Background

This meeting is a follow on from the Committee’s meetings in January and March 2012 and IASB meeting in May 2012. The Committee received a request to clarify whether a business meets the definition of a non-monetary asset.

The question was asked within the context of whether the requirements of SIC-13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers and IAS 28 Investments in Associates and Joint Ventures (2011) would apply when a business is contributed to a jointly controlled entity (JCE) as defined in IAS 31 Interests in Joint Ventures, a joint venture (JV) as defined in IFRS 11 Joint Arrangements or an associate.

After the January 2012 meeting, the Committee noted that the submission was related to the issues arising from the inconsistency between the requirement in IAS 27 (2008) and SIC-13 in dealing with the loss of control of a subsidiary that is contributed to a JCE, a JV or an associate. IAS 27 requires full gain or loss recognition when there is a loss of control when a subsidiary is contributed to a JCE/JV or an associate in exchange for an equity interest in the JCE/JV or associate. SIC-13 only allows for a partial gain or loss arising from contributions of non-monetary assets to a JCE (i.e., the gain or loss is restricted to the extent of the interest attributable to the other equity holders in the JCE). The consequence is that the gain or loss (if any) accounted for under IAS 27 would be larger than that under SIC-13.

Because of such inconsistency, there is diversity in practice on the accounting for a loss of a subsidiary when it is contributed. The staff also noted that such an inconsistency would remain under IFRS 10 Consolidated Financial Statements and IAS 28 (2011).

In March 2012, the Committee decided to ask for the Board’s recommendation on how to proceed.

At the May 2012 meeting, the IASB discussed the following topics:

• Alternatives preferred by the Committee to resolve the inconsistency between IAS 27 and SIC-13; and

• Next steps on how the Committee should proceed with this project.

Alternatives preferred by the Committee to solve the inconsistency between IAS 27 and SIC-13

Alternatives presented at the Committee’s March 2012 and IASB May 2012 (which also included outcomes) meetings included:

• Alternative 1: account for all contributions in accordance with the rationale developed in IAS 27
• Alternative 2: account for all contributions of businesses (whether housed in a subsidiary or not) under IAS 27 and account for all other contributions under SIC-13
• Alternative 3: account for all contributions to JCE/JV or associate under SIC-13;

A majority of the Committee members considered Alternative 1 to be the most robust but they acknowledged it would require addressing other cross-cutting issues. Alternative 1 would allow for full gain recognition on all contributions regardless of whether it is a business. The Committee noted that Alternative 2 would be easier to implement, but had more focus on the definition of a business. Both Alternatives 1 and 2 would resolve the issue related to a contribution of a business as both would result in the same accounting (i.e., would allow for full gain recognition for a contribution that constitutes a business). The Committee rejected Alternative 3 as it is not consistent with decisions reached in IFRS 3 Business Combinations. The Committee also rejected other alternatives as they could potentially create structuring opportunities.

At its May 2012 meeting, IASB members discussed the Committee’s recommendations. Although some IASB members preferred Alternative 1 conceptually, they expressed concerns with proceeding with this alternative. In particular, IASB members expressed concerns related to the cross-cutting issues that Alternative 1 could present and that these issues might not be able to be addressed by the Committee on a timely basis.

The majority of the IASB expressed support for Alternative 2. They believed that it would be easier and take a shorter period of time to implement and also would have minimal cross-cutting issues.

The IASB and the Committee noted that:

1. the accounting for the loss of control of a business as defined in IFRS 3 should be consistent with the latest thinking developed in the Business combinations project; and
2. that a full gain or loss should therefore be recognised on the loss of control of a business, whether the business is housed in a subsidiary or not.

As groups of assets that do not constitute a business were not part of the Business combinations project, the IASB and the Committee concluded that:

• the current requirements in IAS 28 (2011) regarding the partial gain loss recognition for transactions between an investor and its associate joint venture should only apply to the gain or loss resulting from the sale or contribution of a group of assets that is not a business; and

• a partial gain or loss should also be recognised in accounting for the sale or contribution of a subsidiary that is not a business to an associate or joint venture.

