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Issue Description:

How should an entity account for a non-cash distribution to owners – unconditional non-reciprocal transfers of assets by an entity to its equity holders acting in their capacity as equity holders (sometimes referred to as 'dividends in-kind', 'in-kind distributions', or 'in-specie distributions')?

Discussion at the IFRIC Meeting July 2007

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:

Alternative 1:

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.

Alternative 2:

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 of other than cash.
• 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.

Discussion at the IFRIC Meeting September 2007

The IFRIC continued its discussion of the accounting for non-cash distributions, formerly called 'demergers and other in-specie distributions' (see July IFRIC Meeting Notes). The discussion at this meeting concentrated on the following issues:

• (i) How should an entity measure non-cash distributions and the corresponding dividends payable?
• (ii) At the time an entity makes the distributions, how should any difference between the dividends payable and the carrying amount(s) of the asset be accounted for?
• (iii) Should there be any exceptions to the measurement principle?
• (iv) Should IFRS 5 Non-current Assets Held for Sale and Discontinued Operations be applied to the assets to be distributed after an entity declares non-cash distributions?

How should an entity measure non-cash distributions and the corresponding dividends payable?

The IFRIC noted that when an entity declares a non-cash distribution to its equity holders, it has an obligation to deliver non-cash assets. Accordingly, the journal entry would debit distributable reserves (equity) and credit dividends payable.

With regard to the measurement of the dividends payable the IFRIC considered the following three alternatives:

Alternative 1

All dividends payable should be measured in accordance with IAS 39 Financial Instruments: Recognition and Measurement.

Alternative 2

All dividends payable should be measured in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Alternative 3

Dividends payable should be measured in accordance with IAS 37 or IAS 39 depending on the type of asset to be distributed.

The IFRIC tentatively decided that dividends payable should be measured in accordance with IAS 37 (Alternative 2).

Under alternative 2 the initial measurement of the dividends payable should be based on the fair value of the assets to be distributed as the fair value of the assets represents the best estimate to settle the obligation. The IFRIC emphasised that the focus of this project was on measurement of the liability, rather than asset measurement.

At the time an entity makes the distributions, how should any difference between the dividends payable and the carrying amount(s) of the asset be accounted for?

The IFRIC noted that the project addresses situations in which the entity distributes 'something valuable to its equity holders' and that in these situations the fair value of the distribution should be known.

The IFRIC pointed out that any difference between the carrying amount of the asset and the dividend payable (measured with reference to the fair value of the asset) should result in a credit entry to be made. The IFRIC noted that any credit amount arises as a result of the settlement of the dividends payable, that is, the derecognition of a liability.

The IFRIC tentatively decided that the difference arising at the time an entity settles its dividends payable should be recognised in comprehensive income.

Staff was directed to proceed with the project considering alternative accounting treatments of the credit entry in other comprehensive income. The paper is to be brought back to the next meeting.

Should there be any exceptions to the measurement principle?

The IFRIC then discussed whether any exceptions should be made to this measurement principle in situations in which the fair value of the distributed assets cannot be measured reliably, for instance, ownership interests not traded in active markets, intangible assets not recognised in the financial statements of the entity or common control transactions. The IFRIC tentatively decided that no exceptions should be made for ownership interests not traded in active markets or intangible assets not recognised in the financial statements of the entity. Regarding common control transactions the IFRIC tentatively concluded that common control transactions were outside the scope of the project, and therefore no exception was required.

Should IFRS 5 Non-current Assets Held for Sale and Discontinued Operations be applied to the assets to be distributed after an entity declares non-cash distributions?

The IFRIC acknowledged that a distribution is not a sales transaction. Consequently, the IFRIC tentatively decided that after declaration of the distribution, an entity should not apply the measurement and disclosure requirements in IFRS 5 to the assets to be distributed. However, IFRIC acknowledged that the disclosures required by IFRS 5 would be useful to users. Staff was directed to prepare a paper for the next IFRIC meeting that considers two alternatives:

1. A recommendation to the Board of amendments to IFRS 5 to include distributed assets within the scope of the standard.
2. Disclosures to be included within a draft Interpretation requiring disclosure of information equivalent to that required by IFRS 5. This alternative should ensure any such disclosures do not conflict with the requirements of other Standards.

