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The IFRS Interpretations Committee deliberated the accounting for production phase stripping costs in the mining industry, contingent pricing of property, plant and equipment, and a potential clarification of the meaning of 'continuous transfer' in IFRIC 15. The Committee also discussed a number of other topics.
Agenda for the meeting
Thursday 5 May 2011 (10:00h-17:45h)
Active Committee projects
IAS 16 Property, Plant and Equipment – Accounting for production phase stripping costs in the mining industry
IAS 16 Property, Plant and Equipment – Contingent pricing of property, plant and equipment and intangible assets
Items for continuing consideration
IFRIC 15 Agreements for the Construction of Real Estate – Clarification of meaning of continuous transfer
New items for initial consideration
IFRS 8 Operating Segments – Reconciliation of segment assets in IFRS 8
IAS 7 Statement of Cash Flows – Classification of interest paid that is capitalised
IFRS 2 Share-based Payment – Modifications that affect classification of the award
IAS 16 Property, Plant and Equipment – Cost of testing asset — element of cost
Friday 6 May (09:00h-14:15h)
New items for initial consideration (continued)
IAS 19 Employee Benefits Defined contribution plans with vesting conditions
IAS 27 Consolidated and Separate Financial Statements Contributions to a jointly-controlled entity or associate
IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IFRIC 6 Liabilities arising from Participating in a Specific Market — Waste Electrical and Electronic Equipment: Recognition of a Liability
IAS 28 Investment in Associates: Equity Method
Administrative session - Committee work in progress
The IFRS Interpretations Committee considered a revised draft Interpretation on this topic and discussed: (1) the recognition principle (2) the method of allocating costs between current and future periods (3) impairment (4) transition (5) the treatment of existing stripping costs assets (6) removal of the illustrative example
The Committee continued its discussion on accounting for production phase stripping costs in the mining industry. Based on the Committee's comments made during the March 2011 meeting, the staff revised the draft interpretation removing the 'stripping campaign' concept and instead describing the recognition of a long term asset as a 'stripping cost asset'. Additionally, the staff replaced the term 'section' from the recognition principle with the term 'component'.
The revised recognition principle drafted by the staff reads as follows:
8. An entity shall recognise production stripping costs as part of an asset if, and only if:
a. It is probable that the future economic benefit associated with the costs will flow to the entity; and
b. The costs can be measured with reliability.
9. To the extent that the benefit is realised in the current period in the form of inventory produced, the entity shall account for the costs in accordance with the principles of IAS 2 Inventories.
10. To the extent that the benefit is the improved access to ore that is to be realised (mined) in a future period, the entity shall recognise these costs as a long-term asset. This [draft] interpretation refers to this long-term asset as the stripping cost asset'.
a. Identify the component of the ore body for which access has been improved, and
b. Measure the costs relating to the improved access to that component with reliability.
12. If the entity cannot identify the component of the ore body for which access has been improved, or cannot measure the costs relating to the improved access to that component with reliability, then the entity shall recognise these costs in profit or loss.
A few of the Committee members expressed various concerns over the staff's proposed use of the term component'. One Committee member noted in particular that small mining operations may have difficulty in identifying a component and could interpret that otherwise eligible stripping costs would not be eligible for capitalisation. Another suggested providing a more structured definition of a component so that the guidance would not be applied incorrectly. Other Committee members had concern that providing a more specific definition may establish a brightline on what constitutes a component.
Some Committee members also felt that the guidance in paragraphs 8 and 11 above were repetitive and could be streamlined into a single paragraph.
The Committee generally supported the principle drafted by the staff. However, the staff will consider the comments the Committee had with how the principle could be better clarified.
The staff also asked the Committee whether they believed that any recognition trigger' should be included in the final Interpretation. The Committee agreed that a recognition trigger was not necessary.
Method of allocating costs between current and future periods
The Committee continued their discussions from the March 2011 meeting on the method for allocating stripping costs between current and future benefits. Specifically, two approaches were discussed the residual cost approach and the relative benefit approach. The residual cost approach would calculate the standard cost of removing ore in a section of the mine while the relative benefit approach involves allocating the production stripping costs for a section of the mine on a relative benefit basis according to the sales value of the extracted ore. The staff provided a numerical example of the application of each of these two approaches which provided significantly different results.
