 Administrative Matters
The role of IFRIC was discussed at the 22 September 2003 meeting of World Standard Setters. The IFRIC Chairman told the group that the IFRIC is the only body that can issue binding interpretations of IFRS. If national regulators or standard-setters issue local interpretations of IFRS, those decisions can be changed by IFRIC at any time. The Board recognises that IFRIC must take on a greater role as Europe adopts IFRS in 2005. IFRIC staff levels will be increased and possibly two more meetings will be added in 2004.
Two draft interpretations will be exposed for comment in October: Rights of Use and Decommissioning Funds.
IAS 11, Construction Contracts: Combining and Segmenting Contracts
The IFRIC discussed a proposed draft interpretation that provides additional guidance on applying the requirements of IAS 11 to combining and segmenting contracts with the intention to converge IAS 11 with US GAAP.
IFRIC noted that IAS 18 has a requirement to look to IAS 11 for multi-element contracts. Therefore, any changes to IAS 11 in segmenting or combining contracts would have an effect on the recognition of revenue for multi-element contracts (an issue addressed in EITF 00-21 in the US). The staff will prepare a paper detailing how the proposed changes in this draft interpretation relate to revenue recognition of multi-element contracts.
Because this project will require significant changes to IAS 11 but will not likely be finalised until after the first quarter of 2004, IFRIC members suggested a delayed implementation date to ensure a stable platform for adoption of IFRS in Europe. This issue will be discussed at a future meeting.
IAS 19, Employee Benefits: Plans that would be defined contribution plans but for existence of a minimum return guarantee
The IFRIC concluded that multi-employer plans should be accounted for as defined benefit plans regardless of whether the plan assets exceed the minimum guarantee. The IFRIC concluded that the liability should be the higher of the fair value of the assets in the plan or the minimum guaranteed return on those assets at the balance sheet date. Therefore, the expected return on assets should not be projected forward and then discounted back. In some cases the fair value of plan assets will be nil; however, a liability equal to the guaranteed amount should be recorded.
When the liability is measured at the fair value of the plan assets, an extra line item should be presented on the income statement to reflect defined contribution accounting. The balance sheet should be the same regardless of how the liability is measured. The entity should continue to provide disclosures for a defined benefit plan throughout the life of the plan.
The IFRIC also clarified that the scope includes only plans with fixed guarantees, including cash balance plans. Therefore a plan that guarantees a return equal to the S&P; 500, for example, would not be included in the scope of this interpretation. The IFRIC was aware that the EITF in the US is currently addressing this issue and will follow their deliberations.
The staff will prepare a pre-ballot draft for the next meeting.
Initial Application of IAS 29, Financial Reporting in Hyperinflationary Economies
The IFRIC agreed that a two step approach should be applied for recognising deferred taxes when an economy becomes hyperinflationary for the first time and, therefore, IAS 29 is applied. This method does not differentiate whether the deferred taxed is a non-monetary or monetary item under IAS 29.
Under this approach, the entity first recalculates its opening balance for the corresponding period as if the Standard was already applied in the previous year. This amount is recorded in equity. The entity then applies the current year inflation rate to the deferred tax item (with change recognised in income) to arrive at the ending balance.
The IFRIC discussed whether there are other issues to which this approach may be applied, for example, asset impairments, revaluations through equity, provisions where repricing is involved, and pension obligations.
The staff will prepare a draft interpretation to be discussed at the next meeting.
IAS 19: Multi-employer plans
The IFRIC discussed a draft interpretation. Several IFRIC members expressed concern over whether defined benefit accounting would be operational for multi-employer plans since IAS 19 requires balance sheet date measurement of the plan assets and liabilities. The final draft interpretation will provide guidance that the 'corridor' should be applied to these plans at the company level, not the group level, because of IAS 19's requirement for consistent policies. The draft interpretation will note that if the information to apply the corridor approach is not available, then all changes should be recorded immediately.
Because of the difficulties in predicting future estimated returns reliably. several members expressed doubt about whether an interpretation should be issued – because defined benefit accounting may only be possible in rare situations.
The IFRIC members noted that US GAAP requires multi-employer plans be accounted for as defined contribution plans. Current practice in applying IAS 19 is to default to defined contribution accounting and therefore this interpretation, by tightening the rules of IAS 19, would diverge from US GAAP even further. Some members expressed the view that this interpretation merely explains existing IAS 19 requires and does not 'tighten' (change) them. In their view, if this interpretation caused a change in accounting for a multi-employer plan, that change should be accounted for as a correction of an error.
The IFRIC asked the staff clarify that the scope of the interpretation will exclude state plans, such as national social security plans. The staff will continue working on the draft interpretation as originally drafted – defined contribution accounting only in rare cases. Three IFRIC members stated that they would object to the draft. Four other IFRIC members abstained from the vote until a final document is presented to them.
IAS 41: Measurement Issues
IAS 41 requires biological assets and agricultural produce be recognised and measured at their fair value. In some cases, a present value technique is used to estimate fair value because markets do not exist. IAS 41 requires that the cash flows exclude "any increases in value from additional biological transformation". The IFRIC discussed whether a fair value measurement objective can be achieved if these future increases are excluded.
The IFRIC noted that the harvest value at the balance sheet date (which could be zero) will generally be less than fair value, which is the objective of IAS 41. On the other hand, the present value of cash flows expected from the harvest will not include the risks associated with the growth over the harvest period, and therefore will generally be greater than fair value. The IFRIC noted (considering these upper and lower barriers) that fair value will generally be a risk adjusted cash flow. These cash flows may or may not reflect the expected growth over the harvest period.
The IFRIC also discussed whether an entity that has the legal obligation to replant (for instance, trees) after harvest should recognise a provision when the trees are planted for the first time. The IFRIC concluded that a provision should be raised for the obligation to replant when the tree is cut down for the last time. The IFRIC also noted other areas of concern in IAS 41 that seem to prevent a fair value measurement when estimating cash flows, such as the requirement in IAS 44.22 to exclude taxation issues and costs to replant assets from the estimated cash flows.
The staff will prepare a draft interpretation for IFRIC consideration at a future meeting.
This summary is based on notes taken by several observers at the IFRIC meeting and should not be regarded as an official or final summary.
|