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The IFRS Interpretations Committee met at the IASB's offices in London on Tuesday and Wednesday 13 and 14 March 2012. The Committee continued its discussion on accounting for levies charged for participation in a specific market, continued debate on a number of items which may give rise to amendments to standards, and considered a swathe of new items, many of which the Committee tentatively decided not to take onto its agenda.
Agenda for the meeting
Tuesday 13 March 2012 (10:00-17:45)
Active Committee projects
IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IFRIC 6 Liabilities arising from Participating in a Specific Market—Waste Electrical and Electronic Equipment — Levies charged for participation in a specific market – date of recognition of liability
Items for continuing consideration
IFRIC 12 Service Concession Arrangements — Payments made by an operator in a service concession arrangement
IFRS 11 Joint Arrangements — Acquisition of interest in joint operation
IAS 28 Investments in Associates — Application of the equity method when an associate's equity changes outside of comprehensive income
IAS 16 Property, Plant and Equipment — Revenue-based depreciation method
IAS 7 Statement of Cash Flows — Review of requests in relation to IAS 7
Wednesday 14 March 2012 (09:00-14:15)
New items for initial consideration
IAS 1 Presentation of Financial Statements and IAS 12 Income Taxes — Presentation of payments of non-income taxes
IAS 12 Income Taxes — Accounting for market value uplifts on assets that are to be introduced by a new tax regime
IAS 16 Property, Plant and Equipment, IAS 38 Intangible Assets and IAS 17 Leases — Purchase of a right to use land
IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9 Financial Instruments — Term-extending options in fixed rate debt instruments
IAS 27 Consolidated and Separate Financial Statements and SIC 13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers — Definition of the term 'non-monetary asset'
The IFRS Interpretations Committee discussed draft interpretation and transition issues, a proposal to withdraw IFRIC 6, and accounting for levies that are due only if a threshold is met.
Draft interpretation and transition issues
The IFRS Interpretations Committee ('the Committee') received a request to clarify whether, under certain circumstances, IFRIC 6 Liabilities arising from participating in a specific market-Waste Electrical and Electronic Equipment should be applied by analogy to identify the event that gives rise to a liability for other levies charged by public authorities for participation in a market on a specified date. The examples provided in the submission 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). The concern relates to when a liability should be recognised and to the definition of a present obligation in IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
At the November 2011 meeting, the Committee tentatively decided to set out the principles regarding the accounting for a liability to pay a levy charged for participation in a specific market within the scope of IAS 37 (refer to the November 2011 IFRIC Update).
At the January 2012 meeting, the Committee reviewed and agreed with some examples that illustrate the application of the principles identified above. The Committee also tentatively decided to develop an interpretation on the accounting for levies charged by public authorities on entities that participate in a specific market (refer to the January 2012 IFRIC Update).
At the March 2012 meeting, the Committee reviewed the draft interpretation prepared by the staff on the accounting for levies charged by public authorities that are within the scope of IAS 37. The consensus is based on the principles identified so far by the Committee. The draft interpretation includes the illustrative examples that the Committee agreed on at the January 2012 meeting but did not address the accounting for levies that are due only if a revenue threshold is met (see below). A few Committee members raised the issue whether the levies should be addressed through illustrative examples or application guidance rather than an interpretation. A few Committee members expressed concern around the scope and definition of levies and whether the characteristics noted in the draft interpretation were prescriptive or necessary indicators.
The Committee tentatively agreed that the draft interpretation should be amended to not include a definition of levy but to note that if the levies had the following core characteristics, they would be covered within the scope of the draft interpretation:
they are resources transferred to public authorities in accordance with the legislation (i.e., laws and/or regulations);
they are non-exchange transactions, i.e., the entity that pays the levy transfers resources to the public authority, without receiving any specific good or service directly in exchange;
they are due when a specific event identified by the legislation occurs;
and the calculation basis of the levy is based upon data for the current or a previous reporting period such as the gross amount of sales/revenues, assets or liabilities.
The Committee also tentatively agreed to using the word ‘activity´ (and not the word ‘event´) when defining the obligating event that gives rise to a liability to pay a levy (i.e., the obligating event is the activity that triggers the payment of the levy).
A number of Committee members had drafting comments/suggestions to the draft interpretation and basis of conclusion that they agreed to provide to the staff. The Committee intends to vote on the pre ballot/consensus draft at the next meeting.
The Committee tentatively decided that the interpretation should be applied retrospectively in accordance with IAS 8 Accounting Policies, Changes in accounting Estimates and Errors.