To achieve this, the staff recommended that Alternative 2 should be implemented by amending only IAS 28 (2011) and IFRS 10 and not IAS 27 (2008) and SIC-13 as these would be superseded when the proposed amendments would be effective (2013):

• IAS 28 (2011) amendments:
  • amend the current requirements regarding the partial gain or loss recognition for transactions between an investor and its associate or joint venture so that they only apply to the gain or loss resulting from the sale or contribution of a group of assets that is not a business as defined in IFRS 3; and
  • the gain or loss resulting from the sale or contribution of a group of assets that is a business as defined in IFRS 3 to an associate or a joint venture is recognised in full.
• IFRS 10 amendments:
  • the gain or loss resulting from the sale or contribution of a subsidiary that is not a business as defined in IFRS 3 to an associate or a joint venture is recognised only to the extent of unrelated investors’ interests in the associate or joint venture.

The result of these proposed amendments is that a full gain or loss would be recognised on the loss of control of a subsidiary that is a business as defined in IFRS 3, including cases in which the investor retains joint control of, or significant influence over the investee. The proposed amendments also intend to reiterate that when determining whether a group of assets or a subsidiary that is sold or contributed is a business as defined in IFRS 3, an entity should consider whether that sale or contribution is part of multiple arrangements that should be accounted for as a single transaction in accordance with the current requirements in IFRS 10. B97.

At the July 2012 meeting, the Committee tentatively agreed to move the process forward, subject to editorial changes. A number of Committee members expressed concern with the precision of the wording/drafting of the amendments including the implications of removing the term non-monetary asset as well as including references to groups of assets and whether that would extend the scope of the amendments and whether there could be any unintended consequences. The staff agreed to consider these concerns and work on the drafting changes as well as to note the Committee’s concerns to the IASB.

Background

At its January 2012 meeting, the IASB discussed two statement of cash flow issues that had been considered by the Committee. Both of these issues related to classification under IAS 7 Statement of Cash Flows and included:

• classification of cash payments for deferred and contingent consideration arising from a business combination within the scope of IFRS 3 Business Combinations
• classification of cash flows for an operator in a service concession arrangement within the scope of IFRIC 12 Service Concession Arrangements.

The IASB decided that before it could decide on whether or not these issues should be addressed through the annual improvements project, it would direct the staff to ask the Committee to look collectively at these two issues, as well as all of the previous IAS 7 issues that the Committee has discussed regarding the classification of cash flows, and consider whether these issues could be dealt with collectively.

At the March 2012 meeting, the Committee noted two classification principles used to support previous Committee decisions:

• Principle 1 - cash flows in IAS 7 should be classified in accordance with the nature of the activity to which they relate (i.e., most appropriate to the business of the entity), or
• Principle 2 - cash flows in IAS 7 should be classified consistently with the classification of the related or underlying item in the statement of financial position.

The staff suggested that to provide further guidance on how to implement the primary principle (Principle 1), the following elements could be added to help identify the nature of the cash flows being analysed:

• the cause or reason for which the cash flow is received or paid
• the counterparty who receives or pays the cash flow
• whether cash flows result from transactions that enter into the determination of profit or loss, or
• the predominant source of cash flows.

The Committee discussed the staff’s analysis of six examples (see below) that illustrate the classification of cash flows which was aimed at testing the principle (using the first principle as the primary guidance principle) for classification of the cash flows noted above and to determine how existing guidance in IAS 7 could be clarified.

