The IFRIC was asked to clarify the effect of the limited scope of IFRS 6 'Exploration for and Evaluation of Mineral Resources' on exploration and evaluation (E&E) activities.
The IFRIC was asked to clarify the effect of the limited scope of IFRS 6 Exploration for and Evaluation of Mineral Resources on exploration and evaluation (E&E) activities.
The IFRIC was asked if this limited scope (a) reflected the Board’s intention to impose limits on current national GAAP practices only in respect of activities conducted in the E&E phase, while permitting industry practices in other extractive industry areas (e.g. development and exploitation) to continue unchanged, or (b) whether the IASB focused only on E&E activities because it was the only area for which the IASB was willing to grant some relief from the hierarchy for selection of accounting policies in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Under the latter view, the IAS 8 hierarchy would apply fully to an entity’s selection of IFRS accounting policies for activities outside of the E&E phase. The submission identified some inconsistencies between current extractive industry full-cost accounting practices in respect of development and exploitation activities but questioned whether the IASB intended to require change from current practices in these areas in advance of a comprehensive extractive industry project.
January 2006
The IFRIC noted that the effect of the limited scope of IFRS 6 was to grant relief only to policies in respect of E&E activities, and that this relief did not extend to activities before or after the E&E phase. The Basis for Conclusions on IFRS 6 includes the Board’s intention of limiting the need for entities to change their existing accounting policies for E&E activities. The IFRIC believed it was clear that the scope of IFRS 6 consistently limited the relief from the hierarchy to policies applied to E&E activities and that there was no basis for interpreting IFRS 6 as granting any additional relief in areas outside its scope. Therefore, the IFRIC believed that diversity in practice should not become established and decided not to add the issue to its agenda.
IFRIC reference: IFRS 6-1
The IFRIC considered whether to give guidance on which taxes are within the scope of IAS 12.
The IFRIC considered whether to give guidance on which taxes are within the scope of IAS 12.
March 2006
The IFRIC noted that IAS 12 applies to income taxes, which are defined as taxes that are based on taxable profit. That implies that (i) not all taxes are within the scope of IAS 12 but (ii) because taxable profit is not the same as accounting profit, taxes do not need to be based on a figure that is exactly accounting profit to be within the scope. The latter point is also implied by the requirement in IAS 12 to disclose an explanation of the relationship between tax expense and accounting profit.
The IFRIC further noted that the term ‘taxable profit’ implies a notion of a net rather than gross amount. Finally, the IFRIC observed that any taxes that are not in the scope of IAS 12 are in the scope of IAS 37 Provisions, Contingent Liabilities and Contingent Assets
However, the IFRIC also noted the variety of taxes that exist world-wide and the need for judgement in determining whether some taxes are income taxes. The IFRIC therefore believed that guidance beyond the observations noted above could not be developed in a reasonable period of time and decided not to take a project on this issue onto its agenda.
IFRIC reference: IAS 12-5
The IFRIC considered whether long leases of land would represent a situation when a lease of land would not normally be classified as an operating lease even though title does not transfer to the lessee.
The IFRIC considered whether long leases of land would represent a situation when a lease of land would not normally be classified as an operating lease even though title does not transfer to the lessee.
IAS 17 states at paragraph 14 that a characteristic of land is that it normally has an indefinite economic life. If title is not expected to pass to the lessee by the end of the lease term, then the lessee normally does not receive substantially all of the risks and rewards incidental to ownership, in which case the lease will be an operating lease. Even when the land has an indefinite economic life, paragraph 15 states that ‘the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term……’ [emphasis added].
March 2006
The IFRIC noted that leases of land with an indefinite economic life, under which title is not expected to pass to the lessee by the end of the lease term, were classified as operating leases before an amendment to IAS 17 was made in respect of IAS 40 Investment Property. Specifically, IAS 17 was amended to state that in leases of land that do not transfer title, lessees normally do not receive substantially all the risks and rewards incidental to ownership.
Some have understood the introduction of the word ‘normally’ as implying that a long lease of land in which title would not transfer to the lessee would henceforth be treated as a finance lease, since the time value of money would reduce the residual value to a negligible amount.
The IFRIC noted that, as summarised in paragraph BC 8, the Board considered but rejected that approach in relation to the classification of leases of land and buildings, because ‘it would conflict with the criteria for lease classification in the Standard, which are based on the extent to which the risks and rewards incidental to ownership of a leased asset lie with the lessor or the lessee’. The Board also made clear that it had not made any fundamental changes to the Standard.
The IFRIC noted that one example of a lease classification affected by the introduction of the word ‘normally’ was a lease of land in which the lessor had agreed to pay the lessee the fair value of the property at the end of the lease period. In such circumstances, significant risks and rewards associated with the land at the end of the lease term would have been transferred to the lessee despite there being no transfer of title. Consequently a lease of land, irrespective if the lease term, is classified as an operating lease unless title is expected to pass to the lessee or significant risks and rewards associated with the land at the end of the lease term pass to the lessee.