The staff recommended the draft Interpretation require use of the residual cost approach. However, several of the Committee members had concerns with requiring the use of a specific approach. Some of the Committee members also noted that the relative benefit approach could be applied using inputs other than future sales prices, such as based on quantities extracted (the use of highly subjective information such as future market prices was an area of concern for certain Committee members in using this approach). Another Committee member suggested that the relative benefit approach could also be applied by using current market values rather than estimating future market conditions. Because no consensus could be reached, the Committee asked the staff to revise the allocation guidance based on the feedback received from the Committee.
The staff brought back to the Committee revised guidance on allocating cost between current and future benefits. The revised staff proposal included the following:
Where the costs of the stripping cost asset and the inventory produced are not separately identifiable, the entity shall allocate the production stripping costs between the inventory produced and the stripping cost asset on a rational and consistent basis.
The entity shall use an allocation basis that is based on a relevant production metric, calculated for an identified component of the mine, that can be used as a benchmark to identify the extent to which additional activity of creating a future benefit has taken place. Examples of such metrics may include:
a. cost of inventory produced compared with expected cost;
b. volume of waste extracted compared with expected volume, for a given volume of ore production; and
c. mineral content of the ore extracted compared with expected mineral content to be extracted.
The Committee generally supported the direction the staff was headed with the revised guidance, although a few members still had some concerns with certain aspects of the drafting. Only one Committee member had reservations with the concepts in the guidance feeling it was still too prescriptive and preferred that only the first paragraph be included. The staff clarified for the Committee that the guidance was drafted in such a way that the use of sales based metrics were intentionally omitted and that this would be noted in the basis for conclusions.
Some of the comment letter respondents to the draft Interpretation suggested the Committee provide guidance of how a component is to be impaired. However, the staff recommended that the consensus not specifically address impairment. Instead, the basis for conclusions would note that impairment would be considered under IAS 36 Impairment of Assets. The Committee agreed with the staff recommendation.
The draft Interpretation proposed that the provisions would be effective for production stripping costs incurred on or after the beginning of the earliest period presented. Comment letter respondents broadly agreed with the proposed transition requirements. The Committee reaffirmed their previous decision that the provisions in the Interpretation would be effective for production stripping costs incurred on or after the beginning of the earliest period presented.
Existing stripping cost assets
Some entities may have recognised stripping cost assets that cannot be directly associated with an identifiable section of the ore body and therefore not eligible for capitalisation under the Interpretation. The staff recommended that those stripping cost assets no longer eligible for capitalisation would be written off through opening retained earnings upon initial application of the Interpretation. The Committee agreed with the staff recommendation.
Comment letter respondents did not support including the illustrative example in the draft Interpretation in the final Interpretation. Therefore the staff recommended not including the illustrative example in the final Interpretation and the Committee agreed with the staff recommendation.
The Committee discussed whether the decisions during the re-deliberations of the draft Interpretation would require re-exposure. A few of the Committee members mentioned they would like to see an analysis of the changes made between the draft Interpretation and the final Interpretation to better assess whether re-exposure would be required. The staff mentioned they would draft the language for the final Interpretation and prepare the analysis and distribute to the Committee toward the end of May. The Committee may then schedule an interim teleconference meeting in early June to determine whether re-exposure is required. If they determine that re-exposure is not required, the Committee would then finalise the vote to approve the Interpretation. Only one Committee member expressed reservation that she may dissent to the final Interpretation.
The staff provided the IFRS Interpretations Committee with an analysis of existing IFRS literature that could be analogised to for subsequent changes to a contingent pricing liability.
In January 2011, the Committee added to its agenda a request for guidance on how to account for contingent payments agreed for the separate purchases of property, plant and equipment or intangible assets. During the March 2011 Committee meeting, the Committee requested the staff to prepare further analysis on how to account for subsequent changes to the liability.
