IAS 41 Agriculture and IFRS 13 Fair Value Measurement: Valuation of biological assets using a residual method

The Committee continued the discussions from November 2012 meeting on the application of paragraph 25 of IAS 41, with a goal of finalising an agenda decision in this meeting. The paragraph in question permits the use of a residual method to arrive at the fair value of biological assets that are physically attached to land, if the biological assets have no separate market but an active market exists for the combined assets. This might result in nil or marginal fair value for the biological assets. In the November 2012 meeting, the Committee tentatively decided not to take this issue onto its agenda and to issue an agenda decision on the basis that the IASB had tentatively decided to undertake a limited-scope project on IAS 41 to address the accounting for bearer biological assets. Guidance on the application of highest and best use concept in IFRS 13 will also form part of the broader educational material planned for IFRS 13. The tentative agenda decision was published in November 2012 and comments received were brought to the current meeting.

At this meeting, the staff informed the Committee, considering outreach activity and results of conversation with the IFRS 13 educational material team, that the IFRS 13 educational material would not address the specific issue submitted. The staff also noted that the educational material is not authoritative and this specific issue with far reaching implications should not be dealt with only through that material. The staff also noted that constituents feedback had commented that the issue was broader than strictly valuation of biological assets, and even though the project on biological assets is expected to take pressure off of this specific issue, it would not resolve the issue in and of itself.

Hearing this general feedback, Committee discussion revealed a lack of clarity regarding application of the highest and best use concept in IFRS 13 when two or more non-financial assets are physically attached to each other. This lack of clarity was derived from a perceived tension between the requirements of paragraphs 13, 31(a)(iii), 31(b) and 32 of IFRS 13. The requirement in paragraph 31(a)(iii) of IFRS 13 for consistent valuation principles for similar assets in a group of assets combined with the identification of the highest and best use for each of the combined assets was identified as one of the main origins for the issue.

On the basis of the above, while the Committee members presented specific drafting comments on the agenda decision, it was decided to ask the IASB to clarify the meaning and correct application of the above mentioned paragraphs in IFRS 13.

IFRS 3 Business Combinations: Accounting for reverse acquisition transactions where the acquire is not a business

The Committee previously considered two separate requests to clarify the accounting for reverse acquisition transactions where the accounting acquiree is not a business. Such transactions are not business combinations, and thus, not included within the scope of IFRS 3. Based on the previous discussions on the guidance in paragraph B7 of IFRS 3, the accounting acquiree in the fact patterns presented is not a business. Therefore, the Committee concluded the transaction should be accounted for as a share-based payment transaction in accordance with IFRS 2 Share-based Payment. At this meeting, the Committee was asked to finalise the agenda decision considering the feedback received on the tentative agenda decision published in November 2012.

One Committee member repeated his concerns from previous discussions on the argumentation leading to the conclusion without questioning the conclusion itself. In his opinion, application of the control concept in the context of IFRS 2 was not appropriate.

The remainder of Committee redeliberations focused on editorial changes to the proposed agenda decision wording included in the staff paper. For example:

• The Committee members wanted to ensure that the agenda decision could not be interpreted as saying that all non-operating entities would not be considered to be businesses. Drafting comments were made to word the conclusion in a way that would imply the applicability of that assumption only in the context of the fact pattern presented to the Committee.
• A couple of Committee members questioned whether the finalisation of the tentative agenda decision was expected to result in a change in practice, and if so, whether the issue would be best addressed as an amendment or interpretation rather than as an rejection notice. However, some members commented that agenda decisions do not compel changes in current practice, and therefore, preferred issuance of an agenda rejection.
• The Committee agreed to remove the agenda decision sentence referring to diversity in practice.

The Committee approved the agenda decision (as modified by several drafting comments) with a clear majority. The issue is also expected to be picked up in the post-implementation review of IFRS 3.

The purpose of the discussion on the statement of cash flows was to try to identify ways to make the definitions of operating, investing and financing activities in paragraph 6 of IAS 7 clearer to achieve consistency in application.

The staff, in analysing current definitions in IAS 7, proposed the following:

• Operating cash flows classification:
  • operating cash flows are the cash-basis equivalent of transactions that enter into the determination of ‘profit or loss’.
  • the section on cash flows from ‘operating activities’ should be maintained as a residual. However, the section on ‘operating activities’ in the statement of cash flows should segregate ‘other activities’ that do not represent principal-revenue-producing activities of the entity and that remain undefined.
• Financing cash flows classification:
  • the definition of financing activities in paragraph 6 of IAS 7 should indicate that the nature of a financing activity involves (a) the receipt or use of a resource from a provider of finance (or provision of credit); (b) the expectation that the resource will be returned to the provider of finance; and (c) the expectation that the provider of finance will be appropriately compensated through a payment of a finance charge.
  • the definition of financing activities should state that cash flows that provide finance to an entity that are derived from the issue of an entity’s own equity instruments (as defined in IAS 32 Financial Instruments: Presentation) are considered financing by nature.
  • financing activities include those purchase transactions that have been negotiated on extended credit terms.
• Investing cash flows classification:
  • the description of ‘other investments not included in cash equivalents’ in the definition of investing activities should be supplemented with examples.
  • discussion of the classification of expenditures could be made more clear by eliminating certain discussion included in paragraph 16 of IAS 7.
• Classification of interest and dividends:
  • cash outflows for interest paid and dividends paid should be classified as financing cash flows.
  • cash inflows for interest received and dividends received should be classified as operating cash flows.

The Committee members expressed concerns about a number of issues related to the proposals, such as:

• the operating category being the residual category even though it is considered to be the most important category of the statement of cash flows.
• adding more items in the operating category through establishing a subsection of “other activities” under operating activities.
• presentation of the financing component related to providing extended payment terms as a financing activity, while collections on extended payment terms would be classified as operating activities (mismatch).
• complicating the use of the indirect method while easing the application of the direct method of preparing the statement of cash flows (even though both methods are allowed).

Several Committee members expressed support for adding flowcharts to the Standard – as included in the staff paper - to clarify the classification of items between the categories. A few members did, however, express concern with the content included in the staff’s proposed flowchart as well as how the flowchart would be interpreted in practice.

Finally, the Committee decided after a vote that it could not conclude on a way to proceed without more fundamentally modifying the Standard. However, some did see merit in the deletion of one specific sentence in paragraph 16 of IAS 7 relating to investing activities (“Only expenditures that result in a recognised asset in the statement of financial position are eligible for classification as investing activities”). A majority of the Committee members agreed with the deletion of the sentence on the basis that recognition of an asset as a result of the cash outflows should not be a prerequisite for classification of the cash flows in the investing category, nor should all the cash flows resulting in the recognition of an asset be categorised as investing.

It was noted, however, that the IASB had added the sentence now suggested for deletion to the Standard not that long ago with extractive activities specifically in mind. While the deletion would seem appropriate when considering presentation of R&D activities, allowing some of those costs to be presented under investing activities, the Committee members were conscious about the opportunities it opened for the presentation for costs incurred on exploration activities within the investing category.

The Committee agreed to recommend to the IASB the deletion of the specific sentence as part of the annual improvements project.

Several Committee members questioned whether other issues previously deliberated by the Committee but not yet issued as an agenda decision (pending the completion of this broader statement of cash flows project) would be assessed further. The Committee Chair believed these issues should not be assessed on a piecemeal basis (i.e., the issues will be held indefinitely). Committee members generally supported this view.

In May 2012, the Committee published a draft Interpretation on the accounting for levies charged by public authorities on entities that participate in a specific market. Respondents requested that the final Interpretation address the accounting for levies that are due if a minimum revenue threshold is achieved. Those levies were not included within the scope of the draft Interpretation because the Committee could not reach a consensus on the accounting for those levies.

The Committee originally redeliberated this issue, along with several other issues, in November 2012 and January 2013.

As a result of earlier redeliberations, the staff presented a revised draft of the Interpretation for its review. The staff also asked the Committee whether the revised draft of the Interpretation required re-exposure, and if not, whether the revised draft could be submitted to the IASB for approval with a suggested effective date of 1 January 2014.