The IFRIC decided not to add this item to its agenda as, although leases of land that do not transfer title are widespread, the IFRIC has not observed, and does not expect, significant diversity in practice.
IFRIC reference: IAS 17-4
The IFRIC considered how a provider of telecommunications services should account for telephone handsets it provides free of charge or at a reduced price to customers who subscribe to service contracts.
The IFRIC considered how a provider of telecommunications services should account for telephone handsets it provides free of charge or at a reduced price to customers who subscribe to service contracts. The question was whether:
March 2006
The IFRIC acknowledged that the question is of widespread relevance, both across the telecommunications industry and, more generally, in other sectors. IAS 18 does not give guidance on what it means by ‘separately identifiable components’ and practices diverge.
However, the IFRIC noted that the terms of subscriber contracts vary widely. Any guidance on accounting for discounted handsets would need to be principles-based to accommodate the diverse range of contract terms that arise in practice. The IASB is at present developing principles for identifying separable components within revenue contracts. In these circumstances, the IFRIC does not believe it could reach a consensus on a timely basis. The IFRIC, therefore, decided not to take the topic onto its agenda.
IFRIC reference: IAS 18-1
The IFRIC reconsidered whether separate financial statements issued before consolidated financial statements could be considered to comply with IFRSs.
The IFRIC reconsidered whether separate financial statements issued before consolidated financial statements could be considered to comply with IFRSs.
The IFRIC considered a comment letter that had been received objecting to the draft reasons for not taking this onto IFRIC’s agenda.
The comment letter argued that it is possible to interpret IAS 27 as permitting separate accounts to be published when there is a reasonable expectation that consolidated accounts will be published shortly.
March 2006
IFRIC members rejected this approach based on the current text of the standard and reaffirmed the following text, previously published, of its reasons for not taking the item onto its agenda.
The IFRIC considered whether separate financial statements issued before consolidated financial statements could be considered to comply with IFRSs.
The IFRIC noted that IAS 27 requires that separate financial statements should identify the financial statements prepared in accordance with paragraph 9 of IAS 27 to which they relate (the consolidated financial statements), unless one of the exemptions provided by paragraph 10 is applicable.
The IFRIC decided that, since the Standard is clear, it would not expect diversity in practice and would not take this item onto its agenda.
IFRIC reference: IAS 27-1
The IFRIC considered an issue regarding whether a new entity formed to effect a business combination in which it pays cash as consideration for the business acquired could be identified as the acquirer.
The IFRIC considered an issue regarding whether a new entity formed to effect a business combination in which it pays cash as consideration for the business acquired could be identified as the acquirer.
March 2006
IFRS 3.22 states that when a new entity is formed to issue equity instruments to effect a business combination, one of the combining entities that existed before the combination shall be identified as the acquirer on the basis of the evidence available.
The IFRIC decided that, as it is clear that IFRS 3.22 does not prohibit a newly formed entity that pays cash to effect a business combination from being identified as the acquirer, it would not expect diversity in practice and would not take this item onto its agenda.
IFRIC reference: IFRS 3-2
The IFRIC considered an issue regarding whether a reorganisation involving the formation of a new entity to facilitate the sale of part of an organisation is a business combination within the scope of IFRS 3 'Business Combinations'.
The IFRIC considered an issue regarding whether a reorganisation involving the formation of a new entity to facilitate the sale of part of an organisation is a business combination within the scope of IFRS 3 Business Combinations.
March 2006
IFRS 3 does not apply to business combinations in which all the combining entities or businesses are under common control both before and after the combination, unless that control is transitory. It was suggested to the IFRIC that, because control of the new entity is transitory, a combination involving that newly formed entity would be within the scope of IFRS 3.
IFRS 3.22 states that when an entity is formed to issue equity instruments to effect a business combination, one of the combining entities that existed before the combination must be identified as the acquirer on the basis of the evidence available. The IFRIC noted that, to be consistent, the question of whether the entities or businesses are under common control applies to the combining entities that existed before the combination, excluding the newly formed entity. Accordingly, the IFRIC decided not to add this topic to its agenda.
The IFRIC also considered a request for guidance on how to apply IFRS 3 to reorganisations in which control remains within the original group. The IFRIC decided not to add this topic to the agenda, since it was unlikely that it would reach agreement in a reasonable period, in the light of existing diversity in practice and the explicit exclusion of common control transactions from the scope of IFRS 3.
IFRIC reference: IFRS 3-3
The IFRIC considered whether an employee share plan in which the employer had the choice of settlement in cash or in shares, and the amount of the settlement did not vary with changes in the share price of the entity should be treated as a share-based payment transaction within the scope of IFRS 2 'Share-based Payment'.
The IFRIC considered whether an employee share plan in which the employer had the choice of settlement in cash or in shares, and the amount of the settlement did not vary with changes in the share price of the entity should be treated as a share-based payment transaction within the scope of IFRS 2 Share-based Payment.
