However a great number of comment letters had stressed the need for the IFRIC to finalise a solution even if that solution is only interim in its nature. The main areas of criticism were:
- That the criteria for recognising property, plant, and equipment as assets of the grantor, which are outside of the scope of the draft interpretations, did not make reference to the risks and rewards of ownership;
- That the dividing line between the intangible asset model and the financial asset model had been drawn in such a way that economically similar projects would be accounted for in vastly different manners;
- The limited scope of the draft interpretations; and
- The double recognition of revenue in the intangible asset model.
The IFRIC was asked at this meeting to determine the overall direction of the project, particularly whether the IFRIC wished
to pursue any aspect of this project, or whether it should be deferred for consideration by the IASB. Furthermore the IFRIC was asked to reconsider the scope of the project, with particular reference to when property, plant, and equipment should be recognised by the operator, and to reconsider the dividing line between the intangible asset model and the financial asset model.
The IFRIC agreed that the criticisms relating to the limited scope of the project reflected poor communication with constituents. The intention of the IFRIC in limiting the scope was to limit the draft interpretations to those items for which the accounting under existing IFRS was unclear. Therefore, if an arrangement was outside the scope of the draft interpretations it was intended that this would imply to constituents that existing IFRS adequately dealt with the arrangement. For example, some arrangements would be outside the scope of the service concessions project because the assets clearly form part of the property, plant and equipment of the operator, and should therefore be accounted for in accordance with the requirements of IAS 16 Property, Plant and Equipment.
Other comments on the limited scope of the draft interpretations arose because commentators wished IFRIC to allow practices which the IFRIC in fact did discuss during the development of D14 - D16, and decided in those discussions were not appropriate within the IFRS framework. Examples of this include use of the annuity based depreciation method, and capitalisation of borrowing costs into the financial asset model. The IFRIC agreed that they needed to communicate more clearly with constituents those items they had discussed and dismissed as being inappropriate.
The IFRIC considered the direction of the project, and reached the following conclusions:
- The IFRIC agreed to continue with the project.
- The IFRIC anticipated the project in the short term would result in the issuance of one or more interpretations, and that those interpretations would contain more application guidance than is typical within an IFRIC interpretation.
- The IFRIC agreed that those interpretations would need to clarify that the property, plant, and equipment model for accounting for service concession arrangements may be appropriate in some circumstances, but that such circumstances were outside of the scope of the interpretations.
- Furthermore, the interpretations should also clearly stipulate other accounting treatments which the IFRIC considered in the course of its discussions and deemed to be inappropriate under IFRS.
The IFRIC was then asked to consider the basis for recognising property, plant, and equipment (that is the scope paragraphs of D12). A majority of commentators questioned the approach taken in D12, believing that the criteria should take into account the risks and rewards relating to the asset, rather than a purely control based approach.
The IFRIC agreed that it needed to have a clear idea of the consequences of each of the four possible accounting models for service concessions (tangible fixed asset, financial asset, intangible asset, and operating lease) and that it should consider a paper detailing the implications of each of the models.
The IFRIC agreed that the scope criteria did need to be reconsidered, particularly with respect to the significant residual value, as it seemed anomalous that whole of life contracts would be outside of the scope of the interpretations. The IFRIC also noted that whether the counter-party to a contract is a government body is not a defining factor in determining whether the arrangement is within the scope of the Interpretations. The IFRIC confirmed an earlier decision that the interpretations would be drafted so as to provide guidance on the accounting from the perspective of the operator only. The IFRIC noted that its key objective had been in trying to ensure that operators understood how to treat the significant up-front debit that occurs in these arrangements, and that consideration of accounting by the grantor would not be useful in finalising a position on this.
The IFRIC agreed that the draft interpretations needed to provide more guidance on how the scope requirements should be applied in respect of existing assets of the operator. Furthermore the IFRIC agreed that more guidance was needed to support their conclusions in respect of assets constructed for the purposes of the service concession arrangement.
The IFRIC reconsidered the statement in D12 in respect of sale and lease-backs with repurchase agreements. They agreed that this statement is not sustainable as an add on in the basis for conclusions of that document. They agreed that the agenda committee should consider a paper on sales, sales and leasebacks and sales and leasebacks with repurchase options and determine how, if at all, the IFRIC should proceed with a separate project, as the implications would be far wider than too the service concessions industry alone. It was agreed that the progression of this separate project was not critical to the furtherance of the service concessions project.
The IFRIC then considered a paper examining the dividing line between the intangible asset model and the financial asset model. The paper was an attempt to shift this boundary such that economically similar arrangements could be accounted for using the same model, by referring to the back-stop provisions provided by the grantor, rather than only to the part from whom the cash flows flow to the operator. The IFRIC agreed that the boundary that had been drawn in the draft interpretations was inappropriate.