Proposed withdrawal of IFRIC 6
The staff recommended that IFRIC 6 be withdrawn because the new interpretation would address levies generally and as such the guidance in IFRIC 6 would no longer be needed. The Committee tentatively decided not to withdraw IFRIC 6 as a number of Committee members felt that IFRIC 6 contained useful guidance and was not inconsistent with the new draft interpretation.
Accounting for levies that are due only if a threshold is met
Previously with respect to levies that are due only if a minimum threshold is achieved, the Committee could not reach a consensus as to whether:
the threshold is an obligating event (i.e., a recognition criterion) and the liability should be recognised at a point in time only after the threshold is met; or
the threshold is a measurement criterion and the liability should be recognised progressively as the entity generates revenue (if the threshold is expected to be met).
At the February-March 2012 International Accounting Standards Board (IASB or the Board) meeting, the staff presented two different views for the accounting for levies when the legislation specifies that the levy is due only if a minimum threshold is achieved. Per Example 4 in the agenda paper, Entity D is a calendar year-end entity. An annual levy is due if Entity D generates revenues over CU50 million in a specific market in 20X1 and the amount of levy is determined by reference to revenues over CU50 million generated by Entity D in the market in 20X1. The question is whether the liability should be recognised only after the threshold is reached or not.
The Board tentatively agreed that the rationale developed in the example of IAS 34 contingent lease payment applies in both the interim and annual financial statements. As a result, the Board expressed support for recognising in the annual financial statements levies subject to a revenue threshold progressively as the entity makes progress towards the revenue threshold provided it is probable that the threshold will be met. The Board also tentatively confirmed that levies that are not based on taxable profits should be accounted for in accordance with IAS 37, and not IAS 12 Income taxes.
At the March 2012 meeting, the Committee still could not reach a consensus on the accounting for levies subject to a revenue threshold. As such, the Committee tentatively agreed not to include this aspect and Example 4 in the draft interpretation and to remain silent on this issue.
The IFRS Interpretations Committee discussed the key principles in the context of concession payments.
At its November 2011 meeting, the Committee considered a request for clarification on the accounting for certain contractual costs to be incurred by an operator in a service concession arrangement; specifically should they be recognised at the start of the concession as an asset with an obligation to make the related payment or should they be treated as executory in nature and recognised over the term of the concession arrangement?
The Committee noted that when the payments are linked to the right of use of a tangible asset, judgement should be used to determine whether the operator obtains control of the right of use of the asset to determine whether the arrangement is within the scope of IFRIC 12 or of IAS 17Leases. The Committee tentatively decided that when the right of use of a tangible asset is at the direction of the grantor, the operator does not control the right of use and the arrangement is therefore within the scope of IFRIC 12. The Committee tentatively decided that if the payments are part of the service concession arrangement in the scope of IFRIC 12, then whether they are structured as concession fees or right-of-access payments should not impact the accounting for them.
At the January 2012 meeting, the Committee reviewed the staff´s agenda paper which proposed that the accounting for the concession payments depends on the type of service concession (i.e., the financial asset model or intangible asset model). The Committee asked the staff to reconsider the issue and the way in which it should be addressed, focusing on the principles of IAS 18 and multiple element arrangements in order to identify what concession payments represent, before considering if the payments give rise to an asset. The Committee noted that the type of service concession arrangement might affect the accounting for the payments made by the operator.
At the March 2012 meeting, the Committee tentatively agreed with the staff´s view that it would not be able to provide a single answer to the question in the submission that was asked, because the accounting would depend on the substance of what the concession payment is exchanged for, which in turn would depend on facts and circumstances.
However, the Committee tentatively agreed to provide guidance to preparers to help them to identify what factors they should consider when determining what the concession payments represent.
The Committee also tentatively clarified the key principles in the context of concession payments as follows:
if the concession fee arrangement gives the operator a right to a good or service that is distinct from the service concession arrangement, the operator should account for that distinct good or service in accordance with the applicable IFRS
when the payments are linked to the right of use of a tangible asset, judgement should be used to determine whether the operator obtains control of the right of use of the asset. If the operator controls the right of use the arrangement would be considered to be an embedded lease within the scope of IAS 17 Leases;
when the payments are linked to the right of use of a tangible asset, but the arrangement does not represent an embedded lease, the payment should be analysed in the same way as a concession fee arrangement discussed in (d) below, and
if the concession fee arrangement does not give the operator a right to a distinct good or service that is separate from the concession arrangement, the type of service concession arrangement should be taken into account:
if the service concession results in the operator having a contractual right to receive cash from only the grantor, then the concession payment is a reduction in the overall consideration (i.e., financial asset model);
the key assumption in this analysis is that there is only one customer for the operator´s services and that customer is the grantor.