• Example 1: Cash contributions to a long-term employee benefit fund
  • Nature of transaction - Cash outflows are part of the compensation for employment services and would be classified like any other cash payment on behalf of the employees.
  • Classification - Operating activities
• Example 2: Cash received as compensation for an insured loss for damaged PP&E (property, plant & equipment)
  • Nature of transaction - Cash inflows are received to cover for losses and damages of PP&E. This transaction represents ‘in substance’ a disposal of PP&E and would be classified as an investing activity. Insurance proceeds are not derived from the principal revenue-producing activities of the entity.
  • Classification - Investing activities
• Example 3: Cash payment to purchase of PP&E on deferred payment terms
  • Nature of transaction - Cash outflows are to acquire PP&E and made to a supplier. Consequently they would be classified as an investing activity regardless of when cash flows will be paid.
  • Classification - Investing activities
• Example 4: Cash payment to meet a rehabilitation obligation
  • Nature of transaction - Cash outflows are for costs of rehabilitation, which are derived from the mine’s normal operation activities. These activities are for the decommissioning or dismantlement of an asset. They therefore do not meet the definition of an investing and/or financing activity.
  • Classification – Operating activities
• Example 5: Cash received from a government grant
  • Nature of transaction - Cash inflows from a grant provide the entity with financing for the designated asset/activity. They are in substance financing cash inflows.
  • Classification - Financing activities
• Example 6: Cash payments in a reverse factoring agreement
  • Nature of transaction - The bank has provided credit to the entity to enable the entity’s liabilities to be settled on the due date. The repayment of that amount to the bank is a financing cash outflow.
  • Classification - Financing activities

The staff noted that different conclusions were reached if the classification of cash flows is based on the primary principle identified by the Committee (Principle 1: identify the nature of the cash flow analysed), rather than on the classification of the related or underlying item in the statement of financial position (Principle 2).

At the July 2012 meeting, while the Committee members agreed with using Principle 1 - that cash flows in IAS 7 should be classified in accordance with the nature of the activity to which they relate (i.e., most appropriate to the business of the entity) - a number of Committee members noted that they had arrived at different cash flow classification conclusions despite using the same principle and the above elements. A number of Committee members expressed concern regarding the elements and whether they would be appropriate as guidance or indicators. A few Committee members also expressed concern as to how the principle would be applied to non cash transactions.

There was an acknowledgement that there was a need to clarify IAS 7 but there was mixed reaction as to whether this could be solved through an Annual Improvement project or whether the issue was too broad and should be addressed through a different avenue. A few Committee members suggested performing outreach activities to constituents to seek their views. However, one of the Board members in attendance noted that this had previously been performed as a result of the Board’s project on financial statement presentation.

The Committee asked the staff to summarise the constituents’ views from the previous project on financial statement presentation as well as any views regarding cash flows from the agenda consultation process and to consider ways to clarify the primary principle in IAS 7 as well as useful guidance to implement IAS 7 consistently, including how timing can affect the classification of cash flows and to revisit the definition of operating, financing, and investing activities. Several Committee members noted that if the changes were implemented, this could result in a significant change to current practice and a reduction in diversity arising from the inconsistent application of IAS 7.

The staff had also raised an additional issue relating to IAS 7.16 which states that only expenditures that result in a recognised asset in the statement of financial position are eligible for classification as investing activities. The Committee decided not to address this issue at this time and will revisit this issue when it next discusses the topic again.

The Committee received a request to address issues related to rate-regulated activities in circumstances where the local laws permit a regulated entity to recover costs, or be required to refund some amounts, irrespective of whether services are delivered in future periods, although for administrative convenience recovery and refund will normally take place through future billings. In particular, the submitter asked whether the population of customers could be regarded as a single unit of account, and if so, whether it would be acceptable to recognise an asset or liability for over or under billing in a particular period when these items would be recovered or refunded through adjustments to invoices for future services or another mechanism.

The IASB had included requests for views on future plans for this project in its Agenda Consultation published in July 2011. In May 2012, the IASB tentatively agreed to give priority to developing standards-level guidance for rate-regulated activities in its deliberations related to short-term standards-level projects.

The Committee tentatively agreed with the staff’s assessment of the submission against the agenda criteria noting that it was too broad to address within the confines of existing IFRSs and the conceptual framework for the Committee to deal with and that as the IASB had recently expressed support for developing a standards-level project for rate-regulated activities in the short-term, the Committee tentatively decided not to add this issue to its agenda.

