IAS 18 Revenue - Customer Contributions
At the May 2007 meeting the IFRIC considered whether it should develop guidance as to how a utility company should account for customer contributions received.
The IFRIC noted that this issue could potentially apply to a diverse set of arrangements and raised the concern that considering all such arrangements could make the scope too broad for interpretation purposes. Therefore, the IFRIC decided to approach to the issue in a number of stages.
At this meeting the IFRIC discussed situations in which a customer contributes an item of property, plant and equipment to a service provider. The Chairman noted that after having reached a conclusion on the treatment of property, plant and equipment the IFRIC would debate whether the scope can be widened to other assets.
The staff analysis considered the following:
- Has an asset transfer occurred (including considering the effect of IFRIC 4 Determining whether an Arrangement contains a Lease)?
- Is IAS 20 Accounting for Government Grants and Disclosure of Government Assistance an appropriate accounting standard to use to account for a contributed asset?
- Should the asset received be measured at cost or fair value on initial recognition?
- How should any resulting credit should be accounted for
Has an asset transfer occurred?
The IFRIC tentatively decided that only contributed items of property, plant and equipment that meet the criteria for recognition as assets of the service provider should be in the scope of any Interpretation.
Therefore, the entity receiving the assets should first consider whether it is required to recognise the asset in its financial statements. In particular, it should consider whether it can obtain the future economic benefits flowing from the asset and can restrict the access of others to those benefits, and whether it has control over those assets.
In a second step the entity should assess whether the provision of the ongoing service to the customer contains a lease in accordance with IFRIC 4. If so, the entity should account for the lease of the asset to the customer in accordance with IAS 17 Leases.
The staff was directed to prepare a revised paper for discussion at the next meeting.
Is IAS 20 an appropriate accounting standard to use to account for a contributed asset?
The IFRIC unanimously concluded that it is not appropriate to consider customer contribution as being similar to government grants.
Should the asset received be measured at cost or fair value on initial recognition?
The IFRIC tentatively agreed that the contributed asset should be recognised initially at fair value since the contribution is part of an exchange of assets, that is, that it is not a unilateral transaction. In the IFRIC's view, in return for the contributed asset the customer may receive an access right to receive an ongoing service and/or an executory contract to receive a supply of goods and/or an ongoing service. There seemed to be a consensus that recognition at fair value should be applied irrespective of how the entity accounts for the credit record.
In addition it was noted that the fair value should be determined from the view of the utility company/service provider.
How should any resulting credit should be accounted for?
The IFRIC discussed two views:
The credit does not represent a liability or an equity contribution but instead gives rise to income.
The credit represents a liability which should be recorded as a liability and recognised over the life of the ongoing service.
The IFRIC had a thorough debate and mixed views were expressed. There seemed to be a consensus that the credit does not represent an equity contribution but that this issue exclusively relates to the allocation of income. The IFRIC acknowledged that the accounting for the credit depends on the contractual arrangements; in particular:
- If there is a contract between the contributor and the service provider it is most likely that the service provider has a liability and that the revenue arising from the receipt of a customer contribution should be deferred and recognised over the life of the ongoing service.
- If there is no contract between the contributor and the service provider the service provider may not have a liability. This might, for example, be the case if a house builder contributes an item to a utility company and in the absence of any contractual arrangements the utility company may neither have an obligation to provide services nor to grant access to their services. One IFRIC member suggested that in this case the revenue recognition should follow the guidance in IAS 18.
One IFRIC member pointed out that in both cases the accounting principle should be to 'spread the income' over the service period but that this period might be 'zero' in some circumstances.
No decisions were made but the staff was asked to bring back a paper considering the views expressed at this meeting. In particular, the paper should include indicators for upfront recognition and deferral of income.
IAS 18 Revenue – Guidance on Identifying Agency Arrangements
At the May 2007 meeting the IFRIC asked the staff to analyse existing guidance on this issue to determine whether such guidance was consistent and could be used to help to assess the level of diversity in practice.
The IFRIC was nearly equally split between two views.