if the service concession arrangement results in the operator having only a right to charge users of the public service, then the concession payment represents consideration for the concession right (i.e., intangible asset model) ; and
the key assumption in this analysis is that the customer of the operation services is the public and the customer for any construction services is the grantor. Where there is no construction service provided by the operator, the only customer is the public.
the key assumption in this analysis is that the arrangement represents a collaboration agreement between the operator and the grantor where the operator and grantor share the demand risk. This makes the analysis of the revenue arrangement more difficult because there is not a clear customer for the operation services (which was a key basis for the staff in determining the accounting for the concession payments in the other types of service concession arrangements).
One of the Committee members expressed concerns as to whether it would be necessary to define who the customer is but the majority of the Committee members felt that it was necessary to define who the customer. The Committee tentatively agreed that these contractual costs should not be treated as executory in nature. One of the Committee members expressed concerns that under the financial asset model, the concession payment arrangement should be treated as an adjustment to the fair value of the consideration rather than as a reduction in the overall consideration.
The Committee tentatively agreed that IFRIC 12 should be amended to incorporate the principles described above. However, the Committee discussed the staff´s concerns that because the issue of variable payments for the acquisition of items of PP&E and intangible assets outside of a business combination significantly impacts this issue, the IFRIC 12 should only be amended once the Committee reaches a conclusion on the variable payments issue.
The Committee asked the staff to prepare a draft amendment for the next meeting based on the principles that were discussed and to also include an analysis of variable payments in the context of contingent rentals based on an index and future activity or use based on existing leasing literature with a consideration of the impact of the revised leasing proposals. The Committee will discuss at the next meeting on how it will proceed with the proposed guidance.
The IFRS Interpretations Committee discussed their proposed IFRS 11 amendment wording, specifically, they applied a ' general reference approach' to provide a general reference to the principles of business combination accounting and related disclosure requirements in IFRS 3 and other IFRSs.
The Committee previously considered a request to clarify the accounting by venturers for the acquisition of interests in jointly controlled operations or assets in IAS 31Interests in Joint Ventures and the accounting by joint operators for the acquisition of interests in joint operations, as defined in IFRS 11, when the activities and assets underlying the jointly controlled operations or assets, or the joint operation, constitute a business as defined in IFRS 3Business Combinations. Specifically, the Committee was asked whether the acquirer of such an interest should apply the principles in IFRS 3 on initial recognition of the interest or whether the acquirer should instead account for it as the acquisition of a group of assets.
At its November 2011 meeting, the Committee observed that uncertainty exists in accounting for the acquisition of an interest in a joint operation and jointly controlled operations or asset in circumstances where the activity of the joint operation or the jointly controlled operations or assets constitutes a business as defined in IFRS 3. To limit expected future diversity in practice following the adoption of IFRS 11, as the Committee acknowledged that IAS 31 would be superseded by IFRS 11 from 2013, the Committee decided to require application of IFRS 3 to the particular assets and liabilities of a joint operation, including measurement of identifiable assets and liabilities at fair value with few exceptions, and recognition of the residual as goodwill.
At its January 2012 meeting, the Committee confirmed its previous decisions. The Committee directed the staff to draft a recommendation to amend IFRS 11 to address the uncertainty that exists in accounting for the acquisition of an interest in a joint operation or jointly controlled operations or assets where the activity of the joint operation or the jointly controlled operations or assets constitutes a business as defined in IFRS 3.
At this meeting, the staff presented their proposed IFRS 11 amendment wording. The staff noted that they applied a ‘general reference approach´ in detailing IFRS 3 guidance within the IFRS 11 amendments. Specifically, under a general reference approach, the staff sought to provide a general reference to the principles of business combination accounting and related disclosure requirements in IFRS 3 and other IFRSs instead of providing specific and comprehensive references in IFRS 11 to the relevant guidance on accounting for business combinations in IFRS 3 and other standards.
