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IAS 16 – Contingent pricing of property, plant and equipment

Date recorded:

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

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

Scope

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

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

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

Possible accounting treatments

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

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

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

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