May 2006
The IFRIC noted that IFRS 2 defines a share-based payment transaction as a transaction in which the entity receives goods or services as consideration for equity instruments of the entity or amounts that are based on the price of equity instruments of the entity.
IFRIC further noted that the definition of a share-based payment transaction does not require the exposure of the entity to be linked to movements in the share price of the entity. Moreover, it is clear that IFRS 2 contemplates share-based payment transactions in which the terms of the arrangement provide the entity with a choice of settlement, since they are specifically addressed in paragraphs 41 - 43 of IFRS 2. The IFRIC, therefore, believed that, although the amount of the settlement did not vary with changes in the share price of the entity, such share plans are share-based payment transactions in accordance with IFRS 2 since the consideration may be equity instruments of the entity.
The IFRIC also believed that, even in the extreme circumstances in which the entity was given a choice of settlement and the value of the shares that would be delivered was a fixed monetary amount, those share plans were still within the scope of IFRS 2.
The IFRIC believed that, since the requirements of IFRS 2 are clear, the issue is not expected to create significant divergence in practice. The IFRIC, therefore, decided not to take the issue onto the agenda.
IFRIC reference: IFRS 2-2
The IFRIC considered an employee share plan in which employees were provided a choice to have cash at one date or shares at a later date. At the date the transactions were entered into, the parties involved understood the terms and conditions of the plans including the formula that would be used to determine the amount of cash to be paid to each individual employee (or the number of shares to be delivered to each individual employee) but the exact amount of cash or number of shares would only be known at a future date. The IFRIC was asked to confirm the grant date and vesting period for such share plans.
The IFRIC considered an employee share plan in which employees were provided a choice to have cash at one date or shares at a later date. At the date the transactions were entered into, the parties involved understood the terms and conditions of the plans including the formula that would be used to determine the amount of cash to be paid to each individual employee (or the number of shares to be delivered to each individual employee) but the exact amount of cash or number of shares would only be known at a future date. The IFRIC was asked to confirm the grant date and vesting period for such share plans.
May 2006
The IFRIC noted that IFRS 2 Share-based Payment defines grant date as the date when there is a shared understanding of the terms and conditions. Moreover, IFRS 2 does not require grant date to be the date when the exact amount of cash to be paid (or the exact number of shares to be delivered) is known to the parties involved.
The IFRIC further noted that share-based payment transactions with cash alternatives at the discretion of the counterparty are addressed in paragraphs 34 - 40 of IFRS 2. Paragraph 35 of IFRS 2 states that, if an entity has granted the counterparty the right to choose whether a share-based payment transaction is settled in cash or by issuing equity instruments, the entity has granted a compound financial instrument, which includes a debt component (i.e. the counterparty’s right to demand cash payment) and an equity component (i.e. the counterparty’s right to demand settlement in equity instruments). Paragraph 38 of IFRS 2 states that the entity shall account separately for goods or services received or acquired in respect of each component of the compound financial instrument. The IFRIC, therefore, believed that the vesting period of the equity component and that of the debt component should be determined separately and the vesting period of each component may be different.
The IFRIC believed that, since ‘grant date’ is defined in IFRS 2 and the requirements set out in paragraphs 34 - 40 of IFRS 2 are clear, the issues are not expected to create significant divergence in practice. The IFRIC, therefore, decided that the issues should not be taken onto the agenda.
IFRIC reference: IFRS 2-3
The IFRIC has been asked to consider whether an estimate of contingent rentals payable / receivable under an operating lease should be included in the total lease payments / lease income to be recognised on a straightline basis over the lease term.
The IFRIC has been asked to consider whether an estimate of contingent rentals payable / receivable under an operating lease should be included in the total lease payments / lease income to be recognised on a straightline basis over the lease term.
July 2006
The IFRIC noted that, although the Standard is unclear on this issue, this has not, in general, led to contingent rentals being included in the amount to be recognised on a straightline basis over the lease term. Accordingly, the IFRIC decided not to add this issue to its agenda but to recommend to the Board that IAS 17 be amended to clarify the approach intended by the Standard.
IFRIC reference: IAS 17-5
The IFRIC was asked to consider a situation in which an entity issued convertible financial instruments that, in accordance with IAS 32 'Financial Instruments: Presentation', were accounted for as two elements — an equity component and a liability component. The issue was whether the liability component should be presented as current or non-current on the face of the issuer’s balance sheet.
November 2006
The IFRIC observed that both IAS 1 Presentation of Financial Statements and the Framework for the Preparation and Presentation of Financial Statements state that information about the liquidity and solvency of an entity is useful to users. The IFRIC also noted that the definitions of liquidity and solvency refer to the availability of cash to the entity. On that basis, the IFRIC believed that the liability component should be classified as non-current.
On the other hand, the IFRIC noted that paragraph 60(d) of IAS 1 states that a liability should be classified as current if the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date. According to paragraph 62 of the Framework, conversion of an obligation into equity is considered as the settlement of a liability. In addition, according to the definition of a financial liability set out in paragraph 16 of IAS 32, a financial liability may be settled through the delivery of a variable number of the issuer’s own equity instruments. Settlement of a liability is not confined to delivery of cash or other assets.