Committee deliberations focused primarily on the appropriateness of a general reference approach. While Committee members generally preferred a general reference approach, many Committee members preferred more thorough discussion of the applicability of principles and specific guidance in IFRS 3. For example, one Committee member noted that the staff has outlined a number of areas (e.g., guidance on accounting for reverse acquisitions in paragraphs B19-B22(d) and B25-B27 of IFRS 3, guidance on applying the acquisition method to combinations of mutual entities in paragraphs B47-B49 in IFRS 3, guidance on equity-settled share-based payment transactions of the acquiree in paragraphs B62A and B62B of IFRS 3 and guidance on insurance contracts acquired in a business combination in paragraphs 31-33 of IFRS 4 Insurance Contracts) during the January 2012 meeting where the guidance in IFRS 3 was not relevant in the accounting for interests in joint operations described herein. She preferred that the amendments specify these areas. However, other Committee members were concerned with the inclusion of this information as it was not perceived to be an all inclusive listing.
While many Committee members believed that the amendments should merely specify that the principles of IFRS 3 apply to these type transactions, other Committee members preferred that the proposed amendments detail relevant IFRS 3 principles. Specifically, these Committee members preferred that the amendments specify that all relevant principles of IFRS 3 apply, including, but not limited to measuring identifiable assets and liabilities at fair value with the exceptions given in IFRS 3 and other IFRSs, recognising acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with the exception that the costs to issue debt or equity securities are recognised in accordance with IAS 32Financial Instruments: Presentation and IFRS 9Financial Instruments, recognising deferred tax assets and deferred tax liabilities arising from the initial recognition of assets or liabilities, except for deferred tax liabilities arising from the initial recognition of goodwill and recognising the residual as goodwill. Similarly, several Committee members preferred to include an application example in the amendments.
When put to a vote, the Committee tentatively decided that the proposed amendments should specify the principles of IFRS 3 (as outlined above) and an application example should be included.
The staff noted that it will be circulating a final draft of the proposed amendments to the Committee for negative clearance in advance of submission to the Board for approval.
The IFRS Interpretations Committee discussed the analysis of equity settled share-based payments of an associate and written call options issued by an associate in an attempt to develop comprehensive principles to present to the Board in considering whether or how to amend IAS 28 (revised in 2011).
The Committee previously considered a request to correct the inconsistency between the requirements of IAS 28 (revised in 2011) and IAS 1Presentation of Financial Statements (revised 2007) regarding the description and application of the equity method and clarify the accounting for the investor´s share of the other changes in the investee´s net assets that are not recognised in the investee´s profit or loss or other comprehensive income, or that are not distributions received.
The issue focuses on the fact that paragraph 3 of IAS 28 indicates that all changes in the net assets of an investee should be recognised by the investor. However, because of the consequential amendments to paragraph 10 of IAS 28, the standard no longer states whether and where the investor should account for its share of changes in the net assets that are not recognised in net profit or other comprehensive income of the investee (such as movements in other reserves of the associate or gains and losses arising on an associate´s transactions with non-controlling interest of its subsidiaries).
At the Board´s September 2011 meeting, the Board asked the Committee to analyse this issue and recommend a short-term solution (e.g., development of an underlying principles to be brought back to the Board).
At its January 2012 meeting, considering illustrative examples provided by the staff, the Committee tentatively agreed on a principle that where an investor´s share ownership interest in the associate is reduced, whether directly or indirectly, the affect of the change should be recognised in profit and loss of the investor; and where an investor´s share ownership interest in the associate increases, whether directly or indirectly, the affect of the change should be accounted for as an incremental purchase of the associate and should be recognised at cost. At that meeting, the Committee also directed the staff to analyse the accounting by the investor for equity settled share-based payments of an associate and written call options issued by an associate for cash for discussion at a future meeting.
At this meeting, the staff presented its analysis of equity settled share-based payments of an associate and written call options issued by an associate in an attempt to develop comprehensive principles to present to the Board in considering whether or how to amend IAS 28 (revised in 2011).
The staff, in analysing two specific examples of equity settled share-based payments of the associate and written call options issued by the associate for cash, considered multiple alternative views of the appropriate accounting; ultimately proposing a principle that any change in the other net assets of an associate that is not a direct or indirect disposal or acquisition should be presented in the same way as the associate itself presents the transaction. This principle would require an investor to take into account any related other changes in equity that may have occurred at an earlier point in time when determining a net dilution gain or loss.
Many Committee members expressed support for the underlying principle developed by the staff. However, this support was limited given the perceived complexity of the principle in application. Committee members also expressed specific concerns including a view that the principle resulted in ‘an extreme form of recycling´ (as it would result in recycling from equity in the examples described by the staff), relied on having a thorough understanding of an associate´s accounting records (which may not be known) and was developed in anticipation of dilution which might not occur if options are not exercised (which would be unique from convertible preference shares, for example, where dilution is not created until the conversion takes place).