The staff provided the Committee with an analysis of existing IFRS literature that could be analogised to for subsequent changes to the liability. In particular, the staff highlighted IFRIC 1Changes in Existing Decommissioning, Restoration and Similar Liabilities and IFRS 3Business Combinations. The staff also presented the Committee with an update on decisions from the revenue recognition and lease accounting projects as these may have implications on the Committee's consideration of the topic.
A few of the Committee members had concerns with the staff's analogising subsequent changes to contingent payments related to property, plant and equipment to IFRS 3 noting that IFRS 3 dealt specifically with business combinations. Other Committee members felt that it may be an alternative to remove the liability from the scope of IAS 32/39 which would require changes in fair value being recognised in profit or loss.
The Committee ultimately decided that they could not proceed with this issue further until the Board had further finalised its views in the leases and revenue recognition projects. The lease project was specifically noted because of the structuring opportunities that may be presented should the Committee have a view for purchases of property, plant and equipment with a contingent payment features that differs from the Board's view of leases with contingent payment features.
The IFRS Interpretations Committee considered the meaning of 'continuous transfer' under IFRIC 15 'Agreements for the Construction of Real Estate'. The Committee decided to not add this issue to the agenda but instead proposed to defer any further discussion until the revenue recognition project is complete.
During the March 2011 Committee meeting, the Committee noted that IFRIC 15 includes a principle for determining when continuous transfer is achieved. The Committee also noted that the Board's project on revenue recognition is currently developing guidance on the meaning of transfer and continuous transfer. The Committee recommended that the Board should consider the fact pattern received by the Committee in its revenue recognition project. However, before concluding on this issue, the Committee asked for further input on this issue from interested parties.
The Committee discussed the status of the Board's revenue recognition project and whether decisions reached there could provide insight into clarification of the meaning of "continuous transfer" under IFRIC 15. The Board has yet to reach decisions on guidance for the meaning of continuous transfer and the Committee discussed the importance of not making a decision for IFRIC 15 that would contradict those reached in the revenue recognition project expected in July 2011. Based on these circumstances, the Committee decided to not add this issue to the agenda but instead proposed to defer any further discussion until the revenue recognition project is complete. Upon such time, the Committee will then consider what, if anything, applies to IFRIC 15.
The IFRS Interpretations Committee agreed to propose an annual improvement to clarify that capitalised interest should be classified as an investing activity in the statement of cash flows under paragraph 16 of IAS 7 'Statement of Cash Flows' except for interest capitalised into inventory which should be classified as an operating activity.
The Committee considered a request to clarify the classification of interest paid that is capitalised into the cost of property, plant, and equipment. IAS 7Statement of Cash Flows does not clearly prescribe how interest and dividends paid or received should be classified. Currently, there appears to be conflicting guidance within IAS 7; particularly paragraphs 16, 32, and 33.
As such, the staff proposed the following recommendations: Explicitly include interest paid that is capitalised into the cost of property, plant, and equipment in the example guidance in paragraph 16 of cash flows arising from investing activities.
Clarify paragraphs 32 and 33 to avoid contradiction with the guidance in paragraph 16, by: Amending paragraph 32 to clarify that interest paid that is capitalised in accordance with IAS 23Borrowing Costs should be classified in accordance with paragraph 16.
Amending paragraph 33 to exclude interest paid that has been capitalised in accordance with IAS 23 and refer instead to paragraph 16.
This request has been made to include these proposed amendments in the 2010-2012 annual improvements cycle. The Committee discussed the proposed amendments and decided an additional amendment should be made to clarify that interest paid and capitalised into inventory should be classified in the operating section of the statement of cash flows.
The Committee agreed with the staff's recommendation to amend paragraphs 16, 32, and 33 of IAS 7 and to include this in the annual improvements cycle.
The Committee considered a request to clarify the accounting for a modification of a share-based payment that changes its classification from cash-settled to equity-settled.
The Committee considered a request to clarify the accounting under IFRS 2Share-based Payment for a modification of a share-based payment that changes its classification from cash-settled to equity-settled. The classification further impacts the issue of how to measure the replacement award where: A cash-settled award is cancelled and is replaced by a new equity-settled award; and The replacement award has a higher value than the original award.