The IFRIC believed that the above IFRS requirements appeared to be in conflict. In addition, the IFRIC observed that practice, in determining whether the liability component was classified as current or non-current, focused on when the issuer was obliged to deliver cash or other assets.
The IFRIC received a comment letter, supporting an alternative rationale for the non-current classification of the liability component of a compound financial instrument. IAS 32 requires the equity and liability components of a compound financial instrument to be accounted for separately. Because IAS 1 addresses the presentation of liabilities (not equity), the comment letter suggested that the equity component should be ignored in determining whether the liability component should be presented as current or non-current in accordance with IAS 1.
The IFRIC decided that both rationales should be drawn to the attention of the Board with a request for clarification. The IFRIC decided not to take the issue onto its own agenda.
IFRIC reference: IAS 1-3
The IFRIC considered an issue identified in its deliberations of service concession arrangements, namely whether it is appropriate in a single contract to determine different profit margins for the different components of the contract.
The IFRIC considered an issue identified in its deliberations of service concession arrangements, namely whether it is appropriate in a single contract to determine different profit margins for the different components of the contract.
November 2006
Whilst IAS 11 Construction Contracts has specific criteria for contract segmentation, the guidance on segmenting in IAS 18 Revenue is expressed only at a general level. The IFRIC noted that in IAS 18:
The IFRIC noted that, whilst IAS 18 paragraph 21 refers to IAS 11, it does so only for the percentage of completion method for recognition of revenue and the associated expenses and does not refer to the combining, segmenting and disclosure requirements of IAS 11.
The IFRIC noted that, as part of its project on D20 Customer Loyalty Programmes, it had deliberated whether, in a single contract within the scope of IAS 18, it is appropriate to determine different profit margins for the different components of the contract. In D20, the IFRIC tentatively concluded that the requirements of IAS 18 paragraph 13 to account for separately identifiable components of a contract would require segmentation of contracts that have separately identifiable components potentially with different profit margins. D20 also proposes guidance on how to allocate the total contract revenue to the different components.
The IFRIC noted that, for a single contract for construction and other services not directly related to construction activities, IAS 18 paragraphs 4 and 13 require the contract to be separated into two components, a construction component within the scope of IAS 11 and a service component within the scope of IAS 18, in order to reflect the substance of the transaction. The IFRIC noted that the segmenting criteria of IAS 11 apply only to the progressive recognition of margin relating to the construction component and that the requirements of paragraph 13 of IAS 18 apply to the service component. The consequence is that different profit margins might be recognised on the different components of such a single contract.
The IFRIC decided that, in view of the existing guidance in IAS 18 and IAS 11 and because these issues are expected to be addressed in an Interpretation following from D20, it would not take this item onto its agenda.
IFRIC reference: IAS 11-1
The IFRIC discussed whether to take on a project to consider whether the revaluation model in IAS 16 is available for investment property under construction.
The IFRIC discussed whether to take on a project to consider whether the revaluation model in IAS 16 is available for investment property under construction.
November 2006
The IFRIC noted that since IAS 40 was written, the use of fair values in accounting has become more widespread. At the same time, valuation techniques have become more robust. The IFRIC therefore considered that the requirement that investment property under construction be accounted for under IAS 16 might no longer be necessary, and agreed to ask the Board whether it would consider amending IAS 40 to state that investment property under construction should be accounted for under that standard.
As reported in the October 2006 IASB Update, the Board agreed that, as part of its Annual Improvements project, it would propose amending IAS 16 and IAS 40 to state that investment property under construction should be accounted for under IAS 40. Since the issue was being resolved by the Board, the IFRIC decided not to take the issue onto its agenda.
IFRIC reference: IAS 16-1
The IFRIC considered an issue concerning the relative weight to be given to the various indicators in paragraph 10 of SIC-12 'Consolidation—Special Purpose Entities' in determining who should consolidate a special purpose entity (SPE).
The IFRIC considered an issue concerning the relative weight to be given to the various indicators in paragraph 10 of SIC-12 Consolidation—Special Purpose Entities in determining who should consolidate a special purpose entity (SPE).
The issue focused on a situation in which all the decisions necessary for the ongoing activities of the SPE had been predetermined by its creator and in which the majority of the ‘equity interest tranche’ had been transferred to a third party.
The question was whether in such a situation the benefits and risks factors specified in paragraph 10(c) and (d) of SIC-12 took precedence over the factors in paragraph 10(a) (activities of the SPE conducted in accordance with specific business needs of one party) and paragraph 10(b) (one party has decision-making powers or has delegated them by setting up an ‘autopilot’ mechanism).
November 2006
The IFRIC noted that, under IAS 27 Consolidated and Separate Financial Statements, control, which is the basis for consolidation, has two components: power to govern and rights to obtain benefits.