Given the perceived complexity of principles developed for share-based payments of the associate and written call options issued by the associate for cash, the Committee tentatively decided that its proposal to the Board would be limited to those developed during the January 2012 meeting; namely:
where an investor´s share ownership interest in the associate is reduced, whether directly or indirectly, the affect of the change should be recognised in profit and loss of the investor; and
where an investor´s share ownership interest in the associate increases, whether directly or indirectly, the affect of the change should be accounted for as an incremental purchase of the associate and should be recognised at cost.
The Committee would not propose principles associated with share-based payments and written call options, noting that these transactions exceeded the original scope of examples outlined in the submission to the Committee.
The IFRS Interpretations Committee discussed the proposed amendment to IAS 38 and IAS 16 as part of the annual improvements project (2011-2013 cycle) which noted that a revenue-based method is not considered to be an appropriate method of amortisation.
The Committee previously considered a request to clarify the meaning of the term ‘consumption of the expected future economic benefits embodied in the asset´ in paragraphs 97 and 98 of IAS 38Intangible Assets when determining the appropriate amortisation method for intangible assets of service concession arrangements. The request included a specific fact pattern where the tariff chargeable to users is contracted in the agreement and a lower tariff is imposed at the beginning of the concession and increases periodically in line with the grantor´s practice so as not to burden consumers.
At its November 2011 meeting, the Committee considered whether a revenue-based or time-based amortisation method better reflects the economic reality of the underlying contractual terms. The Committee noted that the principle in IAS 38 is that an amortisation method should reflect the pattern of consumption of the expected future economic benefits and not the pattern of generation of expected future economic benefits. Consequently, the Committee decided that amortisation methods based on revenue are not an appropriate reflection of the pattern of consumption of the expected future economic benefits embodied in an intangible asset. The Committee requested that the staff draft the proposed annual improvement for discussion at a future meeting.
At this meeting, the staff presented its proposed amendment to IAS 38 and IAS 16 as part of the annual improvements project (2011-2013 cycle) which noted that a revenue-based method is not considered to be an appropriate method of amortisation. In reviewing the proposed amendment wording, several Committee members expressed reservations with conclusions reached in earlier meetings. This consternation was whether the proposed amendments would eliminate the ability to apply a diminishing balance method of depreciation which is allowable in paragraphs 62 of IAS 16 and 98 of IAS 38.
Specifically, one Committee member outlined an example of a computer chip manufacturer where the consumption of the expected future economic benefits embodied in the manufacturing equipment is subject to significant technical or commercial obsolescence. As a result, price competition results in declining revenue per unit over time. The Committee member questioned whether the proposed amendment, given the influence of a pricing factor, would limit the ability to apply a declining balance depreciation method to the manufacturing equipment. Several Committee members believed that pricing factors (or revenue) could be a proxy for selection of an amortisation / depreciation methodology (i.e., a declining balance depreciation method would not be prohibited). However, the amortisation method should not reflect a pattern of generation of the expected future economic benefits embodied in the asset.
From this general concern, several Committee members suggested that the amendment should specify that an amortisation method should reflect the pattern of consumption of future economic benefits embodied in an asset rather than stating that a revenue-based amortisation method is not appropriate. Therefore, a model that reflects a pattern of generation of the expected future economic benefits embodied in the asset (i.e., a model based on generation of economic benefits from operating the business) would not be acceptable. The Committee tentatively agreed with this view, and thus, they asked the staff to revise the proposed amendments accordingly for presentation to the Board.
The IFRS Interpretations Committee discussed two issues related to classification under IAS 7.
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 7Statement of Cash Flows and included:
classification of cash payments for deferred and contingent consideration arising from a business combination within the scope of IFRS 3Business Combinations; and
classification of cash flows for an operator in a service concession arrangement within the scope of IFRIC 12.
The Board 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.
The staff presented its analysis of IAS 7 issues historically considered by the Committee; noting six issues since 2004. In analysing the nature of these issues, the staff noted that while one issue requested an interpretation of the meaning of ‘cash equivalents´, all other issues related to classification of specific items in the financial statements (i.e., operating, investing or financing classification).
