March

An SEC Commissioner comments on the reconciliation

06 Mar 2006

In remarks before the Tenth Annual Conference on (PDF 37k), US SEC Commissioner Cynthia Glassman spoke about, among other things, convergence of US GAAP and IFRSs and eliminating the SEC's required reconciliation.

An excerpt:

The other significant issue on the international accounting front is reconciliation. As you well know, in their SEC filings, companies that use IFRS or other accounting standards have to reconcile their financial statements to U.S. GAAP. I fully support what has become known as the 'roadmap' to achieving the acceptance of IFRS in the U.S. without reconciliation. Basically, our staff is looking to see the nature and scope of the reconciliations and the consistency of IFRS implementation across countries. While our staff has already begun planning the initial phase of the roadmap, we really cannot get started evaluating the 2005 results of the IFRS/U.S. GAAP reconciliations until mid-year, because IFRS has only been recently implemented in many countries for the first time.

Possible FASB convergence project on major maintenance

06 Mar 2006

At its meeting on Wednesday, 8 March 2006, the US Financial Accounting Standards Board will discuss whether to add to its agenda a project to address planned major maintenance activities.

Currently, under IAS 16, major inspection or overhaul costs are generally accounted for as part of the cost of an asset, while under US GAAP these costs are generally expensed.

'Issues not added to IFRIC agenda' updated

05 Mar 2006

We have updated our table of nearly 100 Issues Not Added to IFRIC's Agenda to reflect the final decisions made at IFRIC's March 2006 meeting not to put the following items to its agenda: IFRS 3 Business Combinations - Whether a new entity that pays cash can be identified as the acquirer IFRS 3 Business Combinations - 'Transitory' common control IAS 17 Leases - Leases of land that do not transfer title to the lessee IAS 12 Income Taxes - Scope IAS 18 Revenue - Subscriber acquisition costs in the telecommunications industry IAS 27 Consolidated and Separate Financial Statements - Separate financial statements issued before consolidated financial statements .

We have updated our table of nearly 100 Issues Not Added to IFRIC's Agenda to reflect the final decisions made at IFRIC's March 2006 meeting not to put the following items to its agenda:

  • IFRS 3 Business Combinations - Whether a new entity that pays cash can be identified as the acquirer
  • IFRS 3 Business Combinations - 'Transitory' common control
  • IAS 17 Leases - Leases of land that do not transfer title to the lessee
  • IAS 12 Income Taxes - Scope
  • IAS 18 Revenue - Subscriber acquisition costs in the telecommunications industry
  • IAS 27 Consolidated and Separate Financial Statements - Separate financial statements issued before consolidated financial statements

IFRIC agenda project pages updated

05 Mar 2006

We have updated the following IFRIC Issues project pages to reflect the deliberations at IFRIC's March 2006 meeting: Service Concession Arrangements IAS 18 Revenue - Customer Loyalty Programmes IAS 18 Revenue - Sales of Real Estate IAS 19 Employee Benefits - The Effect of a Minimum Funding Requirement on the Asset Ceiling IAS 32 - Classification of a Financial Instrument as Liability or Equity .

IASB and Japan continue convergence discussions

04 Mar 2006

Representatives of the Accounting Standards Board of Japan (ASBJ) and the International Accounting Standards Board (IASB) held their third joint convergence meeting on 1 and 2 March 2006 in Tokyo.

The aim of these ongoing discussions is to achieve convergence of Japanese GAAP and International Financial Reporting Standards (IFRSs). The IASB was represented by four Board members, including Chairman Sir David Tweedie, and staff. The ASBJ was represented by four Board members, including Chairman Professor Shizuki Saito, and staff. Click for:

 

SEC, EC support IASB-FASB convergence plan

04 Mar 2006

Both the US SEC and the European Commission have issued press releases expressing strong support for the updated Memorandum of Understanding (MOU) (PDF 68k) published jointly by the US FASB and the IASB earlier this week.