The request provides an example of a cash-settled award that is cancelled and is replaced by a new equity-settled award with a higher value and identifies two different views on how to measure the replacement award:
View 1: Apply by analogy the modification guidance in IFRS 2
View 2: Do not apply the modification guidance in IFRS 2 and instead consider that the original award has been settled and replaced by a new award.
The staff has analysed each view in depth and prefer View 1, which is to apply by analogy the modification guidance in paragraphs 27 and B42-B44 of IFRS.
The staff have considered amending the modification guidance in IFRS 2 (paragraphs 27 and B42-B44) to state that when a cancellation of an award is followed by a replacement of a new award, and the two transactions are made in contemplation of each other, then in substance, this is a modification and the modification guidance in IFRS 2 should be applied.
However, the staff believe that making this clarification is outside the scope of the 2010-2012 annual improvement process because as the current guidance in IFRS 2 does not refer explicitly to modifications that change the classification of an award from one type to another, the staff think there is no specific guidance that could be clarified or corrected through a potential annual improvement.
In conclusion, the staff does not recommend that this issue be included in the 2010-2012 annual improvements cycle. Instead, the staff recommends that a modification of a share-based payment that changes its classification from cash-settled to equity-settled should be considered in a future agenda proposal for IFRS 2.
The Committee discussed the staff's position and in general disagreed with the conclusion reached by the staff that IFRS 2 can apply by analogy using modification guidance in paragraphs 27 and B42-B44. Regardless, the Committee agreed with the staff's recommendation and decided to not take this project forward as this request requires a change to the standard and is out of scope for this Committee. Further, the Committee agreed that this request can be included in the Board's existing agenda to improve IFRS 2. A draft agenda decision would be issued explaining the rationale.
The Committee considered a request to address a concern over the computation of accumulated depreciation at the date of revaluation in paragraph 35 of IAS 16 'Property, Plant and Equipment'.
The Committee considered a request to address a concern over the computation of accumulated depreciation at the date of revaluation in paragraph 35 of IAS 16Property, Plant and Equipment.
The concern is over the word "proportionately" in paragraph 35(a) as a proportionate restatement of accumulated depreciation is not possible in cases where the residual value, the useful life or the depreciation method has been re-estimated before revaluation. The staff has proposed that as the restatement of the accumulated depreciation is not always proportionate to the change in the gross carrying amount, paragraph 35(a) should be amended accordingly. In addition, the proposal has been made to delete the last sentence of paragraph 35(a) of IAS 16 and that paragraph 80(a) of IAS 38Intangible Assets be amended to reflect changes made to paragraph 35(a) of IAS 16. This request has been made to include this proposed amendment in the 2010-2012 annual improvements cycle.
The Committee agreed with the staff's recommendation to amend paragraph 35 of IAS 16, amend paragraph 80 of IAS 38, and to include these in the annual improvements cycle.
The IFRS Interpretations Committee agreed propose an annual improvement to create consistency between the requirements of paragraphs 29(c) and 23 of IFRS 8.
The Committee considered a request to amend paragraph 28(c) of IFRS 8 to indicate that the reconciliation of the reportable segment's assets to the entity's assets should be provided if segment assets are reported in accordance with paragraph 23 of IFRS 8. Paragraph 23 requires disclosure if the amount is regularly provided to the chief operating decision-maker. This request will create consistency to paragraph 28(d) which already indicates that the reconciliation of the total of reportable segments' liabilities to the entity's liabilities should be provided if segment liabilities are reported in accordance with paragraph 23. This request has been made to include this proposed amendment in the 2010-2012 annual improvements cycle.
The Committee agreed with the staff's recommendation to amend paragraph 28(c) of IFRS 8 and to include this in the annual improvements cycle.
The IFRS Interpretations Committee considered a request to clarify the accounting for sales proceeds received from testing an asset before it is ready for its intended use.
The Committee considered a request to clarify the accounting for sales proceeds received from testing an asset before it is ready for its intended use. The request relates to a petrochemical complex with several plants, some of which are ready for use by management and producing chemicals that are sold on the market, while others are still in the commissioning phase and not yet ready for production.