As part of its May 2012 meeting, the Committee considered a request for guidance on the accounting for contingent payments to selling shareholders in circumstances in which those selling shareholders become employees. The request for clarification relates to whether IFRS 3 Business Combinations is conclusive in determining whether an arrangement in which payments to an employee are forfeited upon termination is remuneration for post-combination services and not part of the consideration for an acquisition, or whether this is an indicator but not, on its own, determinative that the payment is compensation.

The question arises because paragraph B55 of IFRS 3, which provides application guidance for determining whether arrangements for contingent payments to employees or selling shareholders are part of the business combination or are separate transactions, introduces subparagraphs (a) to (h) as indicators. However, while subparagraphs (b) to (h) use inconclusive language (such as ‘may indicate’ or ‘might suggest’), subparagraph (a) uses conclusive language in stating ‘...A contingent consideration arrangement in which the payments are automatically forfeited if employment terminates is remuneration for post combination services...’. Therefore, questions have arisen as to whether paragraph B55(a) of IFRS 3 is, on its own, conclusive that payments to an employee which are forfeited upon termination are remuneration for post-combination services.

At that meeting, the Committee noted that IFRS 3 was part of the joint effort by the IASB and US Financial Accounting Standards Board (FASB) to promote convergence of IFRS and US GAAP accounting standards. Consequently, the Committee instructed the staff to consult both the IASB and FASB to determine whether IFRS 3 (IFRSs only) and Topic 805 Business Combinations (US GAAP only) should be conclusive in the fact pattern described above.

At the July 2012 meeting, the staff provided the Committee with a summary of feedback received from its informal consultation with many IASB members on this issue. The preliminary view of many IASB members is that they would prefer that the guidance in paragraph B55(a) be indicative; consequently, entities would apply judgement in determining whether payments that are contingent on the continuing employment of the selling shareholder are post-combination expenses. However, many IASB members acknowledged an inconsistency between the current wording of paragraph B55(a) and the introduction of paragraph B55 which should be resolved.

IASB members also shared the general concern expressed by the Committee as part of its May 2012 meeting that IFRS 3 is part of the joint effort by the IASB and FASB to promote convergence of IFRS and US GAAP accounting standards, and therefore, any decisions to amend IFRS 3 should be considered in the context of not creating divergence with US GAAP. The staff noted that its consultation with the FASB to determine whether Topic 805 is conclusive in the fact pattern described above is ongoing. The staff intends to update the Committee on the results of that consultation as part of the September 2012 meeting.

The Committee was not asked to make any tentative decisions at this meeting, as the meeting only served to summarise feedback from the IASB. However, multiple Committee members voiced questions and possible responses. One Committee members suggested deleting the conclusive language example included in paragraph B55(a) regarding continuing employment so that paragraph B55(a) too is read as an indicator. Another Committee member supported this view and noted that duration of a continuing employment agreement should be considered in conjunction with any automatic forfeiture if an employment terminates in order to avoid volatility in profit and loss. Committee members also discussed some of the historic issues raised to the US Securities and Exchange Commission (SEC) regarding continuing employment in an attempt to confirm treatment under US GAAP.

However, the Committee decided that in advance of discussing this topic further, it would wait for feedback from the FASB. Dependent on the results of that consultation, the Committee will seek direction from the IASB as to whether and how IFRSs should be amended.

At its March 2012 meeting, the Committee considered a request to clarify the accounting for market value uplifts introduced in a proposed jurisdictional tax regime (which has since completed its passage through Parliament).

The request included a specific fact pattern where entities, in calculating taxable profit under the proposed tax regime falling within the scope of IAS 12 Income Taxes, would be permitted to calculate tax depreciation for certain mining assets using the fair value of the assets as of a particular date as the ‘starting base allowance’, rather than the cost or carrying value of the assets. If there is insufficient profit against which the annual tax depreciation can be used, it is carried forward and is able to be used as a deduction against taxable profit in future years.