The IFRIC noted that the factors set out in paragraph 10 of SIC-12 are indicators only and not necessarily conclusive. The IFRIC believed that this approach was deliberate, in acknowledgement of the fact that circumstances vary case by case. In the IFRIC’s view, SIC-12 requires that the party having control over an SPE should be determined through the exercise of judgement and skill in each case, after taking into account all relevant factors. For this reason, the IFRIC decided not to take the issue onto the agenda.
IFRIC reference: IAS 27-2
The IFRIC was asked to consider a situation in which an amendment to the contractual terms of an equity instrument resulted in the instrument being classified as a financial liability of the issuer.
The IFRIC was asked to consider a situation in which an amendment to the contractual terms of an equity instrument resulted in the instrument being classified as a financial liability of the issuer.
Two issues were discussed:
November 2006
The IFRIC noted that at the time when the contractual terms were changed, a financial liability was initially recognised, and, furthermore, that a financial liability on initial recognition is measured at its fair value in accordance with paragraph 43 of IAS 39 Financial Instruments: Recognition and Measurement. The IFRIC observed that Example 3 of IFRIC 2 Members’ Shares in Co-operative Entities and Similar Instruments deals with a similar situation. In that example, at the time when the financial liabilities are recognised, when the terms are changed, they are recognised at their fair value.
The IFRIC observed that the change in the terms of the instrument gave rise to derecognition of the original equity instrument. The IFRIC noted that paragraph 33 of IAS 32 Financial Instruments: Presentation states that no gain or loss shall be recognised in profit or loss on the purchase, sale, issue or cancellation of an entity’s own equity instruments. The IFRIC, therefore, believed that, at the time when the terms were changed, the difference between the carrying amount of the equity instrument and the fair value of the newly recognised financial liability should be recognised in equity.
The IFRIC believed that the requirements of IFRS, taken as a whole, were sufficiently clear and that the issue was not expected to have widespread relevance in practice. The IFRIC, therefore, decided that the issue should not be taken onto the agenda.
IFRIC reference: IAS 32-1
The IFRIC was asked to consider a question relating to the issue by a subsidiary of financial instruments that provide holders with the rights to exchange the financial instruments into a fixed number of equity instruments of the parent at a fixed amount of currency.
At its meeting in April 2005, the IFRIC concluded that derivative contracts that may be settled by an entity by delivering a fixed number of its own equity instruments in exchange for a fixed amount of foreign currency are financial liabilities. At the same time, the IFRIC recommended that the issue should be referred to the Board. However, the Board, in September 2005, decided not to proceed with any amendments to IAS 32 Financial Instruments: Presentation in connection with convertible instruments issued by an entity in a currency other than the functional currency of the entity.
Subsequently, the IFRIC was asked to consider a question relating to the issue by a subsidiary of financial instruments that provide holders with the rights to exchange the financial instruments into a fixed number of equity instruments of the parent at a fixed amount of currency. Variants considered were that the amount of currency is fixed if it is denominated in (i) the functional currency of the issuer of the exchangeable financial instruments or (ii) the functional currency of the issuer of the equity instruments.
The question was whether the conversion options embedded in the exchangeable financial instruments should be classified as equity in the consolidated financial statements of the parent in accordance with IAS 32 Financial Instruments: Presentation.
November 2006
The IFRIC noted that a group does not have a functional currency. It therefore discussed whether it should add a project to its agenda to address which functional currency should be the reference point in determining whether or not the embedded conversion options are equity instruments. The IFRIC believed that the question was sufficiently narrow that it is not expected to have widespread relevance in practice. The IFRIC, therefore, decided not to take the matter onto the agenda.
IFRIC reference: IAS 32-3
IFRIC discussed a submission for a possible agenda item relating to the role of contractual obligations and economic compulsion in the classification of financial instruments.
At its meeting in March 2006, the IFRIC discussed a submission for a possible agenda item relating to the role of contractual obligations and economic compulsion in the classification of financial instruments. At that meeting and the following meeting in May, the IFRIC agreed not to take the item onto the agenda but did not agree on reasons to be given for that decision.
November 2006
At the IFRIC meeting in July, the Chairman reported the Board’s discussions on the issue at its meeting in June 2006. As stated in the June 2006 IASB Update:
The Board discussed whether so-called economic compulsion should affect the classification of a financial instrument (or a component of a financial instrument) under IAS 32 Financial Instruments: Presentation. This issue had previously been debated at the IFRIC meetings in March and May 2006.
For a financial instrument (or a component of a financial instrument) to be classified as a financial liability under IAS 32, the issuer must have a contractual obligation either:
The Board also stressed that IAS 32 requires an assessment of the substance of the contractual arrangement. It does not, however, require or permit factors not within the contractual arrangement to be taken into consideration in classifying a financial instrument. |
In view of the Board’s discussion, the IFRIC believed that it could not achieve anything substantial by adding the issue onto the agenda. Instead, the IFRIC agreed to draw the Board’s attention to comments raised by constituents and to ask the Board whether anything could be done to achieve even greater clarity on this point.