The question arising from this request is whether, with respect to paragraph 17(e) of IAS 16Property, Plant and Equipment, revenue from products produced from completed plants and sold on the market could be used to offset the costs of testing the other plants that are still in the commissioning phase. That is, could such revenues be accounted for as a reduction in the cost of plants being constructed, rather than recognised as revenue in profit or loss?
The staff read paragraph 17(e) of IAS 16 as applying separately to each individual plant. Chemicals sold on the market are produced once the asset is operating in the manner intended by management. In the staff's opinion, revenue from those products should not give rise to 'net proceeds' to be offset against the costs of testing other plants that are part of the complex; the revenue should instead be recognised in profit or loss for the period, because it reflects the operations of the entity for the period.
The Committee agreed with the staff's position and noted there is no significant diversity in practice nor does it expect significant diversity in practice to emerge in the future. As such, the Committee decided to not take this project forward. A draft agenda decision would be issued explaining the rationale.
The IFRS Interpretations Committee considered a request to clarify the impact that vesting conditions have on the accounting for defined contribution plans.
The Committee considered a request to clarify the impact that vesting conditions have on the accounting for defined contribution plans. The question that has arisen is whether contributions are recognised as an expense in the period they are paid for or are they recognised over the vesting period.
The Committee discussed that, subject to paragraph 43 of IAS 19Employee Benefits, the accounting for defined contribution plans means accounting for the reporting entity's obligation to the employees who benefit from the scheme. As such, the Committee read paragraph 44(a) of IAS 19 to mean that contributions to defined contribution plans are expensed or recognised as a liability when they fall due and refunds are recognised as an asset and income when the entity/employer becomes entitled to it, e.g. the employee failing to meet the vesting conditions.
The Committee agreed with the staff's position and noted there is no significant diversity in practice nor does it expect significant diversity in practice to emerge in the future. As such, the Committee decided to not take this project forward. A draft agenda decision would be issued explaining the rationale.
The IFRS Interpretations Committee considered a question focused on when a parent loses control over a subsidiary and that subsidiary becomes part of a jointly controlled entity or an associate, does the parent recognise the full gain or loss resulting from the transaction (the IAS 27 approach) or only to the extent of the interests of the other equity holders in the jointly controlled entity or associate (SIC-13 approach).
The Committee has received multiple requests for clarification on an inconsistency between IAS 27Consolidated and Separate Financial Statements and SIC-13Jointly Controlled Entities — Non-Monetary Contributions by Venturers.
Specifically, the question focuses on when a parent loses control over a subsidiary and that subsidiary becomes part of a jointly controlled entity or an associate, does the parent recognise the full gain or loss resulting from the transaction (the IAS 27 approach) or only to the extent of the interests of the other equity holders in the jointly controlled entity or associate (the IAS 31/SIC-13 approach).
At the December 2009 IASB meeting, the Board concluded that an inconsistency does exist between the two pieces of literature. However, the Board decided not to resolve the inconsistency within the joint ventures project but to address it separately and to incorporate the requirements in SIC-13 and any guidance relating to the equity method for joint ventures as a consequential amendment to IAS 28 Investments in Associates. Additionally, the issuance of the pending consolidation standard (IFRS 10) and the consequential amendments to IAS 28 will not address this inconsistency.
The Committee acknowledged the inconsistency in guidance, but most of the Committee members felt that addressing the issue through the annual improvements process or an interpretation would not be appropriate. Concerns over addressing by the Committee were that the scope would have to be so narrow that it would not fully address the inconsistency.
There was also concern that any limited scope amendment may inadvertently create structuring opportunities.
The Committee concluded that it would recommend to the Board that the issue be addressed through either a post-implementation review or a separate agenda item.
The IFRS Interpretations Committee received a request for clarification about whether IFRIC 6 'Liabilities arising from Participating in a Specific Market — Waste Electrical and Electronic Equipment' should be applied by analogy to other levies charged for participation in a market on a specified date to identify the event that gives rise to a liability.
The Committee received a request for clarification about whether IFRIC 6Liabilities arising from Participating in a Specific Market — Waste Electrical and Electronic Equipment should be applied by analogy to other levies charged for participation in a market on a specified date to identify the event that gives rise to a liability.