At that meeting, the Committee noted that the starting base allowance, including the fair value uplift portion, is attributed to the related assets under the tax regime and will become the basis for depreciation expense for tax purposes. Consequently, the market value uplift forms part of the related asset’s ‘tax base’, as defined in paragraph 5 of IAS 12. The Committee observed that IAS 12 requires an entity to reflect an adjustment to the tax base of an asset that is due to an increase in the deductions available as a deductible temporary difference. Therefore, the Committee noted that a deferred tax asset should be recognised to the extent it meets the recognition criteria in paragraph 24 of IAS 12.

On the basis of this analysis, the Committee tentatively decided not to add this issue to its agenda.

At its July 2012 meeting, the staff presented comment letter analysis with respect to the tentative agenda decision; noting three comment letters in which all three supported the decision not to take the issue onto the Committee’s agenda, but one letter suggested that the agenda decision should make clear that the Committee’s analysis of the proposed tax regime was developed on the basis that the proposed tax falls within the scope of IAS 12.

While the staff noted that the original request did not explicitly state that they assume the proposed tax regime is an income tax under IAS 12, the staff assumed that the proposed tax was an income tax under IAS 12 when issuing the tentative agenda decision given that the fair value uplift forms part of the related asset’s ‘tax base’ (as stated in the submittal). Therefore, the staff recommended that the agenda decision clarify that the proposed tax regime falls within the scope of IAS 12 to clarify the rationale and approach taken by the Committee in arriving at its tentative decision.

The Committee, with little deliberation, reaffirmed its decision not to add this issue to its agenda, but with changes to the wording of the tentative agenda decision as discussed during this meeting.

At its March 2012 meeting, the Committee received a request to clarify the presentation of production-based royalty payments payable to one taxation authority that are claimed as an allowance against taxable profit of another taxation authority. The request for clarification relates to whether these costs should be recognised as an operating expense or a tax expense in the statement of comprehensive income.

It was assumed that production-based royalty payments are, in themselves, outside the scope of IAS 12 Income Taxes while the tax payable to the other taxing authority is within the scope of IAS 12. On the basis of this assumption, the requests asked for clarification of whether the production-based royalty payments can be viewed as a prepayment of income tax payables to the other taxation authority.

At its March meeting, the Committee observed that paragraph 82(d) of IAS 1 Presentation of Financial Statements is intended to require an entity to present taxes that meet the definition of income taxes under IAS 12 within the ‘tax expense’ line item. Similarly, the Committee noted that the basis of calculation determined by the relevant tax rules should be considered rather than the manner of settlement of a tax liability or the factors relating to recipients of the tax.

Therefore, the Committee concluded that production-based royalties do not meet the definition of an income tax and should not be presented as an income tax expense in the statement of comprehensive income.
On the basis of this analysis, the Committee tentatively decided not to add this issue to its agenda.

At its July 2012 meeting, the staff presented comment letter analysis with respect to the tentative agenda decision; noting six comment letters. In analysing the comment letters, multiple concerns were expressed including the scope of tax expense under IAS 1, ‘net’ versus ‘gross’ treatment within the context of the scope issue related to IAS 12, ‘monetary value’ or ‘physical volume’ within the context of the scope issue related to IAS 12, collective-base assessment of the scope of income taxes under IAS 12, the adequacy of outreach activities performed and proposed changes to the wording of the tentative agenda decision.

The staff noted that all the respondents agreed with the view that the line item of ‘tax expense’ that is required by paragraph 82(d) of IAS 1 is intended to encompass taxes that meet the definition of income taxes under IAS 12. It is the basis of calculation that determines whether a tax meets the definition of an income tax. Comment letter analysis suggested that in some situations, entities might need to assess different taxes together on a collective basis to determine whether each tax meets the definition of income taxes under IAS 12.

The staff believed that the basic principle also applied to the case when assessed on a collective basis. Thus, in their view, the royalty payments should not be viewed as prepayment of the taxable profit due to another taxing authority. This is because, in accordance with the relevant tax rules, the calculation basis would not necessarily be a net amount even when assessed in combination with the taxable profit due to another taxing authority. The staff recommended that the agenda decision outline consideration to analysing multiple taxes on a collective basis, but acknowledging that the basis of the calculation of the total amount of those taxes would be a determinant factor in deciding whether those taxes meet the definition of income taxes under IAS 12.