IFRIC reference: IAS 32-2
The IFRIC considered a request for clarification of the accounting when a parent entity has entered into a forward to acquire the shares held by the [non-controlling] minority interest in a subsidiary or the holder of the [non-controlling] minority interest can put its shares to the parent entity.
The IFRIC considered a request for clarification of the accounting when a parent entity has entered into a forward to acquire the shares held by the [non-controlling] minority interest in a subsidiary or the holder of the [non-controlling] minority interest can put its shares to the parent entity.
November 2006
Paragraph 23 of IAS 32 states that a parent must recognise a financial liability when it has an obligation to pay cash in the future to purchase the minority’s shares, even if the payment of that cash is conditional on the option being exercised by the holder. After initial recognition any liability to which IFRS 3 is not being applied will be accounted for in accordance with IAS 39. The parent will reclassify the liability to equity if a put expires unexercised.
The IFRIC agreed that there is likely to be divergence in practice in how the related equity is classified. However, the IFRIC did not believe that it could reach a consensus on this matter on a timely basis. Accordingly, the IFRIC decided not to add this item to its agenda.
IFRIC reference: IAS 32-4
The IFRIC received a request for guidance on whether the consequential amendments made to IAS 38 in December 2003 (as a result of improvements to IAS 16) should be applied retrospectively or prospectively if an entity adopted the March 2004 version of IAS 38 early.
In December 2003 consequential amendments were made to IAS 38 Intangible Assets arising from the improvements to IAS 16 Property, Plant and Equipment. These amendments did not change the transitional provisions in IAS 38.
In March 2004, further amendments to IAS 38 were made, as a consequence of the issue of IFRS 3 Business Combinations. These later amendments changed the transitional provisions in IAS 38 to require prospective application. Both the December 2003 and March 2004 amendments became effective for annual periods beginning on or after 1 January 2005.
The IFRIC received a request for guidance on whether the December 2003 consequential amendments should be applied retrospectively or prospectively if an entity adopted the March 2004 version of IAS 38 early.
November 2006
Whilst the IFRIC agreed that divergence might have arisen in the way that the two sets of amendments to IAS 38 were adopted in 2004, it believed that the issue was not widespread and that further diversity was unlikely to develop in the future. The IFRIC therefore decided not to take the issue onto its agenda.
IFRIC reference: IAS 38-3
The IFRIC received a request for an Interpretation as to whether a mobile phone operator should account for a Subscriber Identity Module (or ‘SIM card’) as an intangible asset in accordance with IAS 38 or as inventory in accordance with IAS 2.
The IFRIC received a request for an Interpretation as to whether a mobile phone operator should account for a Subscriber Identity Module (or ‘SIM card’) as an intangible asset in accordance with IAS 38 Intangible Assets or as inventory in accordance with IAS 2 Inventories.
November 2006
The IFRIC noted that the accounting for SIM cards before their delivery to customers or after connecting these customers to the network using such SIM cards was unlikely to be of practical or widespread relevance as the amounts involved were unlikely to be significant.
The IFRIC also noted that the accounting for SIM cards that had been delivered to customers is part of the question of which costs incurred by a mobile phone operator entering into a contract with a customer qualify for recognition as subscriber acquisition costs.
The IFRIC had previously considered the treatment of subscriber acquisition costs in the telecommunications industry and, in March 2006, declined to take the issue onto its agenda. The IFRIC therefore considered that the question of how SIM cards should be accounted for was a part of the issue that it had declined to take onto its agenda in March 2006. The IFRIC reaffirmed its March 2006 decision that the issue should not be taken onto its agenda.
IFRIC reference: IAS 38-2
The IFRIC received a request for guidance on the treatment of certain principal-to-principal derivatives designed to fix the price of a supply of electricity by linking it with a transaction to buy or sell the electricity through an intermediary.
The IFRIC received a request for guidance on the treatment of certain principal-to-principal derivatives designed to fix the price of a supply of electricity by linking it with a transaction to buy or sell the electricity through an intermediary.
In a related agenda decision published in IFRIC Update for August 2005, the IFRIC noted that such derivatives did not fall under the exemption from IAS 39 for contracts for the receipt or delivery of a non-financial item in accordance with the entity’s expected purchase, sale or usage requirements. The question therefore arose whether such contracts fell under the exception from valuation in IAS 39 for derivatives linked to unquoted equity instruments and, if not, how they should be valued.
Valuation issues included the facts that the derivative had a variable notional amount and that the term of the derivative might extend well beyond the period for which there were any observable market data.
November 2006
The IFRIC noted that the only exception in IAS 39 from the requirement to fair value derivatives after initial recognition is given in paragraph 46(c), amplified by paragraphs AG80 and AG81, and that it was not appropriate to extend this exemption to the derivatives considered in this request.