The MOU sets out a roadmap agreed to by both FASB and the IASB for steps toward convergence between IFRSs and US GAAP over the 2006-2008 period. Here are the: The SEC's release said:

In recent weeks, SEC Chairman Christopher Cox has publicly stressed the agency's commitment to a 'roadmap' for elimination of the requirement that foreign private issuers reconcile financial statements prepared using international financial reporting standards to the U.S. system of Generally Accepted Accounting Principles (GAAP). "The SEC is working diligently toward the goal of eliminating the existing IFRS to U.S. GAAP reconciliation requirement", he said today. "Achieving that goal depends on the contributions of many parties, including U.S. and international standard setters. This important step by IASB and FASB will help ensure that investor protection remains paramount in these efforts."

You can find more information about the MOU in our News Story of 27 February 2006.

Comments on IFRSs by IOSCO leader

04 Mar 2006

Michel Prada, Chairman of the Technical Committee of IOSCO, delivered the (PDF 56k) at a recent roundtable on global accounting convergence sponsored by the Financial Stability Forum in Paris on 16 February 2006. Mr.

Prada addressed a range of issues, including trends in worldwide accounting and auditing standards, the processes for setting standards, the recent changes to the IASCF Constitution, structural changes within IFAC, "adoption, equivalence, harmonisation, and convergence in relation to IFRSs", the importance of a set of IFRSs for small and medium-sized entities, and the need for a 'standard setting pause' ("some stability over the next 3 years may well be needed for the transition to be really completed and digested by the stakeholders"). Here is an excerpt:

We should thus be satisfied to see that today IFRS are accepted in about 75 jurisdictions, the word 'accepted' meaning either a required or permitted use. But this absolute number does not mean much in terms of financial markets. It is more meaningful to observe that:

  • Out of a worldwide market capitalization totalling over 36 trillions US Dollars at the end of 2005, 11 trillions $ correspond to markets where IFRS are either required or permitted and 17 trillions US $ to markets where US GAAP is the rule; out of the balance, 4 trillions US $ correspond to Japan GAAP;
  • In terms of the largest companies included in the Fortune 500 list, 176 prepare their accounts under US GAAP and 200 under IFRS, 81 under Japanese GAAP.
These data illustrate both the good progress already achieved worldwide by the IFRS, and the strategic importance of achieving a satisfactory arrangement for acceptance of IFRS in the USA and for convergence between Japan GAAP and IFRS.

Notes from day 2 of the IFRIC meeting

04 Mar 2006

The International Financial Reporting Interpretations Committee (IFRIC) met at the IASB's offices in London on Thursday 2 March and Friday 3 March 2006. Presented below are the preliminary and unofficial notes taken by Deloitte observers at the second and final day of the meeting.Notes from the IFRIC Meeting2 March 2006 Relationship with National Standard-setters and National Interpretive Groups The IFRIC discussed staff proposals on how the IFRIC should interact with national standard-setters and national interpretive groups.

The proposals were based on the principles enunciated in the draft Statement of Best Practice: Working Relationships between the IASB and other Accounting Standard-Setters. [This document was formerly known as the Draft Memorandum of Understanding and was exposed for comment in 2005.]

Generally, the IFRIC supported the staff positions; however there was a concern that the requirement 'not to monitor actively the work of NSSs and NIGs' was unrealistic. The proposal was thought to be too restrictive and might preclude the monitoring and exchange of information between 'market leaders' and the IASB staff that occurs currently.

The staff will incorporate the IFRIC's comments in the draft of the IFRIC Due Process Handbook due to be placed before the IASC Foundation Trustees prior to exposure for public comment.

IAS 18 - Customer Loyalty Programmes

The IFRIC discussed whether customer loyalty programmes should be regarded as:

  • (a) goods and services supplied as part of a sales transaction;
  • (b) costs of securing sales of other goods and services; or
  • (c) possibly either, depending on the nature of the programme?

Views around IFRIC were evenly divided among the three alternatives. However, several IFRIC members agreed that the analysis provided by the staff tended to support (a), but considered that in many situations (b) was the more appropriate answer. It was noted that some loyalty programmes could be analogised to lease incentives, which are treated as part of the cost of the lease to the lessor, rather than as a reduction of revenue.

The staff next addressed whether loyalty programmes represented separately identifiable components of a transaction for the purposes of IAS 18. The meeting accepted that the staff's analysis was appropriate and that if you accepted approach (a) to revenue recognition. Some members noted that the time value of money would have an effect on the amount recognised for the subsequent service component. The Chairman noted that the IASB's project to revise IAS 37, which is developing a 'cost to settle' model, which could be significant to this issue.