Discussion at the IFRIC Meeting November 2007

The IFRIC continued its deliberations of a proposed Draft Interpretation on the accounting treatment of non-cash distributions to owners. Much of the discussion focussed on the accounting for the assets to be distributed and whether and how and valuation adjustments should be reflected in the financial statements. The IFRIC confirmed the decisions it reached at its last meeting. These included:

• A distribution is defined as an unconditional non-reciprocal transfer of an asset by an entity to its owners acting in their capacity as owners.
• The Draft Interpretation should address all non-cash asset distributions with one exception (the distribution of an asset that is ultimately controlled by the same parent entity before and after the distribution), from the point of view of the financial statements of the entity that makes the distribution.
• The measurement of all dividends/ distributions payable (cash and non-cash) should be addressed by a single standard: IAS 37 Provisions, Contingent Liabilities and Contingent Assets. In accordance with IAS 37, the liability is measured at the best estimate of the expenditure required to settle the obligation at the balance sheet date.
• At the time an entity distributes the assets to its owners (i.e. settles the distribution obligation), any difference between the carrying amount of the assets distributed and the carrying amount of the dividends payable should be recognised in comprehensive income (not an owner change in equity). [The issue of where in comprehensive income is discussed below.]
• Where within comprehensive income should the difference between carrying value of the asset and the IAS 37measure of the distribution obligation be recognised?

The IFRIC staff presented their arguments supporting the view that the difference between the carrying value of the asset and the settlement value of the distribution obligation should be recognised in profit and loss, rather than as a component of other comprehensive income. They noted, in addition, that the staff did not think that the difference met the definition of an owner change in equity and had, for this reason, concluded that the difference could not be recognised directly in equity.

IFRIC members were split on this issue. Some supported the staff position unreservedly; some wanted the difference recognised in other comprehensive income at the time the distribution was irrevocable and recycled to profit and loss on the distribution date (it was not clear what the rationale for this treatment was). Others wanted to avoid comprehensive income entirely. Those who supported this treatment supported the liability measurement proposal but thought that the other component (the unrecognised valuation difference on the asset to be distributed) failed the definition of 'income' in the IASB Framework and should be therefore be excluded from comprehensive income.

A long and difficult debate ensued at the end of which the Chairman proposed a compromise. The Draft Interpretation would be drafted on the basis proposed by the staff (that is, any difference between the carrying amount of the asset and the IAS 37 measure of the distribution obligation should be recognised in profit and loss). The Basis for Conclusions would present an Alternative View in which the difference would be recognised directly in equity. The Invitation to Comment would direct constituents to consider both views when commenting on the Draft Interpretation. The IFRIC agreed to proceed on this basis.

Is an amendment of IFRS 5 required?

The IFRIC agreed to propose an amendment of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations to require assets held for distribution to owners to be measured initially (that is, at the date the entity is irrevocably committed to the distribution) in accordance with IFRS 5. This was to prevent the possibility for accounting arbitrage between two different approaches to asset disposals.

IFRS 5 disclosures would be required for assets to be disposed of through a non-cash distribution.

A minority of IFRIC members thought that it was unnecessary to amend IFRIC 5, but this view did not carry support.

Dividend reinvestment plans

The IFRIC agreed that the Draft Interpretation should not address dividend reinvestment plans. The IFRIC agreed with the staff that the choice offered to shareholders by dividend reinvestment plans was not relevant to non-cash distributions.

Next steps

The IFRIC staff will prepare a revised draft of the Draft Interpretation, including a revised Basis for Conclusions that includes the Alternative View on the treatment of the difference between the carrying amount of the asset to be distributed and the IAS 37 measure of the distribution obligation). This will be reviewed by IFRIC members out of session. If IFRIC members concur that the staff has rendered correctly its decisions, that draft will be sent to the December 2007 IASB meeting for a positive vote (the positive vote is required because of the proposed amendment to IFRS 5).

If the IASB approves the Draft Interpretation, it is likely to be published in early January 2008.

January 2008: Draft Interpretation D23

On 17 January 2008, IFRIC issued for public comment Draft Interpretation D23 – Distributions of Non-cash Assets to Owners. Comment deadline is 25 April 2008.

Comment at the March 2008 IFRIC Meeting

The IFRIC Co-ordinator indicated that the comment letter analysis for draft Interpretation D23 Distributions of Non-cash Assets to Owners will be discussed at the July 2008 IFRIC meeting.

Discussion at the July 2008 IFRIC Meeting

D23 Distributions of Non-cash Assets to Owners – First redeliberations

D23 is aimed to provide guidance on the accounting for non-cash distributions to owners. The purpose of this session was to present to the IFRIC a comment letter analysis along with recommendation of the staff on how to proceed with D23. The issues addressed were:

• General approach in D23
• Applicability of IFRS 5 for the asset to be distributed and timing of recognition of the liability

General approach in D23

The staff highlighted in its overview of the comment letter analysis that the following significant concerns were expressed by commentators:

• The scope is too narrow by excluding common control transactions
• Fair value measurement of the liability and reference to IAS 37 is not appropriate
• The difference between book value of the asset distributed and the distribution liability should not be recognised in profit or loss

Based on those concerns the staff proposed the following:

• Continue with the project
• Include common control transactions
• Provide an consistently applicable accounting policy choice to measure the dividend liability at either fair value or book value of the assets to be distributed
• Keep the disclosures proposed in D23

The staff noted that under the fair value approach taken in D23 most respondents would support recognition of the difference in profit or loss. One IFRIC member asked if the staff analysed whether those respondents would accept recognising the difference directly in equity. The staff answered it did not analyse this.