The staff also noted that outreach did not identify a significant diversity in interpretation of the relevant accounting requirements under IAS 1 and IAS 12. In particular, outreach identified no significant diversity in interpretation of the basic principle that it is the basis of calculation that determines whether a tax meets the definition of an income tax.

In considering the staff’s recommendations, many Committee members supported the view that production-based royalty payments are, in themselves, outside the scope of IAS 12 (however acknowledging that this was an assumption in the submission) and that such payments cannot be viewed as a prepayment of income tax payables to the other taxing authority.

However, many Committee members were uncomfortable with the staff’s recommendation regarding analysing multiple taxes on a collective basis. They noted that this idea was not previously discussed, and many believed that assessment on a collective basis may result in income taxes being artificially scoped out of IAS 12. While they acknowledged that analysing multiple taxes on a collective basis was not explicitly prohibited in IAS 12, they were not certain that a collective basis assessment was intended when drafting IAS 12. Therefore, several Committee members preferred that any reference to analysing multiple taxes on a collective basis be removed. Other Committee members expressed some support for exploring the collective basis argument further.

However, the Committee ultimately decided to reaffirm its decision not to add this issue to its agenda, but with changes to the wording of the tentative agenda decision to not reflect the collective basis assessment as proposed by the staff. Committee members offered a number of other comments regarding the tentative agenda decision wording which will be handled outside of the public meeting.

At its May 2012 meeting, the Committee received a request to clarify the accounting for contribution-based promises (i.e., how to measure the present value of the defined benefit obligation related to contribution-based promises) in accordance with IAS 19 Employee Benefits (2011). An underlying concern in the submission was whether the revisions to IAS 19 in 2011, which clarified the treatment of risk-sharing features related to defined benefit obligations, affect the accounting for contribution-based promises.

At that meeting, the Committee tentatively decided not to add the issue to its agenda. However, the Committee noted that it would consider adding the more broad issue of the accounting for contribution-based promises to its future agenda. The Committee previously considered this issue and published IFRIC Draft Interpretation D9 Employee Benefit Plans with a Promised Return on Contributions or Notional Contributions (D9) in 2004 which considered the accounting for contribution-based promises within its scope. However, the Committee suspended this project in 2006 and instead referred the issue to the IASB to be included in the IASB’s project on post-employment benefits. The IASB later deferred work on this issue to a future broader project on employee benefits.

At the July 2012 meeting, the staff provided the Committee with comment letter analysis of the responses to D9 originally prepared in 2005 and the responses to the discussion paper Preliminary Views on Amendments to IAS 19 Employee Benefits (the DP) regarding the accounting for contribution-based promises. This information was to be used to support the staff’s proposals on possible revisions to the scope and measurement model of D9 before delivering a more defined draft interpretation to a future meeting.

While comment letter analysis revealed multiple issues and concerns with D9 and the DP, the two primary issues requiring consideration before a possible future revision to D9 can be developed include the scope of the revised interpretation and the measurement of the defined benefit obligation.

The staff’s comment letter analysis noted support for the use of defined benefit accounting for plans that fall within the scope of D9. However, further clarification was requested on the scope of D9 and, in particular, on the distinction between defined contribution and defined benefit plans. The scope of D9 was originally set to cover plans with a promised return on actual or notional contributions. However, respondents to D9 noted that the scope implies a direct connection between the contributions made to the plan and the return on those contributions (considered only a problem for funded plans).

To cover all plans that provide a guaranteed return on contributions, the staff recommended that the Committee clarify that there does not need to be a link between the returns on contribution and the return on the assets held in the benefit plan. Additionally, the staff recommended that the Committee clarify that the return on the contribution does not need to be linked to the return on a specific asset and that D9 would include not only post-retirement benefits but also long-term benefits. Thus, the revised scope would clarify that an employee benefit plan would fall within the scope of the interpretation if the employer has a legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay for all employee benefits relating to employee service in the current and prior periods in respect of a promised return on actual or notional contributions or any other benefit guarantee based on the value of one or more underlying investible or non-investible asset.