The staff redefined their position such that, provided that an entity could allocate revenue to the elements and could estimate the cost of the first element, the entity should recognise revenue for the first element and defer the revenue related to the subsequent element(s). Some members noted that in certain situations (for example, air fares) there could be 80-100 different prices represented on a given revenue event (for example, flight). The cost of applying the staff recommendation to the transaction would be very onerous, and, by inference, the information provided of little utility to users.

The IFRIC agreed that when the rights granted under a loyalty programme have the economic nature of sale incentives, the sale is to be considered as a whole, because IAS 18 paragraph 14(a) and (e) have been satisfied. This conclusion was appropriate when the entity had concluded that IAS 18 paragraph 19 was appropriate. However, some did not agree with the analysis that IAS 18 paragraph 19 applied in all situations.

After a protracted debate, the Chairman directed the staff to prepare a draft Interpretation on the basis of no alternative treatments, based on view (a) above (because there was little opposition to the components approach). While this did not guarantee that view (a) would be accepted by a sufficient number of IFRIC members, it provided a means to carry the debate forward.

Review of Tentative Agenda Decisions

The IFRIC reviewed and confirmed the following agenda decisions for which draft 'rejection notices' were published in IFRIC Update as noted:

IFRIC Update (December 2005)

  • IFRS 3 Business Combinations - Whether a new entity that pays cash can be identified as the Acquirer
  • IFRS 3 Business Combinations - 'Transitory' common control
  • IAS 17 Leases - Leases of land that do not transfer title to the lessee
  • IAS 12 Income Taxes - Scope
  • IAS 18 Revenue - Subscriber acquisition costs in the telecommunications industry

IFRIC Update (January 2006)

  • IAS 27 Consolidated and Separate Financial Statements - Separate financial statements issued before consolidated financial statements

IFRIC Agenda: Consideration of IFRIC Agenda Committee Recommendations

IFRS 2 Share-based Payment: Scope of IFRS 2 – Share plans with cash alternatives at the discretion of the entity

The IFRIC was asked whether the following should be treated as a share-based payment transaction in accordance with IFRS 2:

There are a number of bonus plans that may be settled in shares or in cash at the discretion of the sponsoring entity. In addition, the amounts of the cash alternative under those bonus plans may not be determined in a manner that is related to the price of the entity's shares. For example, a company (the issuer) agrees to pay employees a bonus based on performance criteria which are not directly linked to its share price and the arrangement provides the issuer with a choice of settlement, either in cash or in shares with value equivalent to the value of the cash payment.

The IFRIC declined to take this issue to its agenda. Members agreed that the transaction was a share-based payment transaction. The draft rejection notice would refer to IFRS 2 paragraphs 41-43 (the proposed draft rejection wording was not available to Observers)

IFRS 2 – Share plans with cash alternatives at the discretion of the employees: Grant date and vesting periods

The IFRIC considered the following transaction: bonus plans may provide employees with a choice of having cash at one date or shares at a later date.

For example, on 1 January 20X1, an entity enters into a bonus arrangement with its employees. The terms of the arrangement allow the employees to choose on 31 March 20X2 either (1) a cash payment based on between 25 and 50 per cent of the employees' salary on 31 March 20X2 (the exact percentage would depend on the entity's profitability) or (2) a certain number of shares with value equivalent to 150% of the cash payment.

If, on 31 March 20X2, the employees choose to have shares instead of a cash payment, they are required to work for the entity for a further three years and shares would be delivered to them on 30 March 20X5.

The issue considered by the IFRIC was how IFRS 2 should be applied to such a share plan. In particular, assuming that the transaction is a share-based payment transaction in accordance with IFRS 2, the questions that arise are (1) when the grant date is and (2) what the vesting period is.

The IFRIC declined to take this issue to its agenda. On (1), the IFRIC agreed that in the example discussed, the grant date would be 1 January 20X1, being the date on which both the entity and the employees understood the terms and conditions of the arrangement, including the formula that would be used to determine the amount of settlement. On (2), the IFRIC agreed that the vesting period for the equity component and the debt component should be considered separately. Members discussed proposed draft rejection wording that was not available to observers.