The IFRIC noted further that IAS 39 contains general principles on how to measure fair value. The IFRIC decided that it should not seek to develop more detailed guidance on this topic, since the subject was too specific.
IFRIC reference: IAS 39-6
The IFRIC was asked to consider a situation in which an entity uses regression analysis to assess both retrospective and prospective effectiveness.
The IFRIC was asked to consider a situation in which an entity uses regression analysis to assess both retrospective and prospective effectiveness.
In measuring hedge effectiveness at the initial stage of the hedging relationship, the entity finds that the actual dollar-to-dollar comparison of the changes in the fair value or cash flows of the hedged item that are attributable to the hedged risk and the changes in the fair value or cash flows of the hedging instrument was outside a range of 80-125 per cent. The issue was whether such a result meant that the entity failed to qualify for hedge accounting in accordance with IAS 39 Financial Instruments: Recognition and Measurement.
November 2006
The IFRIC noted that IAS 39 distinguishes the requirement to perform periodic hedge effectiveness tests from the requirement to measure and recognise hedge effectiveness and ineffectiveness. The IFRIC noted that measurement of hedge effectiveness and ineffectiveness requires the comparison of the actual gains or losses on the hedging items and those on the hedged instruments.
However, the IFRIC observed that IAS 39 does not specify a single method for assessing retrospective and prospective hedge effectiveness. Paragraph 88 of IAS 39 requires that an entity should document the method for assessing hedge effectiveness at inception of the hedging relationship and apply the same method consistently over the life of the hedging relationship. The entity should use the documented method to perform the tests. The IFRIC believed that the fact that the dollar-to-dollar comparison of the changes in the fair value or cash flows of the hedged items and the changes in the fair value or cash flows of the hedging instrument falls outside a range of 80-125 per cent does not necessarily result in the entity failing to qualify for hedge accounting, provided that the dollar-to-dollar comparison is not the method documented at inception of the hedge for assessing hedge effectiveness.
The IFRIC also noted that, regardless of how hedge effectiveness is assessed, IAS 39 requires any hedge ineffectiveness to be recognised in profit or loss. The IFRIC noted that specifying how to apply a particular method for assessing hedge effectiveness would require development of application guidance (rather than an Interpretation). The IFRIC, therefore, decided not to take the issue onto the agenda.
IFRIC reference: IAS 39-7
The IFRIC was asked whether the estimated value of shares issued only to employees and subject to post-vesting restrictions could be based on an approach that would look solely or primarily to an actual or synthetic market that consisted only of transactions between an entity and its employees and in which prices, for example, reflected an employee’s personal borrowing rate. The IFRIC was asked whether this approach was consistent with the requirements under IFRS 2 'Share-based Payment'.
The IFRIC was asked whether the estimated value of shares issued only to employees and subject to post-vesting restrictions could be based on an approach that would look solely or primarily to an actual or synthetic market that consisted only of transactions between an entity and its employees and in which prices, for example, reflected an employee’s personal borrowing rate. The IFRIC was asked whether this approach was consistent with the requirements under IFRS 2 Share-based Payment.
November 2006
The IFRIC noted the requirements in paragraph B3 of Appendix B to IFRS 2, which states that, ‘if the shares are subject to restrictions on transfer after vesting date, that factor shall be taken into account, but only to the extent that the post-vesting restrictions affect the price that a knowledgeable, willing market participant would pay for that share. For example, if the shares are actively traded in a deep and liquid market, post-vesting transfer restrictions may have little, if any, effect on the price that a knowledgeable, willing market participant would pay for those shares.’
Paragraph BC168 of the Basis for Conclusions on IFRS 2 notes that ‘the objective is to estimate the fair value of the share option, not the value from the employee’s perspective.’ Furthermore, paragraph B10 of Appendix B to IFRS 2 states that ‘factors that affect the value of the option from the individual employee’s perspective only are not relevant to estimating the price that would be set by a knowledgeable, willing market participant.’
The IFRIC noted that these paragraphs require consideration of actual or hypothetical transactions, not only with employees, but rather with all actual or potential market participants willing to invest in restricted shares that had been or might be offered to them.
The IFRIC believed that the issue was not expected to create significant divergence in practice and that the requirements of IFRS 2 were clear. The IFRIC, therefore, decided not to take the issue onto the agenda.
IFRIC reference: IFRS 2-4
The IFRIC was asked to consider a situation in which the fair value of the equity instruments granted to the employees of an entity increased after the sponsoring entity undertook a capital restructuring that was not anticipated at the date of grant of the equity instruments. The original share-based payment plan contained neither specific nor more general requirements for adjustments to the grant in the event of a capital restructuring. As a result, the equity instruments previously granted to the employees became more valuable as a consequence of the restructuring.
The IFRIC was asked to consider a situation in which the fair value of the equity instruments granted to the employees of an entity increased after the sponsoring entity undertook a capital restructuring that was not anticipated at the date of grant of the equity instruments. The original share-based payment plan contained neither specific nor more general requirements for adjustments to the grant in the event of a capital restructuring. As a result, the equity instruments previously granted to the employees became more valuable as a consequence of the restructuring. The issue was whether the incremental value should be accounted for in the same way as a modification to the terms and conditions of the plan in accordance with IFRS 2 Share-based Payment.