The two specific examples noted by the staff were 1) the bank levy assessed in the UK where the bank is taxed at the end of the reporting period and measured based on the carrying value of equity and liabilities and 2) a railway tax that is triggered if the entity is authorised to participate in its market on the first day of the annual reporting period and based as a percentage of revenues in the preceding annual period.
The request focuses on the date of recognition of the liability and whether analogy to IFRIC 6 should be made because the taxes on these example scenarios all refer to the taxes being conditional on the entity existing or participating in a particular activity at a specified date (similar to the decommissioning liability discussed in IFRIC 6).
Most of the Committee members were supportive of the Committee adding the project to their agenda as they acknowledged it is a significant issue in current practice and that IAS 37 was the real issue. The Committee generally supported having the staff perform additional analysis on the issue; however, most acknowledged that this issue would be challenging to address. One Committee member had concerns that the Board is having difficulty in revising IAS 37 and questioned whether the Committee could address the issue any sooner or better than the Board. One of the Board members in attendance noted that the Board was having difficulty on the measurement aspects of IAS 37 but that recognition had not been as problematic.
The Committee requested the staff to perform additional analysis around what are the characteristics in IAS 37 for recognition of the liability and to consider when the liability exists (i.e., should it be brought back into the previous period in the railway levy example). One of the Committee members raised two more questions for the staff to consider, those being whether any amount of the levy paid should be deferred as a prepaid asset (implications for interim reporting periods) and what the implications are when the tax year and the reporting entity's fiscal year end are not aligned.
The IFRS Interpretations Committee considered the issue of how changes in the net assets of an investee should be recognised by the investor under IAS 28 'Investments in Associates'.
In March 2011, the Committee received a request to correct an inconsistency between paragraphs 2 and 11 of IAS 28Investments in Associates and IAS 1Presentation of Financial Statements that arose from consequential amendments to IAS 28 when IAS 1 was revised in 2007.
Paragraph 2 of IAS 28 indicates that all changes in the net assets of an investee should be recognised by the investor. However, paragraph 11 only addresses the accounting of the investor's share of profit or loss, distributions and other comprehensive income but does not address the accounting for other changes in the investee's net asset when the investor applies the equity method. The staff note that examples of situations of other changes in the investee's net asset can include 1) movements in other reserves of the associate (e.g., share-based payment reserves), 2) gains and losses arising on an associate's transactions with non-controlling interest of its subsidiaries, and 3) liabilities recognised in respect of put options to non-controlling interests.
The staff recommended that the Committee address the inconsistency through the annual improvements process and for other changes in net assets of an investee to be recognised within the investor's other comprehensive income.
The Committee members generally agreed that the issue needed to be addressed but several Committee members had concerns over both addressing through the annual improvements process and the staff's recommendation to recognise those changes in the investor's other comprehensive income. Several Committee members felt the scope of the issue would require a reconsideration of equity method accounting more broadly and would not qualify for either an interpretation or the annual improvements process. They also disagreed with recognising all other changes in other comprehensive income. Some Committee members felt that each change would need to be assessed individually while some Committee members felt that if there were to be a 'catch-all' category it should be profit or loss rather than recognising more items in other comprehensive income.
The Committee concluded that it could not address the issue through either the annual improvements process or through issuance of an interpretation as this would require a significant change to the standard. The Committee requested the staff to perform additional analysis of whether to recommend that the Board address this issue in isolation or in combination with other equity method related practice issues.
The IFRS Interpretations Committee considered two agenda requests which have not yet been discussed, in relation to IFRS 3 and IAS 27.
The staff is currently researching two agenda requests that have been received by the Committee but for which the Committee has not yet discussed the issue.
These two requests include:
IFRS 3:9 requesting clarification on the identification of the acquirer in a business combination involving a newly formed entity
IAS 27:13 requesting clarification on whether the amendments to IAS 27 in 2008 can be applied to group reorganisations in which a newly incorporated entity inserted into a group, rather than added on top of a group, and has several direct subsidiaries rather than just one direct subsidiary.
The Committee had no questions for the staff on these two items.
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