[Those interested in this topic might wish to note that there is a potential overlap of item (2) and the proposed Amendment to IFRS 2 regarding vesting conditions.]

IFRS 2 – Fair value measurement of a post-vesting transfer restriction

The IFRIC considered employee share purchase plans in which employees can buy shares of the employing entity at a discount to the market price but are not permitted to sell those shares for a certain period after the vesting date.

The IFRIC declined to take this issue to the agenda. Members discussed proposed draft rejection wording that was not available to observers.

IAS 39 Financial Instruments: Recognition and Measurement – Aspects of Derecognition in the Context of Securitisation

The staff conducted an extended educational session on issues before the IFRIC. These issues essentially address how best to make the requirements of IAS 39 and summarised in the flowchart in IAS 39 AG 36 operational.

It was noted that IFRIC members were aware of diverse accounting treatments around the world as well as divergent interpretations of how IAS 39 AG 36 should be applied in practice.

After working through the staff's initial analysis, the IFRIC asked that the staff treat the various issues identified as part of a single Interpretation and proceed with the project on that basis.

IAS 39 Financial Instruments: Recognition and Measurement – Hedging Inflation Risk: Whether inflation risk qualifies as a separable component for hedging purposes

The IFRIC discussed whether inflation qualifies as a risk associated with a portion of the fair value or cash flows of an interest-bearing financial asset or an interest bearing financial liability in terms of IAS 39 paragraph 81. The staff noted that if inflation risk qualifies as a risk associated with a portion of the fair value or cash flows of an interest bearing financial asset or an interest bearing financial liability then it would be possible to hedge interest bearing financial assets and financial liabilities with respect to inflation risk.

The staff position was that inflation risk was not a separable component, based on a reading of IAS 39 AG 100, which states, among other things:

Changes in the price of an ingredient or component of a non-financial asset or non-financial liability generally do not have a predictable, separately measurable effect on the price of the item that is comparable to the effect of, say, a change in market interest rates on the price of a bond. Thus, a non-financial asset or non-financial liability is a hedged item only in its entirety or for foreign exchange risk.

The IFRIC agreed that there was a need for more guidance on what a portion is under IAS 39, and whether the staff's view of AG 100 was appropriate when the instrument had only financial components. The IFRIC was divided: some members were convinced that inflation risk was a separable component: 'base inflation' is traded on some deep and liquid markets. Others disagreed, saying that just because something was traded did not make it a component for the purposes of IAS 39.

The IFRIC asked the staff to develop the model proposed further, based on accounting standards currently in force.

This summary is based on notes taken by observers at the IFRIC meeting and should not be regarded as an official or final summary.

Scroll down for notes from Day 1 of this meeting.

Deloitte guidance on IFRSs for financial instruments

03 Mar 2006

Deloitte & Touche LLP (United Kingdom) have developed iGAAP 2006 Financial Instruments: IAS 32, IAS 39 and IFRS 7 Explained, which has been published by CCH.

This publication is the authoritative guide for financial instruments accounting under IFRSs. The 2006 edition expands last year's edition with 150 new pages of interpretations, examples, guidance on the recent amendments to the standards, as well as comparisons of IFRSs with US GAAP on financial instruments. iGAAP 2006 Financial Instruments: IAS 32, IAS 39 and IFRS 7 Explained (496 pages, February 2006) can be purchased through www.cch.co.uk or by phone at +44 (0) 870 777 2906 or by email: customerservices@cch.co.uk.

Notes from day 1 of the IFRIC meeting

03 Mar 2006

The International Financial Reporting Interpretations Committee (IFRIC) is meeting at the IASB's offices in London on Thursday 2 March and Friday 3 March 2006. Presented below are the preliminary and unofficial notes taken by Deloitte observers at the first day of the meeting.Notes from the IFRIC Meeting2 March 2006 Service Concession Arrangements The Chairman opened this session by expressing his goal to complete Service Concessions project during the summer of 2006. He said he hoped that today's session would give the staff opportunity to get into 'drafting mode' to reach that goal. Today's session covered staff proposals set out in three papers: Service Concession Arrangements - Determining the appropriate accounting model Service Concessions - The interaction of D12 with IFRIC 4 Determining whether an Arrangement Contains a Lease Service Concessions - Analysis of remaining comments Determining the appropriate accounting model The purpose of this paper was to clarify when the assets of the service provider in a service concession arrangement meet the definition of a financial asset under IAS 32. The staff proposed to amend the wording of the consensus in the draft interpretation to better reflect the economics of the arrangement, rather than base classification on who has primary responsibility to pay. This amendment raised the possibility of bifurcation of a service concession: depending on the economics and substance of the transaction, the service provider would have to account for financial assets while also recognising intangibles under the same contract.