The project should be removed from the IFRIC agenda on the basis that:
- Existing guidance, including that issued by some international audit firms, is consistent with this guidance being mainly based on EITF 99-19 (US GAAP) and FRS 5 (UK GAAP).
- Determining whether a seller is an agent or principal requires judgement and will depend on the particular facts and circumstances of each arrangement and that this would not change as a result of any guidance.
- Under IAS 8 GAAP hierarchy, an IFRS preparer may wish (although it is not obliged to do so) to consider other guidance.
- Any guidance in this area is more in the nature of implementation guidance and should not be issued by the IFRIC.
The IFRIC should proceed with its work on this project on the basis that:
- The issue is widespread and has practical relevance.
- Whereas the guidance in US GAAP and UK GAAP is useful outside of their respective jurisdiction, it is likely that some preparers around the world may not be aware of it.
- An Interpretation should be issued based on this existing guidance and it should not be difficult for the IFRIC to reach a consensus on this issue on a timely basis.
Finally the IFRIC came to the conclusion that 'there should be something in the IFRS book' in order to avoid being required to look at the guidance of other standard setter.
The IFRIC reached a tentative decision that this matter should be addressed by the IASB by adding an example to the appendix of IAS 18 and should not be added to the IFRIC agenda. The staff was asked to prepare a proposal for such an example whereby the example should be based on indicators.
The IFRIC will return to this issue at a subsequent meeting.
IFRS 2 Share-based Payment – Group Cash-settled share-based Payment Transactions
The IFRIC discussed whether it should provide guidance on how to account for the following cash-settled share-based schemes in the financial statements of a subsidiary that receives services from its employees.
The employees of the subsidiary will be reimbursed by cash payments that are based on the price of the equity instruments of the subsidiary.
The employees of the subsidiary will be reimbursed by cash payments that are based on the price of the equity instruments of the parent of the subsidiary.
Under both schemes, the parent (not the subsidiary) has the obligation to provide the employees of the subsidiary with the cash payments required.
The IFRIC concluded that scheme 1 is in the scope of IFRS 2 in accordance with paragraph 6 of IFRIC 8 Scope of IFRS 2.
With regard to scheme 2 the IFRIC believed that under the existing guidance this scheme would not be in the scope of IFRS 2. The IFRIC stated that the scheme is essentially cash-settled and share-based and that the subsidiary should measure the services received from its employees based on the requirements applicable to cash-settled share-based payment transactions.
Some IFRIC members raised the concern that application of other standards (for instance, IAS 19 Employee Benefits) may result in not recognising expenses in the subsidiary's books; for instance, if the parent does not charge its expenses to the subsidiary. Such an accounting treatment was considered to be misleading.
The IFRIC began an assessment of this potential agenda item against its Agenda Criteria. In doing so, it agreed that this issue would best be addressed by amending the definition of cash-settled share-based payment transactions in IFRS 2.
The IFRIC reached a tentative decision that this matter should be addressed by the IASB and should not be added to the IFRIC agenda. The staff was asked to draft a proposed amendment to IFRS 2 and consequential amendments to IFRIC 8 for discussion at a subsequent meeting.
IAS 27 Consolidated and Separate Financial Statements – Non-cash Distributions
Possible scope of the project
The IFRIC made the following tentative decisions:
- Non-cash distributions are defined as unconditional non-reciprocal transfers of assets by an entity to its equity holders acting in their capacity as equity holders.
- All equity holders of an entity within the same class are treated equally.
- After the distribution, the entity that distributes the assets is no longer entitled to any future economic benefits derived from the assets distributed.
- Assets distributed can be any non-cash assets (including ownership interests in subsidiaries, associates and joint ventures).
- The guidance would consider the treatment in the financial statements of the entity that distributes the assets only and the effect of non-cash distributions should be considered from the perspective of this entity.
The staff noted that situations in which equity holders of an entity within the same class are not treated equally are not addressed as such transactions might be more in the nature of exchange transactions or might imply that there are additional transactions between the equity holders. Such issues should be considered in a second step if deemed necessary.
The IFRIC discussed briefly whether cash options of the equity holders should be considered. There seemed to be a consensus not to address cash options but that the existence of such options should not scope out the underlying non-cash distribution in general.
