It was noted that 74% of respondents agreed either fully or in part with the proposals.
The IFRIC considered in brief issues raised by respondents, including:
- Expanding the title of the interpretation to reflect its increased scope;
- The need for additional guidance clarifying the difference for accounting purposes between a prohibition on the creation of a liability, and the prohibition on the settlement of a liability;
- Agreeing in principle that the ability to change the Charter of an organisation does not affect the classification as liability or equity until such time as that change in Charter has occurred;
- The use and application of the portfolio approach;
- The need for transitional provisions, noting that in Europe these would be unnecessary as entities would be caught by the transitional provisions relating to adoption of IAS 32; and
- Whether profit or loss could ever arise on reclassification between liability and equity.
The objective of the session was to highlight issues and ensure IFRIC members believed all major issues arising in comment letters would be addressed by exploration of those issues. The IFRIC agreed to discuss these issues in more detail at its November meeting. In addition the IFRIC will consider a draft interpretation at its November meeting.
The IFRIC was presented three draft interpretations in relation to service concessions to consider:
- D10A Service Concession Arrangements - Determining the Accounting Model
- D10B The Financial Asset Model
- D10C The Intangible Asset Model
Determining the accounting model
The IFRIC considered issues arising from the draft interpretation on selection of the accounting model. They noted that where there is a requirement for the grantor to pay, at the end of the concession, the fair value of the asset at that time, the arrangement would not be within the scope of the interpretations because the control tests are not met.
One IFRIC member raised a concern as to whether an operator can allocate different margins to different parts of a contract where the segmentation criteria in IAS 11 are not met. It was generally agreed that where output measures are used to measure completion then such accounting is possible, but this issue would be better considered as part of the combining and segmenting project, and should not hold up the release of the draft interpretations.
Some IFRIC members expressed concern about the use of the financial asset model when payments by the grantor depend on usage, but most IFRIC members believed this was acceptable. The IFRIC discussed widening the scope of the financial asset model to capture all arrangements where an entity has a right to receive cash (whether from the grantor, or from users with a grantor minimum guarantee), leaving arrangements where an entity only has the right to try and earn cash in the intangible asset model. The IFRIC agreed that the model as currently drafted should be released for exposure without this widening of the application of the financial asset model. The IFRIC also requested that wording be included to the effect that the existence of rate regulation (ie an ability to increase prices to offset lower than expected demand) does not by itself mean the financial asset model is appropriate, as such rate regulation is only effective in creating a financial asset where the possibility of non-recovery is remote.
The IFRIC briefly discussed transitional arrangements, and given the planned effective date of 1 January 2006, what, if anything could be done about accounting for these arrangements in 2005. It was agreed that they should not propose to suspend the hierarchy in respect of these arrangements for 2005, and therefore entities would have to determine accounting policies believed to be consistent with the hierarchy which, it was acknowledged, could include continuing to apply a fixed asset model.
The IFRIC also discussed whether a fair value at date of adoption transition model could be offered, and agreed that under the intangible asset model it could not because there is no active market (and therefore such a transitional alternative would be inconsistent with IFRS 1. It was generally agreed that the transitional arrangements as drafted (that where restatement is not practical the entity should reclassify the asset and test for impairment as of the beginning of the earliest period presented if possible) should be exposed for public comment.
Staff agreed to develop some additional worked examples of how each of the models work across a long-lived concession for consideration at the next meeting, and that these would be considered for incorporation into educational material rather than as part of the draft interpretations.
The Financial Asset Model
The draft interpretation considered by IFRIC was broadly consistent with the one considered at the September meeting. The IFRIC considered a number of issues, particularly around the measurement of a financial asset, including the effect of anticipated penalty clauses, and re-measurement when such assumptions change. It was agreed that this was outside of the scope of this interpretation.
It was noted that in the context of the financial asset model it would be unlikely that there would be material qualifying assets for the purposes of capitalising borrowing costs. It was agreed that the draft interpretation should explain this in more detail by outlining the interaction of IAS 11, IAS 18 and IAS 23 in this situation.
The Intangible Asset Model
The IFRIC revisited the issue discussed in previous meetings on the exchange transaction that occurs when the intangible asset model is used, resulting in revenue being recognised on the construction services (exchange of construction services for an intangible asset), followed by recognition of additional revenue resulting from the cash inflows from operations (perceived as a 'double counting' because ultimately only the one set of cash flows is received). A number of IFRIC members expressed their discomfort with this outcome, however only two IFRIC members indicated their intention to dissent on the basis of this issue. Other IFRIC members were uncomfortable, but unable to develop technical bases for dissenting as they believe this outcome is forced by the current literature.
There was considerable discussion around whether an entity should recognise the intangible as it completes construction services, recognise the intangible and a corresponding liability for performance on Day 1, or recognise a receivable as it completes construction services (being the right to receive an intangible). It was agreed that the interpretation should not be explicit on this issue, but should clarify that the intention is that the pattern of revenue recognition should be similar to that which would occur under ordinary IAS 11 construction contract accounting.
One IFRIC member indicated his intention to draft a dissent from the exchange model, on the basis that as you cannot segment the contract, only the total cash flows should be recognised as revenue (being the fair value of amounts received or receivable from the combined construction and operation activities) and agreed that he would not dissent from issuing the draft interpretation for comment if his dissent were adequately reflected in the basis for conclusions.
The IFRIC agreed that when the intangible asset model is being applied that the effect of any caps, floors etc should be recognised using an IAS 37 type model and that fair valuing such features should not be permitted.
Considerable confusion was noted around how repairs and maintenance obligations should be accounted for, and it was agreed that further application guidance was necessary. Such guidance would clarify that under the financial asset model, it would simply be a revenue deferral issue (that is the repairs and maintenance might be completed either before or after revenue in respect of these services was received, and the revenue should be accounted for according to whether the related service had yet been performed). Under the intangible asset model repairs and maintenance should be accounted for in accordance with IAS 37.
The IFRIC will consider draft interpretations at the meeting to be held in November with the intention of voting to issue them for public comment at that time. It is expected that there will be a 3 month comment period.
This summary is based on notes taken by observers at the IFRIC meeting and should not be regarded as an official or final summary.