Several Committee members found the language included in the Interpretation on the interim accounting for the liabilities confusing, but the staff and some Committee members also expressed that such wording is needed and currently is and should be in line with IAS 34 Interim Financial Reporting.

It was agreed, that the text included in BC7 of the proposed Interpretation stating that the existence of a contractual relationship was not enough to meet the definition of a levy should be moved to the actual text of the Interpretation.

One Committee member asked whether the Interpretation was expected to impact purchase contracts with volume rebates. The staff noted the proposed Interpretation focused on non-contractual arrangements in IAS 37. Volume rebates were noted as a cost of inventory under IAS 2 which should not be impacted by the Interpretation.

When requested to express support and dissenting views on the publication of the Interpretation, the majority of the Committee members supported the publication. One Committee member expressed his intention to dissent and one member stated she would abstain to the draft Interpretation on the basis of perceived usefulness given the current scope. The dissenting view will be included in the staff papers provided to the IASB. The staff will proceed to finalise the Interpretation for IASB approval.

In May 2012, the IASB published Exposure Draft ED/2012/1 Annual Improvements to IFRSs 2010-2012 Cycle which proposed to amend IFRS 3 to clarify that:

1. classification of contingent consideration in a business combination as either a liability or an equity instrument is based solely on the requirements of IAS 32 Financial Instruments: Presentation
2. contingent consideration in a business combination that is not classified as an equity instrument is subsequently measured at fair value, with the corresponding gain or loss recognised either in profit or loss or other comprehensive income in accordance with IFRS 9.

At a previous meeting, the Committee discussed constituent feedback to the annual improvement proposal. The Committee, at that meeting, tentatively agreed:

1. the wording of the requirement on non-equity contingent consideration subsequent measurement in paragraph 58(b) of IFRS 3 should be amended to ensure that it does not imply that contingent consideration can only be a financial instrument
2. that the proposed amendment to IFRS 9 paragraph 4.1.2 should be deleted
3. the wording of the transition and effective date paragraph should be amended to ensure that the proposed amendment to IFRS 3 could not be applied without also applying IFRS 9.

At that meeting, the Committee noted that the proposals would require the recognition of fair value changes relating to own credit risk in other comprehensive income for financial liability contingent consideration; a result inconsistent with the proposed requirements for the subsequent measurement of non-financial liability contingent consideration. Therefore, the Committee requested that the staff consider how the accounting for the subsequent change in the fair value of financial and non-financial liability contingent consideration could be made more consistent.

Considering feedback at the previous meeting, the staff analysed the subsequent measurement basis for three different types of liability contingent consideration; those being, trading financial liabilities, other financial liabilities and non-financial liabilities. As a result of its analysis, the staff presented the following proposal:

1. Held for trading financial liability contingent consideration issued in a business combination should be subsequently measured at fair value through profit or loss (FVTPL)
2. Other financial liability contingent consideration issued in a business combination should be required to apply the requirements for liabilities designated as at FVTPL in paragraph 5.7.7–5.7.9 of IFRS 9; and
3. For non-financial liability contingent consideration issued in a business combination, the fair value changes attributable to the non-performance risk of that non-financial liability contingent consideration should be required to be presented in other comprehensive income, and the remaining amount of change in the fair value of that non-financial liability contingent consideration should be presented in profit or loss.

Several Committee members expressed concern with the staff proposals, particularly in the area of non-financial liability contingent consideration. Concerns included a view that the staff proposals were creating presentation inconsistencies between non-financial liability contingent consideration and other non-financial liabilities under IAS 37, while also limiting the usefulness and practicality of bifurcated non-performance risk from other fair value changes (which is not a requirement for any other non-financial liabilities in IFRS).

Another Committee member believed the Committee’s original intention was to eliminate the inconsistency between derivative financial liability contingent consideration (which goes to profit or loss) and non-derivative financial liability contingent consideration (which goes to other comprehensive income). He noted the staff proposal did not resolve this inconsistency. He expressed a preference that all contingent consideration in a business combination that is not classified as an equity instrument be subsequently measured at FVTPL. He saw this as a simplistic approach which promoted consistency in application but acknowledged that it resulted in some inconsistencies with IFRS 9.

The Committee Chair, listening to member views, outlined two alternatives:

1. measure all contingent consideration in a business combination that is not classified as an equity instrument at FVTPL, or
2. measure all contingent consideration in a business combination that is not classified as an equity instrument at FVTPL except for non-derivative financial instrument contingent consideration (which should be measured through other comprehensive income).

The Committee could not reach a super majority on these alternatives, with eight Committee members supporting (1) and six Committee members supporting (2). The Committee Chair then asked whether anyone would object to (1), to which no one objected. Therefore, the staff plans to bring the Committee recommendation to the IASB for its consideration.

In May 2012, the IASB published Exposure Draft ED/2012/1 Annual Improvements to IFRSs 2010-2012 Cycle which proposed to amend IAS 7 Statement of Cash Flows to clarify the classification of interest paid that is capitalised into the cost of property, plant and equipment in the statement of cash flows.

At this meeting, the staff intended to provide an analysis of the comment letters received on the proposal to clarify that capitalised interest payments should have a consistent classification in the statement of cash flows with other payments for the underlying asset into which those payments were capitalised.

However, as outlined above, the Committee did not specifically discuss this issue. Instead, the Committee tentatively decided that it not be addressing this issue given an inability to reach a consensus on the broader IAS 7 principles.

In November 2012 the IFRS Interpretations Committee (the Interpretations Committee) discussed a request to address the accounting for mandatory purchases of non-controlling interests (NCI) in business combinations. The submission noted that IFRS 3 Business Combinations does not specifically address the accounting for a sequence of transactions that begins with an acquirer gaining control of an entity and is followed shortly thereafter by the acquisition of additional ownership interests as a result of a regulatory requirement that obliges the acquirer to offer to purchase the ownership interests of NCI shareholders.

At the meeting in November 2012 the Interpretations Committee discussed two issues:

1. whether the initial acquisition of the controlling stake and the subsequent mandatory tender offer (MTO) should be treated as separate transactions or as a single acquisition (i.e. as linked transactions)
2. whether a liability should be recognised for the MTO at the date that the acquirer obtains control of the acquiree.

On the first issue, the Interpretations Committee tentatively agreed, in the November 2012 meeting, that the initial acquisition of the controlling stake and the subsequent MTO should be treated as a single acquisition. It tentatively decided to propose that the guidance in IFRS 10 Consolidated Financial Statements on how to determine whether the disposal of a subsidiary achieved in stages should be accounted for as one or more transactions should also be applied to circumstances when the acquisition of a business is followed by successive purchases of additional interests in the acquiree. The Interpretations Committee tentatively decided to propose to the IASB that the Board amend IFRS 3 through Annual Improvements.

The Interpretations Committee also discussed the second issue in their November 2012 meeting. The Interpretations Committee noted that IAS 37 Provisions, Contingent Liabilities and Contingent Assets excludes from its scope contracts that are executory in nature and therefore concluded that no liability needs to be recognised for the MTO. The Interpretations Committee, in the November 2012 meeting, tentatively decided to recommend to the IASB not to amend IFRS 3 for this second issue.

In the March 2013 Interpretations Committee meeting the Staff noted that feedback had been received on the second tentative decision from the November 2012 meeting.  Some expressed the view that the Interpretation Committee’s rationale was unclear and others disagreed with the tentative conclusion.  Some noted that if MTOs were excluded from the scope of IAS 37 because they were executory contracts then how could they be excluded from the scope of IAS 32 because they were not contracts.

Other concerns were expressed that the Interpretation Committee’s tentative conclusion that a liability did not need to be recognised for an MTO was inconsistent with its tentative decision that the initial acquisition of the controlling stake and the subsequent MTO be treated as a single acquisition.  They argued that if the transactions are linked then the occurrence of the second transaction is dependent upon the occurrence of the first transaction.  Hence the obligation to purchase the NCI shareholders’ shares is generated by the acquisition of the controlling stake and should be reflected in the financial statements as a liability.

