- D10A Service Concession Arrangements - Determining the Accounting Model
- D10B Service Concession Arrangements - The Receivable Model
- D10C Service Concession Arrangements - The Intangible Asset Model
The Flowchart (Click to Open in New Window) sets out the structure of the draft interpretations. New terminology is proposed. The party that grants the concession is called the grantor (formerly the concession provider), and the party that operates the concession is called, simply, the operator (formerly the concession operator). The terminology will be incorporated into SIC 29 as well for consistency purposes.
The July discussion was a preliminary one. Further discussion will take place at the IFRIC's September 2004 meeting. Staff hopes, after the September meeting, to be in a position to prepare definitive drafts, with a view to publishing them in October or, at the latest, November. A comment period of at least two months would be provided.
IFRIC D3: Determining Whether an Arrangement Contains a Lease (Rights of Use)
Concern was expressed that it was not clear where lease accounting ended and accounting for service concession arrangements begins. After discussion, IFRIC concluded that decisions had to be taken first on who controlled the assets, as this would determine the relevant accounting literature to look to.
The differences between 'control' and 'right of use' were discussed, with members indicating that control was a more permanent notion compared to right of use.
Members raised the concern as to how the holistic approach of examining service concession arrangements may potentially contradict the components approach in IAS 16 Property, Plant and Equipment. This concern was illustrated by considering an example where a road is layered with tar by an operator in line with a service concession agreement. Should the asset recognised by the operator only be that layer as the rest of the road potentially belongs to the grantor? This approach would be consistent with the components approach in IAS 16. Members agreed to continue the discussion of whether to 'draw a line' as to where the holistic view to be taken in the scope paragraph ends.
The need to define 'service concession arrangements' was discussed and staff would look into this. Members indicated that this may require that staff consider the multiple elements revenue recognition issues as well.
Control vs. risks and rewards, and consistency with IFRSs
IFRIC members generally agreed that the significance of the residual interest in the assets should be a factor in establishing who controls the assets. IFRIC discussed other factors that indicate control, including whether the asset was constructed by the operator, estimated useful lives and concession periods, replacement assets expected to be purchased or constructed in the future (whether obliged or not), and the passing on of ownership. This debate was in the context of the different models used in IAS 18 Revenue and IAS 17 Leases in establishing when risk and rewards are passed and therefore, who controls the assets.
Members requested that staff prepare examples for consideration by the IFRIC at the next meeting.
The IFRIC noted a decision taken previously that an interpretation was to be developed regarding a sale and leaseback arrangement with a repurchase agreement. It was noted that such an interpretation would complete the suite of guidance regarding such issues. IFRIC discussed whether such guidance would be issued in the form of an interpretation or as an amendment to IAS 17, but no decisions were made.
Receivables model and intangible asset model
IFRIC debated when each model should be used. The staff requested guidance on the issue of what type of asset arises when either the grantor pays the operator or when the end user makes payment. The IFRIC suggested looking into the segmentation of concession contracts, which would help identify an asset construction phase (if any) and then a service phase that would cover the operation of the asset or provision of specified services. The importance of this segmentation proposal was underscored by the fact that certain arrangements may dictate that the operator will only be compensated for the construction phase based on the maintenance of the asset (for instance, the road constructed must be kept in good condition). In such a case, where the first phase receivable depends on the second phase performance, such segmentation may not be required.
IFRIC also discussed whether a different treatment would result if two operators were engaged separately for each phase.
In terms of the receivables model, a discussion ensued regarding the type of receivable: whether it is an IAS 11 Construction Contracts type receivable similar to 'gross amount due from customers for contract work' or an IAS 39 Financial Instruments: Recognition and Measurement type financial asset. There was concern that such a receivable would not necessarily meet the definition of a financial asset. Staff will explore this issue further.
The issue of whether a receivable still existed if the amount was dependent on demand risk (level of activity in the service phase, such as number of cars using the road) was raised. The IFRIC appeared to be in general agreement that a receivable existed under IAS 11 but this was not the case in terms of IAS 39. Staff were again asked to explore the disconnect between the two standards. It was expressed that a receivable might exist that was based on part performance (that is, not an executory contract) but absent any demand risk. This scenario was effectively where the grantor had 'guaranteed' a minimum amount based on work done but subject to completion of construction.
Regarding the demand risk discussion, staff asked the IFRIC to consider whether an intangible asset existed, instead of a financial asset. A debate ensued but no decisions were made.
Revenue and profit or loss treatment of services provided in exchange for an intangible asset
A general discussion took place regarding the exchange notion contained in IAS 16 and IAS 38 Intangible Assets. Specifically, IFRIC discussed any changes to the cash configuration as a principle that is used in existing literature. A conclusion was not reached as to whether cash flows changed in a service concession arrangement. Members noted that for an exchange to take place there must be an asset given up, whereas in the context of the discussion on service concession arrangements, it was not yet clear whether the assets in question were controlled by the operator. The debate was postponed as this issue had not yet been finalised.
D5 Applying IAS 29 Financial Reporting in Hyperinflationary Economies for the First Time
Staff presented an overview of responses received on D5. In total, 30 comment letters were received. A significant number of respondents raised concerns pertaining to broader issues in relation to IAS 29 itself. Some debate around these broader issues ensued with IFRIC concluding that the issues had to be elevated to the IASB, as the IAS 29 approach required revision. Staff raised the concern that it was unlikely that the IASB would be able to take this onto its agenda in the short term.