A few Committee members expressed concern with this change in scope. They noted that the proposed scope would actually lead to more plans being included in the scope of a revised D9; that being, plans that provide a guarantee not based on the return of the contributions made, but based on the return on, or value of, other assets, as well as plans in which the promised return is not based solely on investible assets (such as a measure based on corporate performance).

Another Committee member requested that the staff perform outreach to understand how widely the provisions of D9 are currently being applied, and likewise, understand more fully whether the accounting for contribution based promises is a widespread issue creating diversity in practice. Similarly, another Committee member asked to understand more fully the implications of the proposed change in scope both in terms of the number of plans likely to be impacted by this scope and likely impact on practice.

While multiple concerns were expressed about scope creep following the staff’s recommendation, the Committee tentatively agreed to the staff’s scoping recommendation as a working assumption to be reconsidered once more outreach is performed.

Regarding measurement models, the staff outlined the four proposed methodologies for measuring the liability which were originally developed in 2005 as part of the redeliberations of D9. The staff noted that they were currently analysing the work done on measurement in 2005 with a view to bring a proposal on measurement to the Committee at its next meeting. Limited research to date suggested that some preparers were using the fixed/variable measurement approach outlined in D9. However, the staff did not have sufficient information on how widespread that use was and whether those applying D9 have simple or more complex plan structures. Therefore, the staff intend to perform further outreach before making any formal recommendation to the Committee. Committee members agreed with the staff’s plan. However, one Committee member requested that the staff provide practical examples of the four approaches to a future meeting so that distinguishing characteristics of each approach can be determined.

At its May 2012 meeting, the Committee considered a request for guidance on the circumstances in which the restructuring of Greek government bonds (GGB) should result in derecognition of the whole asset, or only part of it, in accordance with IAS 39 Financial Instruments: Recognition and Measurement. The principal issue raised was whether the transaction should result in derecognition of the whole asset, or only part of it, in accordance with IAS 39.

While the Committee addressed many of the questions raised in the submission as part of the May meeting, it did not address the question of whether paragraph AG5 of IAS 39 could apply when determining the effective interest rate on initial recognition of the new GGBs that were received as part of the debt restructuring. Applying paragraph AG5 means that the effective interest rate would be determined at initial recognition using estimated cash flows that take into account incurred credit losses.

At the July 2012 meeting, Committee members generally agreed that application of paragraph AG5 of IAS 39 is not limited to purchase transactions, but includes the notion of ‘originated’ instruments even though AG5 uses the word ‘acquired’. Thus, application of paragraph AG5 applies to purchased and originated assets alike. They also agreed that the context and structure of IAS 39 means that paragraph AG5 is an integral part of the effective interest method and hence applies to all financial assets for which interest revenue is calculated on an effective interest basis, including assets that are originated.

These conclusions were generally based on supporting wording in IAS 39 which uses the term ‘acquired’ in various instances as a generic term that comprises both purchases and originations of assets. For example, paragraph 9 of IAS 39, in defining financial asset or financial liability at fair value through profit or loss and transaction costs, as well as paragraph 43 of IAS 39. The context and structure of IAS 39 and the purpose of the requirement were also seen to support this view.

Committee members requested, however, that the tentative agenda decision clearly reflect that the Committee was not asserting that an incurred credit loss is present in the specific circumstances raised in the submission. The Committee noted that the assessment of whether an incurred loss exists must be made by local regulators.

One Committee member questioned the rationale for this question as she believed the existence of an incurred loss on an originated debt instrument would be rare. However, another Committee member noted that even though the origination of a debt instrument with an incurred loss is rather unusual, there are situations in which such transactions occur. He spoke of ‘troubled debt restructurings’ in the US environment such that significant financial difficulty of an obligor result in originations of debt instruments that are outside the normal underwriting process. This could include situations in which modifications of debt instruments result in derecognition of the original financial asset and the recognition of a new financial asset. In these circumstances, new financial assets could be recognised that have incurred losses on initial recognition.