The Staff noted, among others, that others concerns expressed were:

1. If a liability was not recognised, the entity’s financial statements would not reflect the acquirer’s unconditional obligation to pay cash (or deliver another financial asset) in exchange for the NCI shareholders’ shares.
2. The Interpretation Committee’s tentative conclusion on MTOs was inconsistent with the accounting for put options written on non-controlling interests (NCI puts).
3. The requirement to make an offer to NCI shareholders that arises from an MTO effectively creates an NCI put and hence would meet the definition of a liability under IAS 32.  The Staff argued that it might be suggested that since the put option arising from an MTO is not the result of a contractual obligation but rather is the result of a legal/statutory obligation, it would not meet the definition of a liability in IAS 32. However they noted that the legal obligation has an impact on the contractual relationship between the shareholder and the reporting entity and is therefore no different from any other put option on NCI.  The Staff noted that this was consistent with paragraph 5 of IFRIC 2 which states that an entity must consider all of the terms and conditions of a financial instrument in determining its classification as a financial liability or equity and this would include local laws and regulations.
4. An MTO meets the definition of a liability in paragraph 4.4(b) of the Conceptual Framework for Financial Reporting and hence should be reflected in an entity’s financial statements.

The Staff noted that in light of these comments they had performed additional analysis as to whether a liability should be recognised for an MTO.  The Staff noted to the Interpretations Committee that they considered that a liability should be recognised for an MTO at the date that an acquirer obtains control of an acquiree.  The Staff agreed that such an arrangement met the definition of a liability in the Conceptual Framework and it would be misleading to investors to omit this liability from the financial statements.  The Staff also were of the view that the MTO should be accounted for in accordance with the requirements for financial instruments (IAS 32 and 39 or IFRS 9) and noted that they thought that the MTO described in the submission was similar to an NCI put (the entity had a present unconditional obligation to purchase the shares held by the NCI shareholders.  The Staff acknowledged that the form of an MTO was different from that of an NCI put as with an NCI put the parties have will enter into a bilateral contract which was not the case with an MTO.  However the Staff thought that the substance of the arrangements was the same and hence should be accounted for the same.

The Staff also highlighted that they thought the rights and obligations that arise from an MTO are inextricably linked to the share contracts that were held by the controlling and NCI shareholders.  They noted that the acquirer (by virtue of becoming the controlling shareholder) has an unconditional obligation to offer to purchase the shares held by the NCI shareholders and the other shareholders (by virtue of being NCI shareholders) have an unconditional right to sell their shares to the acquirer.  The Staff noted that while the MTO is a statutory requirement, the controlling and NCI shareholders were bound by that arrangement as a result of holding their respective ownership instruments.

The Staff asked the Interpretations Committee whether they agreed that a liability should be recognised for an MTO in a manner consistent with IAS 32 at the date that the acquirer obtains control of the acquiree.

One Committee member was still of the view that the tentative decision reached in the November 2012 Interpretations Committee meeting was still the correct decision and hence disagreed with the Staff.  This Committee member did not think that the MTO should be accounted for like an NCI put under IAS 32 and believed that there was no contractual obligation.  This Committee member believed that this was a linked transaction and hence the acquirer was obtaining control in one step rather than a two-step approach of obtaining control and then non-controlling interest separately.  This Committee member noted that in this situation his view was that the acquirer was acquiring assets and liabilities rather than non-controlling interests and IAS 39 (AG 35(b)) states that when there is firm commitment to acquire assets and liabilities (which this member thought was the case) then there would not be recognition of a liability at the date of the commitment but instead when one of the parties had performed under the agreement.  Hence, even if it was considered that there was a contractual obligation under IAS 39, a financial liability would not be recognised at the date that the acquirer obtained control of the acquiree as nothing had been performed under the executory contract yet.  This view was shared by some other Committee members.

Another Committee member also disagreed with the Staff conclusion.  She also disagreed that the MTO should be accounted for as an NCI put.  This Committee member stated that the Staff were removing the relevance as to whether there is or is not a contract in place in deciding whether there is a financial liability under IAS 32.  She noted that there had always been emphasis on the existence of a contract and the relevance of the terms of a contract to decide whether IAS 32 is applicable in recognising a financial liability.  This member noted expressed concern with the consequences of not sticking to this view.  This Committee member also expressed a view that she did not think that this situation was a linked transaction – she was of the view that there were two separate transactions.  This Committee member did not think that the IFRS 10 criteria for linked transactions were met and no liability should be recognised.  Another Committee member agreed with this view.  He did not agree with the analogy to IAS 32 based upon the fact that the MTO was not contractual where IAS 32 had always required the existence of a contractual obligation for recognition of a financial liability.  He thought that this was an executory contract and agreed with the conclusion in the November 2012 Committee meeting.  He noted that this would not be a liability under IAS 37 which excludes from its scope executory contracts.

Against the views of these Committee members one Committee member expressed the view that he considered that the MTO met the definition of a liability in the Conceptual Framework and agreed with the Staff.  He thought that the key debate to be had was which standard governs the recognition of the liability.  He considered, like the Staff, that the MTO was similar to an NCI put even though not contractual and hence a liability should be recognised.  Another Committee member also agreed with the view of the Staff.  He did not agree that because in the situation being discussed there was an enforced contract rather than a voluntary contract a liability should not be recognised.

Another Committee member agreed that the MTO was in substance the same as an NCI put and hence should be accounted consistent with NCI puts.

Another Committee member believed that the MTO was a liability that should be recognised.  She believed that the transaction was linked and hence the obligation to purchase the NCI shareholders’ shares was generated by the acquisition of the controlling stake.  She agreed that there was an obligation that met the definition of an obligation in the Conceptual Framework and hence should be recognised.

The Chair put a vote to the Interpretation Committee members as to whether they considered that there was a liability.  Eight Committee members tentatively supported the Staff recommendation that the MTO should be accounted for as a liability and six tentatively disagreed, instead seeing there to be an executory contract.  The Chair asked the Staff how to proceed in line with the Due Process Handbook.  The Staff noted that the original proposal was for an annual improvement that would be presented to the IASB.  It was noted that with an 8:6 split an annual improvement could not be presented to the IASB.  The Staff noted that the results of the discussion would be reported to the IASB and that there was an 8:6 vote expressed on the issue or recognising a liability for the MTO.  It would also be recommended to the IASB that this issue be grouped with other NCI issues and the post implementation review of IFRS 3.

In October 2012, the Committee received a request for guidance on the determination of the rate used to discount post-employment obligations. The main concerns of the submitter were that:

1. according to paragraph 83 of IAS 19 the discount rate should be determined by reference to market yields at the end of the reporting period on high quality corporate bonds (HQCB);
2. IAS 19 did not specify which corporate bonds qualify to be HQCB;
3. listed corporate bonds were considered to be HQCB if they received one of the two highest ratings given by an internationally recognised rating agency (e.g. ‘AAA’ and ‘AA’ from Standard and Poor’s); and
4. because of the financial crisis, the number of corporate bonds rated ‘AAA’ or ‘AA’ (AA-Bonds) had decreased significantly and were traded less frequently. It was therefore considered that single trades could influence market yield more significantly than in the past and eventually distort the observable market rate, which would in turn distort the discount rate.

In particular, the submitter asked the Committee whether corporate bonds with an internationally recognised rating lower than “AA” could be considered to be high quality corporate bonds (HQCB). The submitter noted that two views existed in practice:

1. only AA bonds were considered HQCB
2. corporate bonds with a rating lower than AA could be considered HQCB

In its January 2013 meeting, the Committee:

• requested the staff to consult with the IASB:

1. i.            to confirm that the underlying principle for the determination of the discount rate is set out in paragraph 84 of IAS 19 (2011), and is described as “the discount rate reflects the time value of money but not the actuarial or investment risk”;
2. ii.            to provide clarity about this sentence in paragraph 84;
3. iii.            to ask whether this sentence in paragraph 84 means that the objective for the discount rate for post-employment benefit obligations should be a risk-free rate; and
4. iv.            to confirm that IAS 19 should be amended to clarify that when government bonds are used to establish the discount rate in the absence of HQCBs, those government bonds used must themselves be high quality.