Focusing its attention on cash flow classification issues, the staff identified two possible classification principles used to support previous Committee decisions: (1) cash flows in IAS 7 should be classified in accordance with the nature of the activity to which they relate or (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 (i.e., consistent with the cohesiveness principle in paragraphs 57-58 of the Financial Statement Presentation project's Staff Draft (published in July 2010)).
In considering the staff´s research, many Committee members preferred a principle in which cash flows are classified in accordance with the nature of the activity to which they relate. Reasons cited for this view were primarily based on paragraph 11 of IAS 7 which states ‘An entity presents its cash flows from operating, investing and financing activities in a manner which is most appropriate to its business. Classification by activity provides information that allows users to assess the impact of those activities on the financial position of the entity and the amount of its cash and cash equivalents...´.
However, other Committee members expressed concerns with this principle. Specific concerns included:
uncertainty as to whether the above principle would take precedent over the definition of operating, investing and financing activities included in paragraph 6 of IAS 7 in classifying cash flows;
uncertainty as to the use of the word ‘activity´ within the above principle. For example, in the acquisition of a fixed asset for use in the operations of a business, many Committee members noted that this cash flow should be characterised as an investing cash flow and not an operating cash flow. They noted that the word ‘activity´ does not refer to the entity´s use of the underlying asset, but rather, ‘activity´ is applied in a context similar to paragraph 6 of IAS 7; and
operational concerns with application of such a principle for service concession arrangements or other specific transaction types.
At the extreme, one Committee member even suggested that too many classification questions were being raised in practice, and therefore, one potential solution would be to remove the classifications entirely. Instead, disclosure could be required to describe specific types of cash flows to assist users. However, other Committee members expressed concern with this view given the importance operating cash flows play on key performance indicators and debt covenants, for example.
Considering the feedback received, the majority of Committee members expressed support for the core principle that cash flows should be classified in accordance with the nature of the activity to which they relate. Therefore, the Committee requested the staff to apply the underlying principle developed to IAS 7 issues raised to the Committee in the past. If clear answers to the classification questions could be reached in application of the developed principle, the Committee would seek to bring a proposal to the Board in a future meeting.
The IFRS Interpretations Committee discussed whether the royalty tax payments paid to other tax authorities should be classified as operating or tax expenses.
The Committee received a request for clarification on the presentation in the statement of other comprehensive income for production-based royalty payments paid to one tax authority that are claimed as an allowance against income tax paid to another tax authority as either operating or a tax expense. This submission results from a proposed tax legislation (the Minerals Resource Rent tax or ‘MRRT´) in Australia that is scheduled to become effective 1 July 2012. Under this legislation, payments to another local tax authority for production-based royalties would be deductible in calculating the MRRT payment due.
The Committee considered whether the royalty tax payments paid to other tax authorities should be classified as operating or tax expenses. The staff analysis supported classification as an operating expense. In the staff view, the line item of tax expense in IAS 1Presentation of Financial Statements does not include taxes that are outside the scope of IAS 12Income Taxes. Paragraph 5 of IAS 12 states that:
"tax expense (tax income) is the aggregate amount included in the determination of profit or loss for the period in respect of current tax and deferred tax. Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period. Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences. Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of:..."
The staff recommends the Committee not add this item to its agenda as through their outreach they have not identified significant divergence in practice as non-income taxes are presented as operating expenses or production costs in those jurisdictions. The Committee broadly agreed with the staff recommendation but had certain concerns with the draft tentative agenda rejection notice.
In discussing the proposed rejection notice, the Committee Chair questioned whether the notice should include the statement "the Committee noted that it did not expect diversity in practice on the presentation of non-income tax payments to emerge." One Committee member mentioned that this was a topic that should be discussed across all issues rather than discussing only for this agenda decision.
The IFRS Interpretations Committee discussed a submission related to Australia's Mineral Resource Rent Tax (MRRT) for clarification on the accounting for the market value uplift on related assets permitted under the MRRT legislation.
The Committee received another submission related to Australia´s Mineral Resource Rent Tax (MRRT). This request asked for clarification on the accounting for the market value uplift on related assets permitted under the MRRT legislation.
The MRRT is levied based on the net profit of a mining project but is deductible for calculating taxable profit for corporate tax purposes. The ‘starting base allowance´ is part of the allowances deducted from mining revenue to calculate mining profit.
The starting base allowance recognises investments in assets that relate to upstream activities of a mining project interest existing before the new tax regime was announced (the ‘starting base assets´) and reflects the annual tax depreciation of those starting base assets. Entities may choose to calculate the starting base allowance using either a market value approach or an accounting book value approach. When the market value approach is utilised, then the difference between the market value and the accounting book value is referred to as the market value uplift.