Possible alternative treatments of the distributed assets
Based on the tentatively defined scope the IFRIC discussed the following issues:
- Whether the assets distributed should be remeasured at the time of distribution, particularly what triggers remeasurement.
- If so, at what amounts the assets should be remeasured.
- How any difference between the carrying amounts and the remeasured amounts should be accounted for.
The staff presented the following alternatives:
An entity should not remeasure the assets distributed at the time of distribution, that is:
- Distributions are recorded at the carrying amounts of the assets distributed immediately prior to the distribution.
- No gain or loss is recognised in profit or loss.
- Instead, the fair values of the assets distributed are disclosed in the notes to the financial statements.
An entity should remeasure the assets distributed at the time of distribution, that is:
- Assets are remeasured to their fair values at the time of distribution. No exception to the fair value measurement requirement is given.
- Any difference between the carrying amounts and fair values is recognised in profit or loss immediately.
The IFRIC had a thorough debate and was nearly equally split between the two alternatives.
IFRIC members in favour of alternative 1 noted that IFRSs (as they exist today) do not trigger remeasurement for distributions and that a distribution does not represent a disposal of assets. Accordingly, any differences between the carrying amounts and fair values of the assets distributed would not be realised. In addition, two IFRIC members were concerned that non-cash distributions do not meet the definition of income in paragraph 92 of the Framework as they do not result in an increase of assets or a decrease in liabilities.
IFRIC members in favour of alternative 2 argued that the assets concerned are realised at the time of distribution and that such a change triggers remeasurement. It was suggested that the accounting treatment for non-cash distributions should not differ from instances where the assets concerned are first sold and the cash is distributed to the equity holders afterwards.
One IFRIC member offered a different analysis: the distribution should be measured at fair value (since the shareholders were receiving something of value from the entity). The distribution was recognised and measured only once. It was the discharge of the distribution obligation that triggered remeasurement of the assets used to satisfy that obligation.
A straw poll of members suggested that there was sufficient support for Alternative 2 for the staff to explore this alternative further. To address the concerns of IFRIC members in favour of alternative 1 senior staff suggested to also elaborate the following approach when drafting the paper for the next meeting:
- Assess whether an obligation is created by the declaration of a dividend to be satisfied through a distribution in-specie.
- If such an obligation is created, how this liability should be measured.
- Whether the realisation or notional realisation of the distributed assets used to extinguish this liability may give rise to a gain/loss, and where any gain or loss is presented in the financial statements.
Staff Recommendations for Tentative Agenda Decisions
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations–Disclosures
The IFRIC continued discussing whether it should provide guidance to clarify whether the disclosure requirements of IFRS 7 Financial Instruments: Disclosures and IAS 19 Employee Benefits apply to non-current assets (or disposal groups) classified as held for sale or discontinued operations under IFRS 5.
At the May 2007 meeting staff was requested to confer with the FASB/EITF staff to determine the US experience on the application of FAS 144. Subsequently, the staff had determined that when issuing SFAS 144, the FASB did not address specifically the issue of whether disclosure requirements of other standards would apply to long-lived assets (or disposal groups) to be disposed of or to discontinued operations.
At this meeting, the IFRIC discussed the following alternative views:
IFRS 5 specifies all the disclosures required in respect of non-current assets classified as held for sale or discontinued operations, together with the requirement of IAS 33 Earnings per Share paragraph 68 to disclose the amount per share for discontinued operations.
Disclosures required by IFRSs, whose scope does not exclude non-current assets classified as held for sale or discontinued operations, continue to apply to non-current assets classified as held for sale or discontinued operations.
Several IFRIC members agreed that, given the current wording of the Standards, View B was hard to refute although it did appear to be onerous. There was widespread support for the IASB to address this apparent conflict in the Standards via the Annual Improvements process.
The IFRIC reached a tentative decision that this matter should be referred to the IASB for consideration as part of the Annual Improvements process. In doing so, the IFRIC would express a preference for the view that IFRS 5 specifies all the disclosures required in respect of non-current assets classified as held for sale or discontinued operations unless additional note disclosure would be required through application of IAS 1 paragraph 30, together with the requirement of IAS 33 Earnings per Share paragraph 68 to disclose the amount per share for discontinued operations (a modified View A).