In the February 2013 IASB meeting, the staff asked the Board members if they agreed:

1. that the objective for the determination of the discount rate is paragraph 84 of IAS 19, i.e. “the discount rate reflects the time value of money but not the actuarial or investment risk.  The Staff also asked the Board members whether they agreed that the discount rate does not reflect the entity-specific credit risk borne by the entity's creditors, nor does it reflect the risk that future experience may differ from actuarial assumptions.”
2. that the Interpretations Committee should clarify the sentence “the discount rate reflects the time value of money but not the actuarial or investment risk” and that this sentence does not mean that the discount rate for post-employment benefit obligations should be a risk-free rate
3. that the discount rate should reflect the credit risk of HQCB and that a reasonable interpretation of HQCB could be corporate bonds with minimal or very low credit risk
4. that the Interpretations Committee should propose amendments to IAS 19 to specify that when government bonds are used to determine the discount rate those bonds should be of high quality.

The majority of IASB members agreed.

At the March 2013 Interpretations Committee meeting the Staff noted that their proposed next steps were:

• to bring to the May 2013 Interpretation Committee meeting a draft amendment to IAS 19 (narrow scope amendment) that will reflect the tentative decisions of the IASB in the February 2013 meeting
• to clarify in the draft amendment that in determining the discount rate an entity shall include corporate bonds with minimal or very low credit risk issued in other countries, provided that these bonds are issued in the currency in which the benefits are to be paid.

The Staff noted that in their view, in this narrow scope amendment guidance should be provided for determining the discount rate when there is no deep market for corporate bonds with minimal or very low credit risk and when government bonds are not “high quality”.  The Staff noted that their preliminary view was that in this situation, an entity should use the government bonds and adjust the yield of these bonds removing the market premium for the additional credit risk.

The Staff asked the Interpretation Committee members whether they had any comments on the proposed next steps.

One Committee member questioned what “minimal or low credit risk” means.  She asked whether it meant AA rated bonds or above and that guidance needed to be developed to enable this concept to be applied in practice.  She noted that maintaining that just HQCB with “minimal or low credit risk” are used in the determination of the discount rate without further explanation would create application issues and questions.  She also asked what one would do where there is no HQCB and noted that although the Staff were proposing to create a synthetic yield curve this notion had always been rejected.  She mentioned that she envisaged practical difficulties in removing the market premium for additional credit risk.  Another Committee member agreed that with the confusion created by the terms “minimal or low credit risk”.  He also noted that this also implied a choice – to use HQCB with minimal or low credit risk in determining the discount rate.  He agreed that there is still the question whether to use AA/AAA corporate bonds etc.

This view was not shared by a couple of Committee members who noted that they did not feel that minimal or low credit risk would create confusion as the term was taken from a known credit rating agency and was a term used in practice.

Another Committee member was also concerned with the creation of a synthetic curve for government bonds that were considered “junk bonds” and how this would actually be created.  This view was shared by another Committee member who noted that a number of companies in countries such as Asia and South America do use government bonds when there is not a deep market for HQCB.  He noted that for them to attempt to create a synthetic yield would represent a huge task for them.  This member questioned whether a different approach could be explored with actuaries as in order to determine what the discount rate for employee benefits should really represent.  This proposal for a different approach was also shared by another Committee member.

One Committee member shared the view that the focus should be on the principle in IAS 19 for determination of the discount rate rather than trying to set a rate as AAA/AA and trying to create a synthetic rate.

The Chair was receptive to the proposal of involving actuaries/capital markets and for the Staff to gain further insights before discussing the matter further.  The Chair also noted that if the Staff conclude that more fundamental work on the discount rate is required then the work should be moved to the broad research project on discount rates.

One Committee member proposed that if there were no high quality government bonds or there was no deep market for corporate bonds with minimal or low credit risk then one should go and search for the highest available high quality government or corporate bond.  She gave the example that if there were “junk” government bonds but higher quality corporate bonds then one should use these higher quality corporate bonds rather than constructing a synthetic yield on government bonds.  This view was shared by another Committee member who also noted that if the Staff involved actuaries then it would take a long time to come to a solution and the issue was a very real one now.

The Chair brought the discussion to a close and noted that there were three views being formed:

1. to follow a principle of selecting the highest available bond available where there are no high quality government bonds and there is not a deep market for corporate bonds with minimal or low credit risk (shared by some Committee members);
2. to concede that this issue cannot be addressed except in the context of the broader Board project on discount rate;
3. the Staff should consider this issue further and come back to the Interpretations Committee with further considerations at the next meeting.

The Chair proposed option 3 to the Committee members.  No votes was held on this topic.

At the July 2012 meeting, the staff provided the Committee with updates on issues that have been referred to the IASB but not yet addressed. As a result of the discussions, the Committee decided to revisit certain issues related to IFRS 2. Two of those issues were discussed during this meeting.

The Committee discussed how to classify a share-based payment transaction in which the entity withholds a specified portion of the shares that would otherwise be issued to the counterparty upon exercise (or vesting) of the share-based payment award in order to settle the counterparty’s tax obligation. The shares are withheld by the entity in return for settling the counterparty’s tax withholding obligation associated with the share-based payment. The request received by the Committee asked whether the portion of the share-based payment that is withheld should be classified as cash-settled or equity settled.

On the basis of its analysis, the staff recommended that IFRS 2 should be amended to provide specific guidance for share-based payment transactions with net settlement provisions. This approach would be to provide specific guidance for the share-based payment transactions similar to that in U.S. GAAP to require that the portion that is net settled in cash for the purposes of meeting the employee’s income tax obligations should be classified as equity-settled. The staff noted that the specific guidance could be limited to a situation in which a provision in a law or agreement with the employee requires an entity to withhold a portion of the equity instruments to meet its minimum tax withholding requirements. Accordingly, in other cases such as when an amount is withheld in excess of the statutory minimum requirements, or may at the be withheld employee’s discretion, the classification of that portion of the award would be determined in accordance with classification requirements in IFRS 2 and would therefore be classified as cash-settled in accordance with IFRS 2.

Several Committee members expressed support for the staff’s analysis of the issue but were concerned with amending IFRS 2 to provide an exception (which was inconsistent with IFRS practice) for a very specific fact pattern. As a result, other recommendations were outlined by Committee members to resolve this issue without creating a specific exception to the principles in IFRS 2. However, for each alternative proposed, other Committee members believed the proposal would not meet the objective of addressing this issue.

One Committee member, highlighting his experience in the U.S. (which has specific guidance on this issue), noted the staff’s proposal would not work in the U.S. as drafted. Specifically, he noted that withholding tax in the U.S. is required to be remitted to the Internal Revenue Service (IRS), but the manner of remittance (e.g., net settlement, withheld from payroll, etc.) is not specified. As the staff’s proposal was to include specific guidance in a situation in which a provision in a law or agreement with the employee requires an entity to withhold a portion of the equity instruments to meet its minimum tax withholding requirements, he noted the proposals would not effectively capture the U.S. marketplace since net settlement is not required. The staff noted their intention was to largely conform with U.S. GAAP, and thus, the wording of the proposals would be reconsidered offline.

A couple of Committee members, in contrast to the staff proposals, expressed support for amending IFRS 2 to specify that withholding a portion of the share-based payment transaction to meet the tax obligations is, in substance, a repurchase of the vested equity instruments as described in paragraph 29 of IFRS 2 and therefore the entire award should be accounted for as an equity-settled share-based payment transaction. However, support was limited for this alternative.

After hearing the debate, the Committee Chair asked who would not object to the staff recommendation (subject to amendment for conformity with U.S. GAAP as noted above), with the super majority of the Committee noting they would not object. Therefore, the Committee intends to propose to the IASB that it should amend IFRS 2 in line with the above recommendation in a narrow-scope amendment project.

The Committee discussed how to measure and account for a share-based payment in situations in which a cash-settled award is cancelled and is replaced by a new equity-settled award and the replacement award has a higher fair value than the original award.

The staff, in analysing this issue, noted that there is no specific guidance in IFRS 2 for a modification of terms of a cash-settled share-based payment transaction, including a modification that changes its classification to equity-settled and there is significant diversity in practice for the share-based payment transaction analysed.