On the basis of this analysis, the Committee tentatively decided not to add the issue to its agenda. The Committee asked that the staff revise the tentative agenda decision on the basis of discussion during the meeting for recirculation.

The staff provided the Committee with a summary of issues that have been referred by the Committee to the IASB from January 2008 to May 2012, except for those recommended by the Committee to be addressed through the annual improvements process. The staff requested that the Committee review the table and provide direction to the staff on future action of those items.

The staff’s summary recommended that the following issues be reconsidered by the Committee:

• IAS 28 Investments in Associates issue requesting clarification on how impairment of investments in associates should be determined in the separate financial statements of the investor.
• IFRS 2 Share-based Payment issues:
  • requesting clarification of the classification and measurement of share-based payment transactions for which the manner of settlement is contingent on either: a future event that is outside the control of both the entity and the counterparty; or a future event that is within the control of the counterparty; and
  • requesting clarification on how to measure and account for a share-based payment in situations where 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.
• IFRS 5 Non-current Assets Held for Sale and Discontinued Operations issues:
  • requesting guidance on how a disposal group should be recognised at the lower of its carrying amount and fair value less costs to sell when the difference between the carrying amount and fair value less costs to sell exceeds the carrying amount of non-current assets; and
  • requesting guidance on whether an impairment loss for a disposal group classified as held for sale can be reversed if it relates to the reversal of an impairment loss recognised for goodwill.

Committee members generally expressed support for the recommendations outlined by the staff. However, Committee members highlighted two issues that should potentially be reconsidered by the Committee but were not recognised in the staff’s recommendation. They include:

• IFRS 2 issue requesting clarification of the classification of 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. Given that the Committee would consider addressing two other IFRS 2 issues, as noted above, the Committee preferred the virtue of completeness in addressing the lone remaining IFRS 2 issue.
• Financial instrument-related issues. A number of IAS 32 Financial Instruments: Presentation and IAS 39 issues were identified in the staff summary. The Committee did not necessarily recommend taking all these issues onto its future agenda, but instead, requested that the staff work with the Financial Instruments project team to consider these issues within the scope of the more broad reassessment of IFRS 9 Financial Instruments currently underway.

The staff intends to provide agenda papers on the above issues in future Committee meetings. The agenda papers are expected to explore the scope of the issue as well as the current diversity in practice.

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 July 2012 meeting. The Committee deferred work on three new issues and five outstanding issues which will be discussed at future meetings. These issues include:

• IFRS 3 outstanding issue requesting clarification on whether an asset with relatively simple associated processes meets the definition of a business in accordance with IFRS 3.
• IAS 12 outstanding issue requesting clarification of the calculation of deferred tax in circumstances where the entity holds a subsidiary which has a single asset within it.
• IAS 41 Agriculture outstanding issue requesting clarification of paragraph 25 of IAS 41 regarding the use of a residual method to arrive at the fair value of biological assets physically attached to land if the biological assets have no separate market but an active market exists for the combined assets.
• IAS 19 new issue requesting clarification of the scope of paragraph 93 of IAS 19 (2011).
• IFRS 3 new issue requesting clear guidelines for Special Purpose Acquisition Company (SPAC)-related merger transactions.
• IAS 27 and IFRIC 17 Distribution of Non-cash Assets to Owners new issue requesting clarification on the accounting for the purchase of a non-controlling interest when the consideration includes non-cash items.
• IAS 16 Property, Plant and Equipment outstanding issue requesting clarification on how to account for contingent pricing for the outright purchase of a single item of property, plant and equipment or an intangible asset. The staff are monitoring this issue in the context of developments on the IASB’s leases project.
• IAS 2 Inventories outstanding 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.

One Committee member asked if the Committee would be considering the issue of push-down accounting at a future meeting. The Committee Chair noted that there were no plans to take this issue forward at this time. This is based on the results of a questionnaire the Committee Chair had circulated to National Standard Setters regarding the prevalence of push-down accounting in their jurisdiction.