The IFRIC discussed how to determine the dividing line between recognising a financial asset and an intangible.

Most IFRIC members supported the staff's proposed amendment.

IFRIC members then discussed how contractual rights arising from a guarantee would affect recognition of a financial asset. Members generally agreed that a contractual guarantee by the grantor, ensuring a certain cash amount on the service concession, should be recognised as a financial asset.

Some members also said that there should be a dividing line between contractual rights to cash and other contractual rights to non-cash items. This would imply that contractual rights/guarantees given to a service provider do not necessarily exclude the recognition of an intangible arising under the same contract (that is, recognition of both financial assets and intangibles).

While acknowledging that bifurcation may be appropriate in certain circumstances, some IFRIC members expressed their concern that this would create measurement problems.

The following general views were given at the end of this part of the discussion:

  • Members were generally supportive of the proposed amendment to clarify that the economics of the transaction should determine classification. Some minor amendments were proposed and will be considered by the staff.
  • IFRIC accepted that the economics in some service concession arrangements would lead to a bifurcation model in which the service provider would have to account for both financial assets and intangibles.

Staff will provide the IFRIC with a revised Draft interpretation.

The interaction of D12 with IFRIC 4

The paper set out two issues for the IFRIC to decide:

  • Whether the 'significant residual interest' criterion for service concessions was a necessary part of the scope requirements in D12.
  • Whether the scope issue between D12 and IFRIC 4 should be resolved by amending IFRIC 4 to specifically exclude service concession arrangements.

Staff recommended no changes to the scope paragraph (that is, leaving the 'significant residual interest' criterion in service concessions as proposed in the Exposure Draft), as they thought the criterion was essential to clarify the scope of D12.

The IFRIC discussed how this would affect classification of 'whole of life assets' (that is, an asset used in a service concession arrangement for the whole of its useful life). IFRIC members generally concluded that the 'significant residual interest' criterion should be kept, which would mean that such assets would be out of the scope of service concessions. Members generally felt that a contract would not be outside the scope of IFRIC 4 just because there is a significant residual. However, because comment letters expressed concerns about the scope issue, it would be more helpful to amend IFRIC 4.

The IFRIC agreed that the residual interest criterion in paragraph 5(b) of IFRIC D12 should be amended to clarify that the interpretation applies if a significant residual interest exists and that interest passes to the grantor. If a significant residual interest does not exist (that is, whole of life arrangements) but the other scope criteria are met, the arrangement will be also within the scope.

The IFRIC therefore decided to amend IFRIC 4 stating a specific scope exclusion for service concession arrangements.

Analysis of remaining comments

Staff had analysed the responses received on the remaining questions in exposure drafts D12, D13, and D14 that had not been discussed at the prior IFRIC meeting. Staff made various proposals based on responses received.

Timing of recognition of an intangible asset

The ED had proposed not to mandate the timing of recognition of an intangible asset. The staff suggested that the IFRIC postpone its discussion of this issue until final agreement on the dividing line between recognising a financial asset and recognising an intangible asset.

The IFRIC agreed to the postponement.

Amortisation of an intangible asset

The staff proposed to clarify in the Basis for Conclusions that amortisation methods acceptable under IAS 38 would be acceptable for amortisation of intangibles in service concession arrangements.

The IFRIC discussed the 'unit of production' (UOP) method in relation to this proposal. Some members thought that the UOP method would better reflect the economic circumstances if the underlying value of the intangible changed during the service arrangement.

The IFRIC did not decide whether to accept the staff proposal. Instead, IFRIC asked the staff to explore the interaction with the requirements in IAS 38 on amortisation of intangibles and bring this issue back at a future meeting.

Repairs and maintenance obligations

Staff proposed that the IFRIC should reconsider the treatment of repair and maintenance obligations when they had concluded on how to proceed regarding the dividing line between financial assets and intangibles.