The IFRIC Coordinator noted that IFRS 5 and FAS 144 were converged standards. The staff would notify the FASB staff so that any amendment of IFRS 5 could be done in conjunction with a FASB Staff Position on FAS 144.
IAS 19 Employee Benefits-Post employment benefits: Benefit allocation for defined benefit plans – salary increases
The IFRIC discussed whether it should remove D9 Employee Benefits with a Promised Return on Contributions or Notional Contributions from its agenda.
In phase 1 of its project on post-employment benefits the Board considers the allocation of benefits in relation to a new category of promises called defined return promises and the Board tentatively decided that an entity should always allocate the contribution component of a defined return promise to periods of service in line with the benefit formula.
The IFRIC reached a tentative decision to remove this issue from its agenda. In doing so, it noted that, although the IASB would not address the issue for all defined benefit plans in Phase I of its project on post-employment benefits, it would be difficult to address this issue while the Board had an on-going project that addressed the issue for some defined benefit plans.
Review of Tentative Agenda Decisions Published in the May 2007 IFRIC Update
The IFRIC confirmed its decisions not to take the following items to the Agenda:
In doing so, the IFRIC had suggestions on the wording of the Agenda Decision notices. In particular, when the IFRIC was referring something to the IASB, the staff was asked, wherever possible, to indicate the action that the IFRIC was suggesting (for example, an Annual Improvements Project item, incorporation into a current project, or other). The Agenda Decisions will be published in the July 2007 issue of IFRIC Update.
- IAS 12 Income Taxes - Deferred taxes arising from unremitted foreign earnings
- IAS 39 Financial Instruments: Recognition and Measurement - Gaming transactions
- IAS 39 Financial Instruments: Recognition and Measurement - Hedging multiple risks with a single derivative hedging instrument
- IFRS 5 Non-current Assets Held for Sale and Discontinued Operations - Plan to sell the controlling interest in a subsidiary
The IFRIC had more substantive redeliberations on the following items.
- IAS 39 Financial Instruments: Recognition and Measurement - Hedging future cash flows with purchased options
The IASB staff noted that this issue would be addressed in an IASB Exposure Draft on what risks and cash flows can be designated as hedged risks and hedged portions of risks, expected in the third quarter of 2007. The view in the ED is consistent with the IFRIC's tentative Agenda Decision published in the May 2007 IFRIC Update.
Consequently, the IFRIC revised the reasons for its tentative decision not to take the issue to its agenda. The rationale would now be that the issue is being addressed specifically by an IASB project.
- IAS 39 Financial Instruments: Recognition and Measurement - Scope of IAS 39.11A
The IFRIC noted the issues raised by commentators critical of the Tentative Agenda Decision. The staff had not yet been able fully to investigate those matters and was therefore not in a position to recommend a particular action.
The IFRIC agreed to defer confirming their Tentative Agenda Decision pending further investigation by the staff. One IFRIC member was concerned that, in the absence of a confirmed agenda decision, there might be the suggestion that any non-financial item with an embedded derivative could be designated at fair value through profit and loss, whereas the Board clearly intended the fair value option to be limited (see IAS 39 BC78).
The July IFRIC Update will contain a 'status report' on this matter.
- IAS 39 Financial Instruments: Recognition and Measurement – AG33(d)(iii)
The IFRIC noted that the comments received on this Tentative Agenda Decision demonstrated that there was difficulty in this area, which might suggest that guidance should be developed. However, IFRIC members noted that any guidance would be in the nature of Application Guidance, which is beyond IFRIC's terms of reference.
The staff suggested that additional analysis was necessary before it could make an informed recommendation to the IFRIC. In particular, it would revert to the standard-setters who had commented (plus at least one other known to face the issue in its jurisdiction) and the international accounting networks to gain more information and understanding of current guidance and practice.
The IFRIC agreed to defer confirming their Tentative Agenda Decision. The July IFRIC Update will contain a 'status report' on 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.