the Board whether there should be amendments made in the IFRS literature in order to align the purchaser’s accounting with the seller’s accounting (i.e., that a financing component contained in a purchase contract should be recognised when the impact is significant).
At the March 2012 meeting, the staff clarified that this would apply to purely financing transactions. Some Board members expressed concern that this might overlap with the time value of money issue raised in the agenda consultation process. The staff clarified that the agenda consultation issue related to the appropriate discount rate to use across the various standards and not whether the time value of money should apply to the purchaser on prepayments.
The Board tentatively agreed that this should only apply to a limited scope. The Board tentatively decided that the purchaser and the seller should address the time value of money in such contracts in a similar manner and that a financing component contained in a purchase contract should be recognised when the impact is significant. However, the Board tentatively decided to direct the Committee to first deal with this issue via an Interpretation.
IAS 37 Provisions, contingent liabilities and contingent assets – levies charged for participation in a specific market – date of recognition of a liability
The Interpretations Committee received a request to clarify whether, under certain circumstances, IFRIC 6 Liabilities arising from participating in a specific market—Waste Electrical and Electronic Equipment should be applied by analogy to identify the event that gives rise to a liability for other levies charged by public authorities for participation in a market on a specified date. The concern relates to when a liability should be recognised under IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
At the November 2011 meeting, the Committee tentatively decided to set out these principles regarding the accounting for a liability to pay a levy charged for participation in a specific market within the scope of IAS 37:
- An entity does not have a constructive obligation to pay a levy that arises from operating in a future period as a result of being economically compelled to continue operating in that future period.
- The preparation of financial statements on the going concern principle does not create a present obligation in accordance with IAS 37 and therefore does not lead to the recognition of a liability at a reporting date for levies that arise from operating in the future.
- The obligating event in accordance with IAS 37 is the last of the necessary events that is sufficient to create the present obligation when more than one event is required to create an obligation. For example, the obligating event for a levy that is charged if the entity undertakes discrete activities both in the current and in the previous period is the activity in the latter period as identified by the legislation.
- The obligating event arises progressively if the activity that creates the present obligation occurs over a period of time. For example, a liability is recognised progressively if the obligating event as identified by the legislation is the generation of revenues over a period of time.
- The liability for the obligation to pay a levy gives rise to an expense, unless the levy is an exchange transaction in which the entity that pays the levy receives assets or future services in consideration for the payment of the levy.
- As per IAS 34 Interim Financial Reporting, the same recognition principles should be applied in the interim financial statements as are applied in the annual financial statements.
At the January 2012 meeting, the Committee reviewed and agreed with some examples that illustrate the application of the principles identified above. The Committee also tentatively decided to develop an interpretation on the accounting for levies charged by public authorities on entities that participate in a specific market.
However, with respect to levies that are due only if a minimum threshold is achieved, the Committee could not reach a consensus as to whether:
- the threshold is an obligating event (i.e., a recognition criterion) and the liability should be recognised at a point in time only after the threshold is met; or
- the threshold is a measurement criterion and the liability should be recognised progressively as the entity generates revenue (if the threshold is expected to be met).
At the March 2012 meeting, the staff presented two different views for the accounting for levies when the legislation specifies that the levy is due only if a minimum threshold is achieved. Per Example 4 in the agenda paper, Entity D is a calendar year-end entity. An annual levy is due if Entity D generates revenues over CU50 million in a specific market in 20X1 and the amount of levy is determined by reference to revenues over CU50 million generated by Entity D in the market in 20X1.
- View A – liability is recognised progressively over 20X1 as the entity generates revenues if the entity expects to meet the annual threshold in 20X1.
- View B – the liability is recognised only after the threshold is met.
To address this, the Board also considered the following alternatives:
- Alternative A: the Board could conclude that the rationale developed in the example of IAS 34 contingent lease payment applies in both the interim and annual financial statements;
- Alternative B: the Board could conclude the rationale developed in the example of IAS 34 on contingent lease payment only applies to interim financial statements;
- Alternative C: the Board could decide to exclude levies from the scope of IAS 37 and to develop a specific treatment.
Twelve Board members tentatively agreed with alternative A (view A) that the rationale developed in the example of IAS 34 contingent lease payment applies in both the interim and annual financial statements (i.e., the liability is recognised progressively if the entity expects to meet the annual threshold). The Board tentatively agreed that it would be appropriate to treat such levies within in the scope of IAS 37. The staff will share the Board’s feedback with the Committee and the Committee intends to discuss this issue again.
IFRS Interpretations Committee — Agenda rejection notices
At the March 2012 meeting, the Board discussed continuing issues surrounding the agenda rejection notices published by the IFRS Interpretations Committee (the "Committee") when it decides to not add an issue to agenda.
The Board tentatively affirmed that the Committee’s agenda rejection notices were not intended to characterise the accounting practices in question as errors.
The Board tentatively decided not to recommend any change to the status of agenda rejection notices in the hierarchy in IAS 8 and as such, these agenda rejection notices do not require effective dates or transition requirements. This view will be communicated on the IASB website.
The Board tentatively agreed that if the Committee has reached a view about the accounting in a situation, it should state that view as it provides guidance to the IFRS Constituency efficiently and in a manner that is accessible.
The Board tentatively agreed that there should not be any changes in the level of detail and background provided by agenda rejection notices. However, the Boards tentatively agreed that the Committee staff and Education staff could pursue tools that could improve the communication.
The Boards tentatively decided not to add Board approval or ratification to the existing process of handling Committee agenda decisions.
The Boards tentatively decided that tentative agenda decisions be open for comment for 60 days after publication. Although this will delay finalisation by one Committee meeting, it would allow time for broader participation in the process. This is a change from existing practice where the tentative agenda decisions are currently open for comment for 30 days after publication and are finalised in the following Committee meeting. This will be reflected in the revised general theory of due process and the Due Process Oversight Committee will be notified.