IFRIC decided to postpone this discussion.

Allocation of contract revenue

Staff had proposed to strengthen the analysis on which revenue should be allocated between different activities of a service concession arrangement by reference to the fair values.

Some members expressed a fundamental disagreement with the staff proposal. They commented that this was an issue that could not be answered under service concessions because it is being addressed by the Board as part of its measurement project.

The IFRIC decided not to address this issue.

Effective date

Staff proposed that IFRIC should consider an effective date for the interpretations when their post-exposure deliberations are complete.

The IFRIC agreed.

IAS 18 Revenue Recognition - Sales of Real Estate

The IFRIC agreed to add to its agenda a project to clarify how the requirements of IAS 18 Revenue should be applied to real estate sales in which contracts are agreed before construction is complete.

The IFRIC then discussed matters to be addressed in the project. With regard to the scope of the interpretation, the point was made that the interpretation should assume the relevant agreements through which the construction work is to be undertaken to have been agreed prior to construction. The IFRIC agreed to revisit the scope after discussing the other matters.

Two possible fact patterns could be developed as the potential issues to be addressed:

  • 1. Whether it is permissible to switch from the sale of goods guidance (IAS 18.14) to the rendering of services guidance (IAS 18.20) at some point during construction?
  • 2. If legal title to the land transfers to the buyer before construction is completed, can IAS 18 be interpreted in a way that allows, from that point onwards, the contractor's activities to be viewed as delivering items onto the buyer's property.

The second issue was noted as posing further questions about separating identifiable components, possibly the land and building under construction as separate deliverables. IFRIC members noted that it is quite possible to deliver a partially complete building.

The IFRIC agreed that the interpretation should address the circumstances in which a contract for sale should be regarded as a construction contract within the scope of IAS 11.

In addressing when revenue should be recognised (provided it is appropriate to apply IAS 18), the IFRIC agreed to explore how transfers of legal title take place in such construction arrangements (title to land may transfer to the buyer but the construction activity continues under the control of the contractor) and how that differs from the notion of 'equitable title' referred to in paragraph 9 of the Appendix to IAS 18. Some IFRIC members noted that the term 'equitable title' is not defined in IFRSs and is used loosely in various jurisdictions. It was agreed that the Interpretation should be drafted using the 'significant risks and rewards' notion with a reference to equitable title as appropriate.

IFRIC noted the possibility of recommending an amendment or deletion of paragraph 9 of the Appendix to IAS 18 if an Interpretation is finalised. This was re-enforced by some IFRIC members who noted that any Interpretation prepared would interpret the Standard, not the Appendix that accompanies but is not part of IAS 18.

IFRIC noted the IAS 18.14(e) requirements about costs but noted that the interpretation should not deal with the allocation questions that arise (for example, costs attributable to the penthouse situated at the top of an apartment block are likely to differ from the costs of the ordinary apartment on the ground floor) as this is an area of judgement based on facts and circumstances.

IAS 19 Post-employment Benefits - The Effect of a Minimum Funding Requirement (MFR) on the Asset Ceiling

The key decisions made at the September 2005 meeting were as follows:

  • 1. If an MFR obligates the entity to pay additional contributions to a plan, an additional liability should be recognised under IAS 19 to the extent that the assets derived from those contributions would not be available to the entity as a refund or reduction in future contributions.
  • 2. It is not necessary for the refund or contribution reduction to be immediately available at the balance sheet date, provided that it would be available at some point during the life of the plan or when the plan liability is finally settled.
  • 3. The amount available as a refund shall be recognised to the extent that any surplus existing on the final settlement of the plan liabilities will revert to the entity, after taking into account all the costs associated with the settlement.
  • 4. The amount available as a reduction in future contributions is the present value, using IAS 19 assumptions, of:
    • i. The service cost (if there were no surplus) excluding future employee contributions; less
    • ii. the entity's minimum funding contribution requirement.

The IFRIC considered a draft interpretation based on the above decisions.