The staff presented the Committee with three potential alternatives provided by the submitter. The first alternative is an adjustment to the tax base such that deductible temporary differences arise and a deferred tax asset is recognised if it meets the criteria under IAS 12. The second alternative is a tax holiday approach where no deferred tax asset or upfront tax income is recognised. The third alternative is an initial recognition exception approach where, by analogising to paragraph 24 of IAS 12, no deferred tax asset is required to be recognised.
The staff analysis supported the first alternative such that when the market value uplift is used, the change to the starting base asset should be considered as an adjustment to the tax base of the asset and that a deferred tax asset should be recognised to the extent that it meets the recognition criteria for a deferred tax asset under IAS 12. In assessing the Committee agenda criteria, the staff did not expect significant diversity in this area and noted that SIC 25 already interprets IAS 12 for situations where there are changes in the tax status of an entity or its shareholders under a tax regime. As a result, the staff recommended the Committee not add the item to their agenda.
The Committee members were in general agreement with the staff analysis and recommendation not to add this item to their agenda. One Committee member noted that when Australia introduced capital gains taxes this also introduced market uplift issues and the first alternative was the method used so in utilising this approach MRRT would be treated consistently.
The Committee focused on the draft agenda decision rejection notice and a few Committee members suggested removing the discussion of the various alternatives discussed but include further analysis for the approach supported by the Committee and the staff. The Committee Chair noted that this would be appropriate as the rejection notice is communicating a conclusion rather than a basis for conclusion.
The IFRS Interpretations Committee discussed a request from Indonesia to clarify whether the purchase of a right to land should be accounted for as a purchase of property, plant and equipment, a purchase of an intangible asset or as a lease of land.
The Committee received a request from Indonesia to clarify whether the purchase of a right to land should be accounted for as a purchase of property, plant and equipment, a purchase of an intangible asset or as a lease of land.
In Indonesia, the local laws do not permit entities to own title to land, rather only individuals may own land. To facilitate entities acquiring rights to use land, the government can grant either rights to exploit or cultivate the land (agricultural usage) or rights to build upon the land (commercial usage). The initial transfer occurs between an individual and the entity through the government while extension and renewals occur directly between the entity and the government. Once the entity purchases the usage rights, the individual does not retain any rights over the land and the entity has to return the land only if the government revokes the entity´s right on the group of public interest or if there is a change in the allocation of use of the land. The Indonesian standard setter noted that different interpretations have developed in their jurisdiction as a result of this issue.
The staff considered whether the acquisition of use of land rights should be classified as purchase of property, plant and equipment under IAS 16, purchase of an intangible asset under IAS 38 or a lease of land under IAS 17. While acknowledging that the right is not land itself, the staff supported classification as a purchase of property, plant and equipment and suggested the Committee recommend an amendment to IAS 16 to the Board. They noted that the right is similar to a purchase and that substantial ownership is assumed to be transferred in this scenario.
However, some Committee members disagreed with the staff position of amending IAS 16. The felt the right either represents a lease or an intangible rather than a purchase of property. One Committee member noted concern with classification as property given the renewal option is not under the entity´s control. The Committee Chair questioned whether they would consider a government´s right of eminent domain as any different and the Committee member responded they would as under eminent domain the government has to seize land and compensate the holder whereas under the fact pattern in the submission the government has the right to not renew or extend the right of use. Another Committee member questioned if the Board´s leasing project is silent on whether a right of use asset is a tangible or intangible asset then why the Committee would be discussing the same issue. Another Committee member noted that a 999 year lease would be classified as a finance lease and didn´t understand why the acquisition of a right of use would not be classified similarly.
The Committee disagreed with the staff recommendation to amend IAS 16 and agreed not to add the item to the Committee´s agenda. The staff will work on drafting a rejection notice to be discussed during the next Committee meeting.
The IFRS Interpretations Committee discussed a request to address an issue related to embedded derivatives relevant for both IAS 39 and for financial liabilities under IFRS 9.
The Committee received a request to address an issue related to embedded derivatives relevant for both IAS 39 and for financial liabilities under IFRS 9. The question focused on whether the issuer of a fixed-rate debt instrument with a term-extending option included in its terms should separate the option from the host instrument. The staff presented the Committee with four potential alternatives.