The staff presented multiple approaches to resolving this diversity and lack of guidance, including applying by analogy the modification guidance in IFRS 2 and treating the original award as having been cancelled and replaced by a new award (with the new equity-settled award measured at the replacement date fair value of the equity-settled award). The latter view would also require assessment of how to account for the difference between the carrying amount of the liability and the elapsed portion of the replacement date fair value of the new equity award as of the replacement date (e.g., recognise it over the remaining vesting period (consistent with paragraph B43 of IFRS 2) or recognise it immediately in profit or loss (consistent with paragraph 43(c) of IFRS 2)).

The staff believing it appropriate to treat the original award as having been cancelled and replaced by a new award, with the difference between the carrying amount of the liability and the elapsed portion of the replacement date fair value of the new equity award as of the replacement date recognised immediately in profit or loss. Reasons for this support followed from views that the consideration paid for the settlement of a liability should be measured at fair value of the settlement date (consistent with a general principle for the accounting for the settlement of a liability in paragraph 6 of IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments), acknowledging that recognising the difference between the carrying amount of the liability and the fair value of the consideration paid is consistent with the accounting requirements for a cash-settled share-based payment award and noting that this approach is already taken in paragraph 43(c) of IFRS 2, even though it provides specific guidance to a situation in which the entity has a choice of the manner of settlement and the entity elects the settlement alternative with the higher fair value as at the settlement date.

Following this analysis, the staff proposed that guidance should be added to IFRS 2 in line with its analysis. As the amendment would not meet the criteria of the annual improvement project, the staff believed the amendment should be performed in a narrow-scope amendment project of the IASB.

Without significant debate, the Committee supported the staff analysis and recommendation. The staff intend to bring the staff draft of the amendments to a future meeting in line with the principles agreed by the Committee. The staff also noted that it is considering the inclusion of implementation guidance on this topic, which will be discussed in a future staff paper.

The Committee previously considered a request to clarify the accounting for variable fees in a service concession arrangement. The request for clarification relates to whether these costs should be recognised at the start of the concession arrangement as an asset with an obligation to make the related payment, or treated as executory in nature and recognised over the term of the concession arrangement.

At its November 2012 meeting, the Committee discussed the initial accounting for variable payments. The Committee could not reach a consensus on whether the fair value of all variable payments should be included in the initial measurement of the liability on the date of purchase of the asset; or the variable payments that are dependent on the purchaser’s future activity should be excluded from the initial measurement of the liability until the activity is performed.

However, the Committee believed the subsequent accounting for variable payments could be decoupled from initial accounting considerations. The core issue in subsequent accounting is whether the remeasurement of the financial liability to make variable payments should be recognised in profit or loss, or should be included as an adjustment to the cost of the asset. General consensus for recognising remeasurement of the financial liability to make variable payments as an adjustment to the cost of the asset was reached in the November 2012 meeting.

To start the discussion in the current meeting, the staff noted feedback from preparers supporting the adjustment of the cost of the asset. The staff noted that preparers asked for a retrospective catch-up adjustment to the depreciation because of the change in the amount of cost. However, the staff believed the depreciation and amortisation under IAS 16 and IAS 38 should be applied prospectively. A retrospective catch-up adjustment to depreciation has been discussed in connection with the Leases project, but the staff believed the Committee should not consider the effect of that future standard as such accounting is not present in current standards (except for some purchase price adjustments made within the specified window). The preparers had also asked whether the foreign currency effects would be capitalised as part of the asset, but those items should be recorded on the statement of comprehensive income in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates.

The staff presented to the Committee two alternatives for the wording of proposed amendments to IAS 16 and IAS 38. The staff recommended Alternative A, which addressed only the accounting for the revision of the estimates of payments (i.e., the estimates of payments that were included in the initial measurement of the financial liability) in accordance with paragraph AG8 of IAS 39. The second alternative (Alternative B) addressed also the subsequent accounting for variable payments that are dependent on the purchaser’s future activity.

Committee members expressed varied levels of support for both alternatives. Several members expressed concerns with Alternative A being too open for interpretation. It was also agreed that the initial accounting topic was not to be discussed in the amendments, which led the majority of the Committee members to support Alternative B.

When put to vote, there was clear support for B with the addition of some introductory language to the Standard on the possibility of the cost including one or more fixed or variable payments, where timing of payments may affect both initial and subsequent measurement of cost. A reference to IAS 39 was requested to be included in the text discussing the initial recognition of the liability while the Standard should mention that direct costs may not be included in the amount of the liability but are included in the asset recognised.

A second vote was held on whether examples are needed to illustrate the effect of these amendments, but this was not supported by the Committee members as the examples would have to address the initial accounting topic in order to be helpful. Instead, Committee members supported the inclusion of the flowcharts in the staff paper in the amendments to the Standard or to the Basis for Conclusions.

The final draft for the agenda decision will be circulated among a couple of Committee members and also discussed with the project team on the Leases project before being submitted to the IASB.

In February 2013, the IFRS Interpretations Committee (‘the Interpretations Committee’) received a request from the European Securities and Markets Authority (ESMA) to clarify the application of the guidance in IFRS 5 Non-current Assets Held for Sale and Discontinued Operations regarding the classification of a non-current asset (or disposal group) as held for sale, in the case of:

1. a disposal plan that is intended to be achieved by means of an initial public offering (IPO) but where the prospectus has not been approved by the securities regulator; and
2. a change in a disposal plan from a plan that previously qualified as held for sale into a plan to spin off the disposal group and distribute a dividend in kind to its shareholders.

In relation to their specific fact pattern (where an entity, A was planning to dispose of a profitable operation, B by way of an IPO), the submitter asked the Interpretation Committee whether:

1. A division (i.e. division B) would qualify as held for sale when there was a disposal plan that was intended to be achieved by means of an initial public offering, but where the prospectus had not been approved by the securities regulator, assuming all the other criteria in IFRS 5 have been fulfilled?
2. a change in a disposal method from a plan that previously qualified as held for sale to a plan to spin off a division, and issue a dividend in kind to the shareholders, would qualify as a change to a plan of sale?

The Chair noted that in the March 2013 Interpretations Committee meeting no vote would be held as to the concerns raised by the submitter as it was considered that based solely upon the submission the Committee might not have adequate information upon which to form a conclusion.  The Chair noted that in the next Interpretations Committee meeting more information would be submitted to the Committee that would enable them to form a conclusion as to the questions asked.  The Chair noted that the objective of the March 2013 Interpretations Committee meeting was to begin discussions on the questions raised solely based upon the fact pattern/information in the submission but that no vote/conclusion would be reached.

Is an approved prospectus needed to qualify as held for sale?

The Staff noted that the submitter asked the question:

• Would a division (B) qualify as held for sale when there was a disposal plan that was intended to be achieved by means of an initial public offering, but where the prospectus had not been approved by the securities regulator, assuming all the other criteria in IFRS 5 have been fulfilled?

The Staff noted that the answer was one of two – either the approval of a prospectus by a competent securities regulator was a condition required for the disposal plan to qualify as held for sale under the requirements of IFRS 5 or it was not a condition required.

The Staff noted that some believe the approval of the prospectus by a competent securities regulator is a condition that is required to meet the criteria in paragraph 8 of IFRS 5 so that the sale of the disposal group can be considered highly probable.  The Staff noted that these individuals feel that without an approved prospectus from the securities regulator the sale cannot be considered highly probable because:

1. the disposal group cannot be actively marketed for sale at a price that is reasonable in relation to its current fair value; and
2. Entity A cannot initiate an active programme to locate a buyer.

The Staff noted that as some of the criteria in paragraph 8 of IFRS 5 for the classification of a disposal group as held for sale are not met then the division would not qualify as held for sale.

The Staff also noted that others have a different view and think that the approval of a prospectus by the securities regulator is not needed to classify the disposal group as held for sale.  The Staff noted that these individuals see that entity A (in the fact pattern discussed in the Staff paper) had been actively involved in the preparation of the prospectus and in ensuring that the prospectus’ approval by the securities regulator would be highly probable.  The Staff noted that specific facts that these individuals pointed to where that entity A had invested significant time and resources in the preparation of regulatory and sales documents for the securities regulators (i.e. meeting weekly with its outside advisors, and monitoring market conditions) and had contacted prospective institutional buyers before it received regulatory approval. These individuals also highlighted that in the fact pattern, entity A had also regularly communicated its plans to the public and was keeping its plans updated.