It was agreed that the intangible asset model could not be removed altogether, because some service concession arrangements are purely a licence to operate with no guaranteed return. It was therefore agreed that the distinction might be drawn between whether you have contract revenue (and therefore a financial asset arising from that contract) or a licence (and therefore an intangible asset which gives you a right to endeavour to earn revenue). In the case of contract revenue, it appears that the grantor actually has the primary obligation, which may be defeased in part by the receipt of payments from the public.
The IFRIC noted that where an operator retains all or substantially all of the demand risk, that operator has acquired a licence to operate, and therefore the intangible asset model would apply. It was noted that the relevant question appears to me not how much risk is taken on, but the nature of that risk. The IFRIC agreed that a contractual possibility of forfeiture does not automatically mean an arrangement could not be a financial asset. It also agreed that it is possible that the contractual possibility of further gain may create an additional intangible, but that such a conclusion would have much wider application than to service concessions and should therefore not be explored at this time.
The IFRIC noted that in many cases the grantor would provide a minimum return only, and therefore a mixed measurement model may be required in respect of such arrangements – a financial asset for the guaranteed portion and an intangible asset for the remainder. The IFRIC agreed to consider this further at a future meeting.
The chair of the meeting noted that the IASB did not wish the IFRIC to feel pressured into reaching conclusions with which it is not comfortable. Accordingly the IFRIC should clear up those issues which it feels able to fix within its mandate to improve financial reporting, and should not feel pressured to resolve all issues within the service concessions industry.
At its next meeting the IFRIC will consider a paper dealing with whether the operator is providing construction services or selling an asset, and a further paper dealing with the scope of the draft interpretations.
IAS 34 – Interaction with IAS 36 and IAS 39
The IFRIC considered a paper detailing an apparent inconsistency between IAS 34 Interim Financial Reporting and IAS 36 Impairment of Assets and IAS 39 Financial Instruments: Recognition and Measurement. IAS 34 states that the frequency of financial reporting will not affect the total numbers reported for an annual period. However, because IAS 36 and IAS 39 prohibit the reversal of certain impairment losses, in fact if an impairment loss is recorded in an interim period, and has reversed by the year end, the frequency of reporting will effect the numbers in the annual report. This is because had the entity not prepared an interim report, the impairment loss need not have been recognised, but because the interim report was prepared it was recognised and cannot be reversed.
Three alternative views were presented to the IFRIC
- Assessment of impairment is required at each reporting date, and reversals that are prohibited by IAS 36 and IAS 39 may not be recorded in a subsequent interim period
- Assessment of impairment is required at each reporting date, but due to IAS 34.28 a reversal would be allowed in a subsequent interim period
- Each impairment should be recognised when it occurs, and therefore the frequency of reporting does not matter, because the event would have been recognised when it occurred and the number of reporting dates in an annual period won't have any affect.
The IFRIC noted that there were other areas where IAS 34 seemed to be inconsistent with other standards (such as revaluations of assets), but that they should not try to comprehensively resolve all of these issues at this time. Staff were asked to prepare a paper for the agenda committee detailing what might be covered by a more comprehensive project on interim reporting.
It was agreed that the three alternative views highlighted the following two questions for IFRIC:
1. When should assessments of impairment be made?
2. Does the frequency of reporting influence on the reported numbers for the annual reporting period?
The IFRIC noted that day-to-day assessment of impairment indicators was not required.
The IFRIC agreed that this item should be taken onto its agenda. A paper should be prepared on how to interpret the application of the impairment requirements at interim reporting dates. The preferences of the IFRIC at this time (which was not a formal vote) were that at each interim reporting period amounts should be recognised that were appropriate at the reporting date, based on the movement since the last reporting date. There is not a requirement to recognise the impairments which would have been required had reporting date occurred at the lowest point during the interim period. If an impairment is booked at an interim period and the reversal of that impairment is prohibited by another standard reversal is not permitted within subsequent interim reporting periods. The IFRIC will reconsider this issue at a future meeting.
IAS 19 Employee Benefits - IFRIC D9 Employee Benefits with a Promised Return on Contributions or Notional Contributions
The IFRIC considered measurement options available for employee benefit plans with a promised return on contributions or notional contributions. It was noted that four possible measurement alternatives had been identified, each of which has serious limitations. The fixed/variable approach proposed in D9 is inconsistent with certain aspects of IAS 19, and furthermore does not provide the best representation of the economics of the plan. A second alternative is a modification of the fixed variable approach exposed in D9, however whilst this approach would be consistent with the standard, it gives a result which does not reflect the economic realities associated with the plan. A pure deconstruction approach is economically representative, but for this to be made effective and amendment to IAS 19 would be required. A modified deconstruction approach would be compliant with the standard but would not provide as faithful a representation of the entity's obligation. The staff recommended that the IFRIC request the Board to amend IAS 19 to permit a pure deconstruction approach. However, the staff were uncertain as to whether the Board would be amenable to such a request.
The IFRIC noted that in issuing D9, the key question had been "if a plan provides an employee with the balance of a certain account but guarantees a certain return on that account, is that defined benefit or defined contribution?" The IFRIC noted that D9 appeared to have been successful in clarifying this issue, and the complexity of measurement was a secondary issue. The IFRIC should not be prevented from finalising the answer to the original question whilst the measurement issue is resolved.