The IFRIC suggested that staff take these issues to the Board members individually as well as to the Director of Technical Activities in order to get input from them for consideration at the next IFRIC meeting. The tentative proposal from IFRIC was that the following issues should form part of the IASB's short-term project with the specific suggestion that amendments be made to IAS 29 ahead of the long-term project that would revisit inflation accounting as a whole:
- 'High' vs. 'hyper' inflation – the IFRIC observed that in practice, the 100%-in-three-years guideline is used more definitively than intended whereas jurisdictions with cumulative inflation rates in the region of say 40% to 80% should ideally be applying the standard were in fact not doing so. The IFRIC suggestion would be to redraft IAS 29 appropriately in this regard.
- Having removed the 100% criteria, the existence of 'high' inflation would then be determined on the basis of expected future inflation levels as opposed to the current criteria, which are based on past inflation.
- Amend IAS 29 such that it only requires restatement from the point in time when it is determined that hyperinflation exists. The rationale for this was that it made no sense to restate from the time the asset was acquired as a similar principle was not applied to jurisdictions with inflation of say 6%. IFRIC members believe such an amendment would result in more comparable information.
The requirements of US GAAP were noted (remeasure into a hard currency), but IFRIC members generally felt that the IAS 29 model was superior.
The IFRIC noted that if the IASB were to take on this project, D5 would become redundant and therefore would not be issued.
A discussion ensued regarding specific issues related to D5:
- Deferred taxation - a member indicated his intention to dissent if the wording in BC12 remained in the Interpretation. This member felt that IFRIC should reach a conclusion as to whether deferred taxation is a monetary or non-monetary item; otherwise, BC12 should not refer to the issue. This member also pointed out that the manner in which deferred taxation is measured does not influence its nature. Some debate around this point took place, but not agreement was reached. The point was then made that resolution of this issue was unlikely to alter the conclusions reached in D5.
- The IFRIC was in general agreement with the suggestion to limit the example to an illustration of just the deferred taxation issue, as the whole example was generally viewed as too simplistic.
- The IFRIC expressed general agreement with a comment received regarding a misallocation in the example between the deferred taxation charge / credit to the income statement and the monetary adjustment. Staff agreed to amend D5.
Employee Benefit Trusts
At its May meeting, the IFRIC began discussing issues concerning employee benefit trusts (EBTs) relating to share-based payment arrangements. The IFRIC discussed a request from the IASB to consider:
1. Whether the scope of SIC-12 Consolidation-Special Purpose Entities should be amended once IFRS 2 becomes effective, to remove the scope exclusion for equity compensation plans.
This phase (step 1) culminated in the issuance of IFRIC D7 Scope of SIC-12 Consolidation - Special Purpose Entities on 30 June 2004, with a request for comments by 13 September 2004.
2. Whether any guidance should be developed on accounting for employee benefit trusts relating to share-based payment arrangements.
The discussion at this meeting would focus on the second step – guidance on accounting for employee benefit trusts relating to share-based payment arrangements. The following issues were discussed but no decisions were made:
- The scope of the interpretation, to distinguish the employee benefit trusts covered by the interpretation from those within the scope of IAS 19 Employee Benefits.
- Whether any guidance should be given on determining whether an EBT is under the entity's control.
- Whether the EBT should be treated as a branch or a subsidiary.
- What guidance, if any, should be given on the consolidation process?
The IFRIC discussed whether to provide guidance similar to that in the UK UITF 38 on consolidation procedures around employee compensation trusts. There was no overwhelming support that such an interpretation should receive IFRIC priority and should only be addressed (if at all) once the results of D7 were known. As a result, that feedback would be considered at the October meeting.
Constitution of an Obligating Event by Future Market Share
Certain types of products bear an obligation of the producer to contribute to the cost of waste management at the end of the product's life cycle. The obligation sometimes depends on the future market share of the producer at that time. The accounting question for the producer is whether the obligating event for the waste management cost occurs (a) when the product has been put onto the market or (b) when the future market share determines the cost for waste management.
The issue has arisen under EU Directive 2002/96/EC on Waste Electrical and Electronic Equipment (WEEE), which regulates the collection, treatment, recovery, and environmentally sound disposal of waste equipment. The Directive came into force on 13 February 2003.
The issue has been addressed by the Accounting Interpretations Committee of the German Accounting Standards Board (AIC) which has developed a draft interpretation on WEEE in December 2003 (D-AIC-1). The draft interpretation provides guidance on applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets relating to the constitution of an obligating event. The draft proposes that if an obligation for cost of waste management depends on a participation of the producer in the future, i.e. future market share, the obligating event is the future participation in the market and not the date when the products are put onto the market.
The was some debate around the specific provisions of the draft interpretation put before the IFRIC with the following notable points:
- IFRIC decided to rename the interpretation to 'Liabilities arising from market share'. It was decided not to include the notion of 'future' market share into the title.
- Although no decision was made, IFRIC members questioned whether the draft interpretation should deal with measurement issues pertaining to the obligation, as it did not seem to be part of the issue brought to them to consider.
There was agreement not to mention the EU directive in the draft Interpretation but instead to use more generic wording.
This summary is based on notes taken by observers at the IFRIC meeting and should not be regarded as an official or final summary.