The Staff noted that paragraph 7 of IFRS 5 set out two requirements for the classification of a non-current asset or disposal group to be classified as held for sale:

1. the asset (or disposal group) must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups); and
2. its sale must be highly probable.

The Staff then considered the criteria in paragraph 8 of IFRS 5 for the sale to be considered as highly probable:

• the appropriate level of management must be committed to a plan to sell the asset (or disposal group;
• an active programme to locate a buyer and complete the plan must have been initiated;
• the asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value;
• the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification, except as permitted by paragraph 9;
• actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn; and
• the probability of shareholders’ approval (if required in the jurisdiction) should be considered as part of the assessment of whether the sale is highly probable.

The Staff, in relation to the fact pattern submitted, and applying the criteria in paragraph 8 of IFRS 5, agreed that the sale of division B by means of an IPO could not be considered highly probable.  They noted that a relevant action required to consider the disposal plan as highly probable was to locate a buyer for the disposal group after marketing the disposal group actively at a sale price that is reasonable.  The Staff were of the view that entity A had not been able to perform these actions because it had not obtained approval of the prospectus from the securities regulator.  The Staff were clear to point out that their conclusion was formed based upon the specific fact pattern of the submitter – in this case they did not think that all of the criteria in paragraph 8 of IFRS 5 had been met.

The Staff also noted that they considered the guidance in IFRS 5 for the classification of an asset (or disposal group) were clear and no further guidance in IFRS 5 was required.

One Committee member disagreed with the Staff view.  He did not think that it was necessary to issue a prospectus because he considered that the prospectus was the last step in a number of steps that an entity would need to undertake in order to have an IPO. He considered that all of the steps before the approval of the prospectus will indicate that the sale was highly probable and the issuing of the prospectus was just the final stage.  This Committee member also considered that the facts and circumstances of a specific case would need to be considered in determining whether the criteria in paragraph 7 of IFRS 5 had been met.  The Chair provided a view that the criteria in paragraph 7 of IFRS 5 noted that to be classified as held for sale under IFRS 5, one of the criteria was that the non-current asset (or disposal group) must be available for immediate sale.  He questioned how this could be the case when the sales document (i.e. the prospectus) had not been approved by the securities regulator.  One Committee member agreed with this view and that a prospectus was required to get regulatory approval before the non-current asset (or disposal group) could be considered available for immediate sale.

Another Committee member noted that she thought that it is the steps that would have been performed before regulatory approval was received for the prospectus, rather than the regulatory approval for the prospectus that should be assessed to determine whether the sale was highly probable – i.e. regulatory approval was not a condition for the sale to meet the highly probable criteria in paragraph 8.  She also commented that the entity, although not having received regulatory approval for the prospectus, would be prepared for immediate sale (through the previous steps performed) and the receipt of regulatory approval was just administrative.

Another Committee member discussed the Staff conclusions reached in paragraph 30 of their paper.  He did not agree that based upon the fact pattern of the submitter, there was no initiation of an active programme to locate a buyer and complete the plan.  This Committee member noted that the company had publicly announced that they are going to carry out an IPO and had contacted institutional buyers.  He hence thought that based upon the fact pattern, this criteria had been met (which the Staff paper said had not been met).  This member also commented that he disagreed that in the fact pattern, the asset had not been actively marketed for sale at a price that is reasonable in relation to the current fair value.  This Committee member expressed the view that IFRS 5 does not state that the entity needs to publicly publicise the price – the Staff paper assumed that this was a requirement of IFRS 5.

A number of Committee member emphasised that the conclusion that would be reached would be heavily reliant upon the facts and circumstances.  One Committee member did not feel that the Staff comments in the paper were reflective of the submission.  She noted that the submission said that the company believed that the approval of the prospectus was highly probable and if this is the case then she felt that the IFRS 5 criteria for held for sale were met.  She noted that having a condition that you have to get regulatory approval for the prospectus before being able to account for the non-current asset as held for sale is irrelevant if it is highly probable that the entity will receive this.

Another Committee member agreed that approval of the prospectus would not be determinative as to whether the sale of the asset was highly probable.  She noted that in certain situations this may be considered a hurdle to an IPO and hence then one would have to consider the IFRS 5 criteria but based upon the fact pattern submitted this did not seem the case.  She, like other Committee members felt that the approval was just an administrative task.

Does a change in a disposal method qualify as a change to a plan of sale?

The Staff noted that the submitter asked the question whether:

1. a change in a disposal method from a plan that previously qualified as held for sale to a plan to spin off Division B and issue a dividend in kind to the shareholders would qualify as a change to a plan of sale?

The Staff noted that in accordance with paragraph 26 of IFRS 5, a change of plan or sale occurred when the criteria in paragraphs 7-9 of IFRS 5 were no longer met and the entity, consequently, would cease to classify the asset (or disposal group) as held for sale.

The Staff noted that the answer was one of two – either the change in the disposal method did qualify as a change to a plan of sale because a disposal and a distribution are different transactions and have different classification requirements or the change in the disposal method did not qualify as a change to a plan of sale because the disposal and a distribution are both means to achieve the intended disposal.

The Staff noted that some individuals view that the requirements to classify a disposal group as held for sale (in accordance with paragraphs 7–9 of IFRS 5) are different from the requirements to classify a disposal group classified as held for distribution in accordance with paragraph 12A of IFRS 5. The Staff noted that supporters of this view think that these transactions are different in the following aspects:

1. a dividend-in-kind does not generate a cash flow for Entity A whereas an IPO does; and
2. management can approve an IPO whereas a spin-off must be approved by the shareholders.

The Staff noted that these individuals were of the view that changing the disposal plan constituted a significant change in plan and the guidance in paragraph 26-29 of IFRS 5 should be followed.

The Staff were of the view that the focus should be on whether the held for sale criteria in paragraph 8 of IFRS 5 is still met regardless of the method of disposal.  The Staff noted that a disposal group will continue to be classified as held for sale as long as the criteria in paragraphs 7-9 of IFRS 5 continue to be met.  The Staff were of the view that a change in the disposal method from an IPO to a dividend in kind would not automatically cause an entity to fail to meet the criteria in paragraphs 7-9 of IFRS 5.  As long as this criteria continue to be met the asset (or disposal group) can continue to be classified as held for sale.  The Staff view was that there should be continuous assessment of this criteria.

The Staff also noted that they considered the guidance in IFRS 5 for the circumstances where an entity should cease to classify an asset (or disposal group) as held for sale are clear and sufficient.  The Staff noted that they did not think that further guidance was required in IFRS 5.

The Staff recommended that the Interpretations Committee should not take these issues onto its agenda.  The Staff proposed issuing two tentative agenda decisions for the two issues.

The Staff asked the Interpretations Committee whether they agreed with the wording of the tentative agenda decisions.

Some Committee members expressed broad tentative support for the Staff proposals.  No significant Committee comments were received in relation to the second question in the Staff paper.

The Chair noted that the majority of the Committee members were sharing the same view and were not in agreement with the Staff paper.  He noted however, that even though initial views were starting to be formed, he would like to continue the discussion in light of the follow up submission that would be received.  There were no objections to this proposal by the Chair.

No vote was held in the meeting.

In August 2012, the IFRS Interpretations Committee (‘the Interpretations Committee’) received a request for clarification about IFRS 10 Consolidated Financial Statements. IFRS 10 defines the principle of control and establishes control as the basis for determining which entities are consolidated in the consolidated financial statements. An important element of control in IFRS 10 is power. The submission related to protective rights and the effect of those rights on power over the investee.

The details of the example submitted were:

• The shares of an operating entity are all owned by one entity, the investor.
• The operating entity enters into a loan arrangement with a bank that contains several covenants. If a covenant is breached, the bank has the right to veto major business decisions (considered to be the relevant activities of the operating entity) and to call in the loan. The bank’s rights are considered to be protective. The investor continues to consolidate the operating entity.
• The entity breaches a covenant. What are the consolidation implications for the investor entity and for the bank? Who now controls the investee—the original investor or the bank?

The Staff noted that the submitter highlighted two interpretations could arise under IFRS 10:

View A: when protective rights become exercisable, there is a change in facts and circumstances and the control assessment should be reassessed in accordance with paragraph 8 of the Standard. The staff noted that they viewed this is the interpretation that the IASB intended.