The IFRIC discussed whether proposing a limited amendment to IAS 19 would be worthwhile, when the very existence of this issue pointed to the fact that IAS 19 has been unable to keep pace with the rate of development in the different ways entities provide employee benefits. The proposed amendment would require that the plans be split into their component parts, with one component being an embedded guarantee of the return, and that guarantee should be measured at its fair value. Many IFRIC members did not believe a fair value measurement of a part of a plan could be comfortably fitted into the existing IAS 19 model. Staff noted that the projected unit credit method as required by IAS 19, is not actually defined in IAS 19, and IAS 19 assumes that it is an accepted actuarial valuation technique. They did not believe that the use of the projected unit credit method automatically disallowed the use of fair value measurements. IFRIC members then queried, if this was the case, why an amendment to IAS 19 was required. It was noted that the amendment was required to enable a plan to be deconstructed to enable separate accounting for the embedded guarantee, rather than to enable the use of a fair value measure.
IFRIC members asked if by measuring the rest of the plan using the projected unit credit method and the embedded guarantee using fair value aggregating these two numbers would result in a mixed measurement model. It was noted that this is a reflection of the different risks - in respect of an employee's final salary the risks only relate to any changes in demographics, but for plans with a guaranteed return there is also a risk that assets will move against each other in an unfavourable manner.
The thinking of IFRIC on this topic to date will be presented to the Board at its September meeting.
Publication of reasons for not taking items onto the IFRIC's agenda
The IFRIC noted that its objectives in publishing reasons for not taking items onto the agenda are:
- To provide substantive arguments as to why issues are not taken on;
- The process provides the opportunity for the full IFRIC to discuss the reasons given and to confirm (or debate) the recommendation of the agenda committee;
- To provide constituents with an opportunity to comment on the reasons for rejecting an issue before the final decision is made; and
- To provide an historic record (which is not authoritative) as to the decisions taken.
The IFRIC was first asked to reconsider items that had been presented at the June 2005 meeting for which the IFRIC had requested they be allowed more time to consider the issues.
Classification of VAT in the Statement of Cash Flows
The IFRIC had received a request for clarification as to the appropriate classification of value added tax (VAT) and similar taxes in the statement of cash flows, particularly whether amounts in the statement of cash flows should be reported gross (inclusive of VAT received/paid) or net. The IFRIC noted that a number of jurisdictions have standards based on IAS 7 which either explicitly address this issue or are supported by interpretations giving explicit guidance on this issue. However, IAS 7 is silent, and therefore there is not a requirement within IFRS that the IFRIC could reasonably interpret. The IFRIC therefore agreed to publish in the IFRIC Update that the item would not be taken onto the agenda despite the emergence of divergence in practice. The reason is that IAS 7 is not prescriptive and does not provide material the IFRIC can interpret. However, the published reason for rejecting the issue would note that it would be appropriate in complying with IAS 1 Presentation of Financial Statement to make adequate disclosures as to the treatment of VAT. The IFRIC will recommend to the IASB that this issue should be addressed as part of the performance reporting project.
Non-amortised Intangible Assets
The IFRIC agreed to issue the final wording for rejecting this issue from its agenda largely as it was published in the April 2005 IFRIC Update. The IFRIC agreed that the wording should not specify whether it is possible, required or prohibited that entities analogise to SIC-21 Income Taxes - Recovery of Revalued Non-Depreciable Assets in certain situations.
Operating Lease Incentives
The IFRIC reconfirmed its earlier conclusion that operating lease incentives must be spread on a straight line basis over the entirety of the lease term, even where there is a clause requiring repricing to market during that lease term. They noted that such a repricing of itself does not change the appropriate accounting for a lease incentive, and agreed final wording for rejection of the issue largely as it was published in the April 2005 IFRIC Update.
The IFRIC requested clarification on the policy about amending or interpreting IAS 39 in the short term. It was noted that at its April 2005 joint Board meeting with the FASB the IASB had considered a convergence project to eliminate a number of differences between the accounting for financial instruments under US GAAP and under IFRS. The issue of appropriate accounting in respect of short trading was among those issues. The joint Boards agreed not to take on a convergence project at that time. Furthermore, a letter had been issue by the chairman of the IASB to the members of the Joint Working Group on Financial Instruments indicating that the Board did not intend to issue further limited amendments to IAS 39, rather where matter of Interpretation are raised the resources of IFRIC should be used to resolve those.
A growing number of IFRIC members believe that the accounting requirements for short trading are not as clear cut as was suggested in the April 2005 IFRIC Update. Others continue to believe that the requirements are clear, however they are unnecessarily costly and burdensome and therefore the underlying standard should be amended. It was agreed that a paper detailing the IFRIC's discussions to date should be presented to the IASB at its September meeting together with a request for the Board's advice as to the best way to progress this matter.
This summary is based on notes taken by observers at the IFRIC meeting and should not be regarded as an official or final summary.