The first alternative would consider the term-extending option as an embedded derivative requiring separation. This alternative is supported by the guidance in IFRS 9 paragraph B4.3.5(b) (carried forward from IAS 39 unchanged) that states ‘an option or automatic provision to extend the remaining term to maturity of a debt instrument is not closely related to the host debt instrument unless there is a concurrent adjustment to the approximate current market rate of interest at the time of the extension.´
The second alternative would consider the term-extending option as an embedded derivative that is clearly and closely related to the host instrument. This alternative is supported by the guidance in IFRS 9 paragraph B4.3.5(e) which provides that prepayment options are closely related to the host contract if the option´s exercise price is equal to the amortised cost or carrying amount of the host contract instrument. They note that prepayment options exercisable at the amortised cost are economically similar to a term extending option without an interest rate reset.
The third alternative would consider the term-extending option an embedded derivative outside the scope of IFRS 9 (or IAS 39). This alternative is supported by those who view the term-extending option as a loan commitment feature outside the scope of IFRS 9 (or IAS 39). This alternative has two possible variations. The first variation would be that the bifurcation requirements do not apply and the extension option is ignored while the second variation would be that the loan commitment should be separated from the host instrument and accounted for in accordance with the applicable IFRS.
The staff also noted that during the January 2012 Board meeting, the IASB and FASB have agreed to redeliberate aspects of IFRS 9 and the FASB´s tentative decision to date on their classification and measurement model. One of the topics to be addressed is the basis, and need, for bifurcating financial assets as well as any follow on issues (including potentially symmetry between bifurcating financial assets and financial liabilities).
The Committee agreed not to take the item on to their agenda at the present time while the IASB is reconsidering IFRS 9.
The IFRS Interpretations Committee discussed a request for clarification on whether a business meets the definition of a ‘non-monetary asset´, specifically whether the requirements of SIC-13 and IAS 28 apply when a business is contributed to either a jointly controlled entity (JCE) under IAS 31, a joint venture (JV) under IFRS 11 or to an associate in exchange for an equity stake in the entity.
The Committee received a request for clarification on whether a business meets the definition of a ‘non-monetary asset´, specifically whether the requirements of SIC-13 and IAS 28 apply when a business is contributed to either a jointly controlled entity (JCE) under IAS 31, a joint venture (JV) under IFRS 11 or to an associate in exchange for an equity stake in the entity.
This issue arises from the inconsistency between IAS 27 and SIC-13 in dealing with loss of control of a subsidiary contributed to a JCE, JV or associate. The transactions in the scope of this issue include 1) contributions of an interest in a subsidiary to a JCE, JV or associate in exchange for an equity interest in the entity and 2) sales of an interest in a subsidiary by a joint-venturer to a JCE, JV or by an investor to an associate in exchange for cash.
At the January 2012 Committee meeting, the Committee believed that the issue should be considered as part of a broader Board project but given the uncertainty for timing over such a project, the Committee also asked the staff to perform further analysis on how the Board could address this issue.
The staff identified five potential alternatives that could resolve the inconsistency. The first alternative would be to account for all contributions similarly in accordance with the rationale developed in IAS 27. The second alternative would be to account for all contributions of businesses (whether through a subsidiary or not) under IAS 27 and account for all other contributions under SIC-13. The third alternative would account for all contributions to a JCE, JV or associate under SIC-13. The fourth alternative would account for all direct contributions (whether a business or not) to a JCE, JV or associate under SIC-13 and account for all indirect contributions under IAS 27. The fifth alternative would be to account for direct contributions of assets that do not constitute a business to a JCE, JV or associate under SIC-13 and account for all other contributions under IAS 27.
The staff recommend either the first or second alternative. They believe that the first alternative would be a broad project that would require a review of existing literature while the second alternative could be implemented more easily. The Committee also had mixed preferences for either the first or second alternative. The Committee agreed for the staff to provide this analysis to the Board noting the Committee´s recommendations of either the first or second alternative.
The IFRS Interpretations Committee held an administrative session, discussing the Trustees´ review of the efficiency and effectiveness of the Committee (including the proposed new agenda criteria) and Committee work in progress.
The Committee closed the meeting with an administrative session. The first topic discussed was the paper the staff will present to the Board during the March Board meetings discussing the Trustees´ review of the efficiency and effectiveness of the Committee. As part of this discussion, the Committee discussed the proposed new agenda criteria to provide feedback to the staff that, along with feedback received by the Board, will be included in the report to the Trustees in April 2012. The Committee also discussed a paper highlighting the Committee´s work in progress and a summary of their activity during 2011. No decisions were made during this session.
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