The IFRIC debated whether an obligation exists merely because of a requirement to place a certain amount into the bank account of the pension fund. The discussion included whether it is of significance if the entity is able to recover that amount through reduced future contributions or otherwise. IFRIC agreed that an obligation exists provided that the MFR is with respect to past service and that if the resultant asset (which may arise if the contribution is made) were recoverable, the liability to make an extra contribution (the MFR) may have a value of nil as a result of applying the IAS 19 methodology which offsets liabilities and assets.

If at the balance sheet date the contribution had not been made to the pension fund, IFRIC discussed the possible accounting to recognise the obligation arising from the MFR. Some IFRIC members suggested that the debit entry should recognise a plan asset that would then be subject to an impairment test that takes into account whether or not it would be recoverable through reductions in future contributions. Any impairment would be recognised in profit or loss. Others believe this accounting cannot be achieved because IAS 19.103 precludes unpaid contributions from plan assets.

IFRIC members commented that the draft interpretation should clearly separate the issue of the MFR liability from the asset ceiling issue that may arise once the MFR liability has been settled.

IFRIC discussed the applicability of the draft interpretation to funding requirements in general, as some IFRIC members believe there to be no distinction in substance between MFR set out by governments and those set out by contract or otherwise between entities and employees (or their representatives, such as trade unions). It was not clear how IFRIC decided to proceed with that issue.

Various questions that may arise on transition were discussed briefly, and staff suggested that a paper be prepared for consideration at a future meeting.

The staff asked the IFRIC to consider the following outstanding issues:

Future changes in the workforce

At the previous meeting, the IFRIC rejected the view that the entity should make allowances for any future changes in the size and demographics of the workforce consistent with the management's most recent budgets/forecasts in determining the future contribution reduction available. The IFRIC decided that actuarial assumptions, including demographic assumptions, used in computing the net plan asset available should be consistent with the assumptions made to compute the benefit obligation at the balance sheet date.

Some IFRIC members pointed out that, in practice, actuarial valuation techniques often consider normal attrition of the workforce and compensate for that by assuming new employees join to replace those that leave the employ of the entity. Following on from this, any significant future changes in the workforce would be accounted for as curtailments.

Associated costs

The staff recommend that the IFRIC should not issue guidance on how the present value of the associated cost should be determined (includes costs associated with gradual settlement or wind-up of the plan). The IFRIC appeared to agree with this recommendation.

IAS 32 - Classification of a Financial Instrument as Liability or Equity

The staff presented a paper in which the analysis provided the rationale that economic compulsion is an issue that may affect the manner of settlement but does not affect classification of a financial instrument as a liability or equity.

IFRIC members generally agreed that the staff's analysis was accurate and reflected the contents of IAS 32. However, some IFRIC members said that although that is what IAS 32 requires (particularly, paragraph AG26), they did not like the answer. Some IFRIC members pointed out the need for an interpretation given the misunderstanding in practice of whether economic compulsion can create an indirect obligation that would affect classification on initial recognition. After agreeing that AG26 is clear, and therefore negated the need for an interpretation, IFRIC decided to remove this issue from its agenda, with public explanation of why, and possibly to release the staff paper as useful analysis for constituents via the IASB website.

IFRS 1 - Cost of a subsidiary in the separate financial statements of a parent

The IFRIC was asked to consider two issues regarding the accounting for investments in subsidiaries on adoption of IFRS 1 First-time Adoption of International Financial Reporting Standards in the separate financial statements of a parent. These issues are applicable only to the separate financial statements of the parent.

  • 1. How to determine the cost of an investment in a subsidiary in the separate financial statements of the parent entity upon its transition to IFRS?
  • 2. What is the dividing line for pre- and post-acquisition reserves of a subsidiary for the purposes of determining the carrying amount of the investment in a subsidiary in the parent entity's first IFRS separate financial statements?

The point was made that the treatment of investments in subsidiaries in the separate financial statements of the parent was not addressed satisfactorily in IFRS 1. The intention of the exemption available for restating business combinations was to discourage the recreation of data that was not collected at the time of the transaction and that compelling entities to revisit every pre-transition cost of investment and pre-acquisition reserves calculation is inconsistent with the principles in IFRS 1.

The Agenda Committee recommended that this issue could not be resolved by an Interpretation and that the Board should be requested to amend IFRS 1. The IFRIC agreed with this proposal.

This summary is based on notes taken by observers at the IFRIC meeting and should not be regarded as an official or final summary.

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