View B: Protective rights can never affect an assessment of control.  The Staff noted that IFRS 10 states that; (I) protective rights are designed to protect the interests of the holder without giving power and (ii) protective rights are defined in the Standard as not conferring power.  This is the view that the submitter favoured and proposed.

The Staff noted that the submitter in view B argued that protective rights should never be assessed as part of the control assessment.  It was noted that paragraph B27 of the standard states that protective rights are designed to protect the interests of the holder without giving power.  The Staff noted that the submitter in view B noted that because the design and intention behind protective rights does not change over time then the facts and circumstances relating to protective rights, which are relevant to an assessment of power, also cannot change over time.  The Staff noted that the submitter was of the view that protective rights are historical and fixed at the point of design.  The Staff noted that as protective rights do not confer power to the holder, as defined in the standard, then the submitter was of the view that these rights do not need to be reassessed as facts and circumstances change.  The Staff noted that the submitter’s view is that protective rights can never be relevant to an assessment of power.

The Staff noted that they did not support the view proposed by the submitter and did not think that this reflected the IASB’s intention in IFRS 10 and indeed contradicted key principles on which the standard was based.  The Staff argued against the submitter on three grounds:

The need for continuous assessment

The Staff noted that the standard required that control be reassessed if facts and circumstances change (paragraph 8).  The Staff noted that in the submission, the issue relates to the element of control that is power and if something changes that would affect the investor’s power to direct the investee then the power element of control should be reassessed.  The Staff noted that the standard was clear that the elements of control should be reassessed in accordance with paragraph 8 of the standard when facts and circumstances change and the Basis for Conclusions (BC149-153) makes it clear that this reassessment should be continuous.

The Staff were of the view that there was no exception for protective rights from the requirement for reassessment in the Standard.  The Staff view was that the breach of covenant in the example was a significant change in the facts and circumstances relating to power and therefore the rights and obligations conferred by the loan agreement should be reassessed at the time of the breach to decide who controls the investee.

Discussion of control and power in the standard

The Staff noted that one element of control is power over the investee and in IFRS 10 it states that power arises from rights and these rights can include contractual rights.  The Staff noted that contractual terms such as those contained in a loan agreement could affect an assessment of power.  The Staff noted that any change in the terms of the loan agreement could affect the assessment of control.

The Staff noted that only substantive rights and rights that are not protective are considered in an assessment of power in accordance with the guidance in B9.  The Staff presented the view that the nature of protective rights can change over time and in the submitted example on a breach.  The Staff noted that a breach could trigger the change to a substantive right or at least to a right that could affect the control decision.

IASB intention

The Staff highlighted that the view proposed by the submitter contradicts the IASB decision made in examples in their paper Consolidation Project: Power to Direct: Protective and Participating rights.  In this paper there was an example where on breach a protective right upon contract inception became substance upon a breach which changed the control assessment.  The Staff noted that this example highlighted that the IASB did not intend protective rights to be exempt from continuous assessment.

The Staff noted that the Standard is effective for annual periods beginning on or after 1 January 2013 and few outreach activities had been able to be performed.  The Staff did not that most accounting firms favoured view A.

The Staff assessed the issue against the criteria of the Current Due Process Handbook.  They noted that they did not recommend adding this issue to the Interpretation Committee’s agenda.

The Staff asked the Interpretations Committee whether they agreed with their recommendation not to add the topic to the Interpretation Committee’s agenda.

The Staff concluded that they did not have sufficient information about the rights of the investor, the bank or other parties to come to a conclusion about control in the submitted example and asked the Interpretations Committee whether they agreed with this.

A long discussion was held around protective and substantive rights.  A number of Committee members agreed that there was interaction between protective rights and substantive rights.  One Committee member noted that in paragraph B26 there were two types of protective right; those that relate to fundamental changes to the activities of an investee and those that apply in exceptional circumstances.  This Committee member noted that it is the latter type of protective right that would usually be subject to some trigger event that would change the holder’s rights or would give the holder additional rights to the protective right that was held.  This member noted that it was these additional rights that should be assessed in the determination of control.

One Committee member questioned why the bank’s rights were considered protective.  He was of the view that the bank’s rights were not protective or substantive (at inception) but as soon as they become exercisable (i.e. upon a breach) then they become substantive.  He argued that he considered that the bank’s rights had never been protective.  The Staff noted that the submitter may have been applying paragraph B26 of the standard in describing these rights as protective as “fundamental changes to the activities of an investee or apply in exceptional circumstances” – i.e. they considered that the beach of covenant would be an exceptional circumstance which would be an attribute of a protective right.

The Chair attempted to summarise the issue.  He noted that the assessment should be continuous.  He noted that when a “trigger” occurred then this would change the basis upon which one would either include or exclude rights from the continuous assessment.  He noted that this may mean that certain rights may now be included in the assessment of control that may not have previously been considered.  He noted that that at this trigger point one would have to consider all of the rights as part of an assessment to determine control.  The Staff noted that the key consideration was who has power and that the terms substantive right and protective right do not themselves equate to power in themselves but are components that one would consider in the reassessment.  It was considered that the discussion as to whether the rights are protective or substantive was not so relevant due to the requirement for continuous assessment which may indicate that these rights have changed as a result of an “event” occurring.

The Chair brought the discussion to a close and noted that the Interpretation Committee did not have an agenda decision before them.  He highlighted that this issue would need to be brought back to a future Interpretation Committee’s meeting.  He suggested that the majority of Committee members tentatively agreed that reassessment was continuous and that the elements (including rights) that would be included in the reassessment would change over time.  He noted that this should be the principle of the future agenda decision.  He noted also that a protective right could change over time and should be considered in the reassessment of control.

No vote was held and no decisions were taken in this Interpretations Committee meeting.

The Committee considered a request to clarify the accounting for a transaction between a joint venturer (an entity) and its joint venture. The request considers a specific fact pattern in which the amount of gains to eliminate from the transaction exceeds the amount of the entity‘s interest in the joint venture. The submitter requested clarification as to whether the gain from the transaction should be eliminated only to the extent that it does not exceed the carrying amount of the entity‘s interest in the joint venture; or the remaining gain in excess of the carrying amount of the entity‘s interest in the joint venture should also be eliminated and if so, to where it should be eliminated.

Committee members expressed general support that all of the entity’s share of the gain should be eliminated (as opposed to elimination only to the extent that it does not exceed the carrying amount of the entity’s interest in the joint venture). Committee members cited paragraph 28 of IAS 28 (2011), which states that gains and losses resulting from upstream and downstream transactions between an entity and its associate or joint venture are recognised in the entity‘s financial statements only to the extent of unrelated investors‘ interests in the associate or joint venture, as the reason for this view.

The Committee then considered how the entity should present the corresponding entry for the remaining gains to eliminate that are in excess of the amount of the investment in the joint venture (e.g., account for it consistent with deferred income or account for it in the same way as for a deduction of the related asset).

Committee members expressed mixed views on this topic. Several Committee members believed elimination in a manner consistent with deferred income was not appropriate based on guidance in paragraph 30 of IAS 28 (2011) and the fact that eliminated gains do not meet the definition of a liability as defined in the Conceptual Framework for Financial Reporting. However, others were not supportive of the accounting in the same way as for a deduction of the related asset. Several Committee members believed fundamental differences in defining the equity method (as either a one-line consolidation or as a measurement basis) were deriving Committee views on this issue. This led to a long discussion of which manner of defining the equity method was appropriate. Committee members were unable to reach a consensus on whether the equity method was a one-line consolidation or a halfway house to fair value, but acknowledged that reaching a conclusion on this issue would not necessarily resolve differing views on how an entity should present the corresponding entry for the remaining gains to eliminate that are in excess of the amount of the investment in the joint venture.