November 2006
The IFRIC believed that the specific case presented was not a normal commercial occurrence and was unlikely to have widespread significance. The IFRIC, therefore, decided not to take the issue onto the agenda.
IFRIC reference: IFRS 2-5
The IFRIC discussed the application to separate financial statements of an issue that had been submitted in connection with the amendment of SIC-12 'Consolidation—Special Purpose Entities' to include within its scope special purpose entities established in connection with equity compensation plans.
The IFRIC discussed the application to separate financial statements of an issue that had been submitted in connection with the amendment of SIC-12 Consolidation—Special Purpose Entities to include within its scope special purpose entities established in connection with equity compensation plans. The issue related to an employee benefit trust (or similar entity) that has been set up by a sponsoring entity specifically to facilitate the transfer of its equity instruments to its employees under a share-based payment arrangement. The trust holds shares of the sponsoring entity that are acquired by the trust from the sponsoring entity or from the market. Acquisition of those shares is funded either by the sponsoring entity or by a bank loan, usually guaranteed by the sponsoring entity. In most circumstances, the sponsoring entity controls the employee benefit trust. In some circumstances, the sponsoring entity may also have a direct control of the shares held by the trust. The issue is whether guidance should be developed on the accounting treatment for the sponsor’s equity instruments held by the employee benefit trust in the sponsor’s separate financial statements.
November 2006
The IFRIC discussed whether the employee benefit trust should be treated as an extension of the sponsoring entity, such as a branch, or as a separate entity. The IFRIC noted that the notion of ‘entity’ is defined neither in the Framework nor in IAS 27 Consolidated and Separate Financial Statements. The IFRIC then discussed whether the sponsoring entity should, in its separate financial statements, account for the net investment according to IAS 27 or rather for the rights and obligations arising from the assets and liabilities of the trust. The IFRIC noted that, in some circumstances, the sponsoring entity may have direct control of the shares held by the trust. The IFRIC also noted that the guidance included in the Framework and IAS 27 does not address the accounting for the shares held by the trust in the sponsor’s separate financial statements.
The IFRIC concluded that it could not reach a consensus on this matter on a timely basis, given the different types of trusts and trust arrangements that exist. The IFRIC noted that this issue related to two active projects of the IASB: the Conceptual Framework and the revision of IAS 27 Consolidated and Separate Financial Statements in the course of the Consolidation project. For these reasons, the IFRIC decided not to take the issue onto its agenda.
IFRIC reference: IFRS 2-6
The IFRIC considered a request for an interpretation of whether a put or forward entered into by a parent entity, as part of a business combination, to acquire the shares held by the [non-controlling] minority interest was contingent or deferred consideration.
The IFRIC considered a request for an interpretation of whether a put or forward entered into by a parent entity, as part of a business combination, to acquire the shares held by the [non-controlling] minority interest was contingent or deferred consideration.
November 2006
The accounting for these arrangements, including the circumstances considered by the IFRIC, was being considered by the Board as part of the current redeliberations on the proposed revised IFRS 3 Business Combinations. The IFRIC expected that the revised IFRS 3 would assist in clarifying whether this type of arrangement includes a component of contingent consideration. The IFRIC therefore believed that it could not develop guidance more quickly than it was likely to be developed in the Business Combinations project and decided not to take a project on this issue onto its agenda.
IFRIC reference: IFRS 3-4
The IFRIC was asked whether the IFRIC’s October 2004 analysis regarding presenting ‘net finance costs’ on the face of the income statement was still valid in the light of paragraph IG13 of IFRS 7.
At its meeting in October 2004, the IFRIC noted that, taken together, paragraphs 32 and 81 of IAS 1 Presentation of Financial Statements preclude the presentation of ‘net finance costs’ on the face of the income statement unless finance costs and finance revenue are also shown on the face of that statement.
IFRS 7 Financial Instruments: Disclosures was issued in 2005. Paragraph IG13 of IFRS 7 states that ‘The total interest income and total interest expense disclosed in accordance with paragraph 20(b) is a component of the finance costs, which paragraph 81(b) of IAS 1 requires to be presented separately on the face of the income statement. The line item for finance costs may also include amounts that arise on non-financial assets or non-financial liabilities.’
The IFRIC was asked whether the IFRIC’s October 2004 analysis regarding presenting ‘net finance costs’ on the face of the income statement was still valid in the light of paragraph IG13 of IFRS 7.
November 2006
The IFRIC believed that its analysis in October 2004 was still valid. Consequently, the IFRIC decided not to take the issue onto the agenda.
The IFRIC believed that the words in paragraph IG13 of IFRS 7 might result in confusion. It therefore decided to recommend to the Board that the paragraph should be amended.
IFRIC reference: IFRS 7-1
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