Following the debate, the Committee Chair asked for tentative views of Committee members. He broke up the vote into ‘cash deals’ (i.e., where no related asset is available with which to offset) and transactions in which an asset/receivable is available. For cash deals, he asked who preferred presentation of the corresponding entry for the remaining gains to eliminate that are in excess of the amount of the investment in the joint venture in profit or loss, and who preferred treatment consistent with deferred income. Views were split on this issue (5 to 6, respectively). For transactions in which an asset/receivable exists, the Chair asked who preferred presentation of the corresponding entry as a deduction of the related asset and who preferred treatment consistent with deferred income. Views were again split, with 6 supporting a deduction of the related asset, 3 supporting deferred income and 2 abstaining given that they did not see a conceptual basis for picking one alternative over the others.

Given inconclusive votes, the Committee Chair asked whether an agenda decision could be drafted to state that all of an entity’s share of the gain should be eliminated in the fact pattern submitted, but the determination of how the entity should present the corresponding entry for the remaining gains to eliminate is driven by facts and circumstances requiring judgement. Several Committee members expressed concern with addressing this issue in an agenda decision. They noted that the staff’s outreach had revealed divergent practice/divergent views by some accounting firms on the issue of whether all of an entity’s share of the gain should be eliminated, thus suggesting an annual improvement or narrow-scope amendment was necessary. The Committee Chair asked the staff to consider this feedback and bring back a paper to a future meeting providing a recommendation of possible action steps.

The Committee considered a request to clarify whether, in accordance with IAS 19 (2011), the discount rate used to calculate a defined benefit liability should be pre- or post-tax. The specific tax regime outlined in the submission specified that (a) the entity receives a tax deduction for contributions made to the plan; (b) the plan pays tax on contributions received and on investment income earned; but (c) the plan does not receive a tax deduction for benefits paid.

Committee members expressed unanimous support that the discount rate should be pre-tax. Committee members noted that IAS 19 (2011) is clear that taxes relating to contributions and benefits should be taken into account in determining the ultimate cost of providing benefits (in accordance with IAS 19.76(b)(iv)). They also noted that in accordance with paragraph 130 of IAS 19 (2011), the return on plan assets includes any tax payable by the plan itself other than tax included in the measurement of the present value of the defined benefit obligation. Therefore, they believed that IAS 19 (2011) was clear that the discount rate used to calculate a defined benefit liability should be pre-tax.

The above tentative decision was inconsistent with that proposed by the staff (as the staff believed a post-tax discount rate may be used, provided that it is consistent with the cash flows, given a view that IAS 19 (2011) did not specify whether the discount rate should be a pre- or post-tax rate). Therefore, the staff noted they would redraft the tentative agenda decision based on Committee tentative conclusions and recirculate that wording.

The Committee discussed a request for guidance on the applicability of the amendments to IFRS 7 Disclosure – Offsetting Financial Assets and Financial Liabilities (‘IFRS 7 Amendments’) issued in December 2011 to condensed interim financial statements.

Specifically, the submitter questioned whether the additional disclosure requirements in the IFRS 7 Amendments should be included in condensed interim financial statements prepared in accordance with IAS 34 Interim Financial Reporting – citing the addition of paragraph 44R to IFRS 7 which notes that the disclosure requirements in the IFRS 7 Amendments are applicable for annual periods beginning on or after 1 January 2013 and interim periods within those annual periods.

Three unique views were considered in relation to scope of these disclosures in interim financial statements:

1. View A: The additional disclosures not required in condensed interim financial statements given that no consequential amendment was made to IAS 34 in relation to these amendments.
2. View B: The additional disclosures are required in all future sets of condensed interim financial statements for a period beginning on or after 1 January 2013.
3. View C: The additional disclosures are required only in the condensed set of financial statements for an interim period during the year of adoption of the amendments (and not for all periods thereafter).

Committee member preferences were primarily influenced by their belief of the IASB’s intention in issuing the IFRS 7 Amendments.

Specifically, several Committee members expressed support for View B on the basis that they believed the disclosures were originally provided as a result of requests from users of financial statements to provide information to enable them to compare statements of financial position prepared in accordance with IFRSs with those prepared in accordance with U.S. GAAP. Therefore, they saw such disclosures as necessary in all future sets of interim financial statements to allow users to assess comparability.

However, other Committee members did not support View B on the basis that no disclosure requirements had been specified in IAS 34 (ultimately expressing support for either View A or View C). While they acknowledged general requirements in IAS 34 to provide an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the entity since the end of the last annual reporting period, they believed a specific disclosure requirement should have been reflected in IAS 34 if it was the Board’s intention to require on-going disclosure.

After a lengthy debate, Committee members acknowledged that all views could be supported (View A on the basis of a lack of amendment in IAS 34, View B on the basis of the language provided in the IFRS 7 Amendments and View C on the basis of language in paragraph 44R of IFRS 7), and therefore, it was necessary to understand the IASB’s intention in drafting the amendments. Therefore, the Committee Chair directed the staff to take this issue to the Board to understand its original intentions.

The staff provided the Committee with an update on the current status of issues that are in progress but not to be discussed during the Committee’s March 2013 meeting. The Committee deferred work on three new issues and nine outstanding issues. All such issues will be discussed at future meetings.

The new issues include:

• A request to provide transitional relief in IFRS 10 Consolidated Financial Statements and IFRS 11 Joint Arrangements related to the application of IAS 36 Impairment of Assets, IAS 21 The Effects of Changes in Foreign Exchange Rates and IAS 23 Borrowing Costs.
• An IFRS 3 issue requesting clarification of whether a previously held interest in the assets and liabilities of a joint operation should be remeasured to fair value on acquiring control over the joint operation.
• An IFRS 10 and IAS 32 issue requesting clarification on how puttable instruments that are non-controlling interests should be classified in consolidated financial statements.

The outstanding issues include:

• An IFRS 3 issue requesting clarification on whether an asset with relatively simple associated processes meets the definition of a business in accordance with IFRS 3.
• An IAS 12 Income Taxes issue requesting clarification of the accounting for deferred tax assets when an entity has deductible temporary differences relating to unrealised losses on debt instruments.
• An IAS 12 issue requesting clarification of the calculation of deferred tax in circumstances where the entity holds a subsidiary which has a single asset within it.
• An IAS 19 issue regarding the accounting for employee benefit plans with a guaranteed return on contributions or notional contributions.
• An IAS 40 Investment Property issue requesting clarification on whether telecommunication towers in a jurisdiction should be accounted for as property, plant and equipment (under IAS 16) or as an investment property (under IAS 40).
• An IAS 29 Financial Reporting in Hyperinflationary Economies issue requesting clarification on whether an entity whose functional currency is the currency of a hyperinflationary economy as described in IAS 29 needs to apply IAS 29 to its financial statements prepared under the concept of financial capital maintenance defined in terms of constant purchasing power units rather than nominal monetary units.
• An IFRS 2 issue requesting clarification on the classification and measurement of share-based payment transactions in which the manner of settlement is contingent on future events.
• An IAS 2 Inventories issue requesting 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. The staff are monitoring this issue in the context of developments on the IASB’s revenue recognition project.
• An IAS 39 issue requesting clarification on how the income and expense that results from negative interest rates should be presented in the statement of comprehensive income. The staff have deferred finalisation of this issue pending the completion of the IASB’s financial instruments: classification and measurement project.

One Committee member, noting the request for transitional relief in IFRS 10 and IFRS 11, highlighted the urgency of this issue – given the effective date of both standards – in order to provide relief to IFRS constituents. The staff acknowledged the urgency of the issue and plan to provide a staff paper as soon as practical possible.

The staff provided the Committee with an overview of the Committee's activity over the last four and a half years, including quantitative details of issues addressed in the following categories:

• interpretations and implementation activities, including areas where an agenda decision was published within the IFRIC Update newsletter
• work performed on behalf of the IASB, including issues addressed through the Annual Improvements Project and narrow-scope amendments.

The review highlighted an increasing number of issues addressed by the Committee from 2008 to 2010, with a significant level of 2010 issues resulting from Annual Improvements Project considerations. Activity in 2011 and 2012 was relatively consistent.

Two Committee members suggested amendments to the presentation of such statistics in the future: those being (1) no longer distinguishing interpretations activities from work performed on behalf of the IASB given that both are activities performed in accordance with the Due Process Handbook, and (2) outlining the nature of topics discussed (e.g., business combinations) so that trend information was available for purposes of assessing the clarity of individual IFRSs. Committee members generally agreed with both of these recommendations.