The IFRIC coordinator explained that most of the transactions that the draft Interpretation attempts to address arise in common control situations. However, some IFRIC members expressed their concerns about the dramatic change in scope. The chairman proposed first to answer the question if common control transactions should be within the scope of the draft Interpretation before proceeding to the remaining issues. Some of the IFRIC members said that in the case of inclusion of common control transactions this would trigger re-exposure.

The IFRIC discussed at length whether common control transactions should be within the scope. Some IFRIC members noted that while the scope should not be extended it should be made clear, possibly in the Basis for Conclusions, what transactions IFRIC considers to be within the scope of the draft Interpretation.

The staff highlighted that even with a scope excluding common control transactions, constituents consider an Interpretation useful. There seemed to be agreement around the table that the scope should not be broadened, but that the scope should be clarified.

Most IFRIC members were against providing an accounting option as proposed by the staff although it might be appropriate if the scope would be extended to include common control transactions.

However some IFRIC members had difficulties with the proposed measurement of the liability and acknowledged that this was shared by commentators. Notably, the reference solely to IAS 37 caused concern. One IFRIC member highlighted that often the liability recognised would be a financial liability as defined in IAS 32 and hence, in the scope of IAS 39. Others proposed to prescribe the measurement attribute 'fair value' instead of referring to IAS 39 which requires applying the best estimate which some considered not to be equal to fair value.

The chairman noted that the IFRIC rejected the staff proposal to provide for an accounting option.

Applicability of IFRS 5 for the asset to be distributed and timing of recognition of the liability

The staff then presented the comment letter analysis regarding the proposed amendment to IFRS 5 resulting from the deliberation of D23. Both the IFRIC and the Board concluded that IFRS 5 should apply to non-cash distributions although this is not a sales transaction. The staff noted that the majority of commentators agreed.

The IFRIC discussed whether IFRS 5 should also be amended to allow fair value measurement above the carrying amount that would avoid creating a mismatch between the measurement of the dividend liability and the asset to be distributed in settlement of that liability.

The IFRIC reaffirmed its position that the assets (groups) should be within the scope of IFRS but that allowing measurement above the carrying amount would be a big change to the principle of IFRS 5.

The staff then asked the IFRIC when the assets should be reclassified in accordance with IFRS 5. The possible options would be commitment date or obligation date, notably in jurisdictions where shareholder approval is necessary. After a short discussion, the IFRIC agreed that the principles of IFRS 5 should apply and that any shareholder approval would be included in the assessment of high probability (one IFRIC member dissented).

The staff then brought to IFRIC's attention the question when to recognise the liability, which is not addressed by the draft Interpretation. The staff recommended that this should be covered by the final Interpretation. It further proposed that this should be dependent on the requirement of shareholders' approval in a jurisdiction. If shareholder approval of a distribution declared by management is required, the liability would be recognised on the date of shareholders' approval. Otherwise, it would be recognised on the date of declaration by management.

There seemed to be agreement with the staff recommendations.

The staff was asked to provide a redraft of D23 based on these conclusions and to prepare a paper on possible ways of addressing the accounting mismatch between dividend liability and asset to be distributed in extinguishment of the liability.

It was noted by some IFRIC members on that occasion that when businesses are distributed there might be unrecognised assets and that there could be a difference between the liability and the assets recognised even if they were measured at fair value.

Discussion at the September 2008 IFRIC Meeting

Approve drafting changes decided at the July IFRIC meeting

The staff explained the various changes made to the draft Interpretation in response to comments received both from constituents and IFRIC members. Some IFRIC members noted that the examples on the scope should be clearer and that the reporting entity should be, for the avoidance of doubt, a publicly listed company. It was agreed that the staff will rework (and possibly expand) the Illustrative Examples. On that note, it was confirmed that the final Interpretation would create a difference with US GAAP.

Regarding measurement of the dividend payable, the IFRIC discussed whether the Interpretation should prescribe the measurement attribute for the dividend liability. One member noted that difficulties arise when the dividend is neither a financial instrument in scope of IAS 39 nor an IAS 37 liability, as there is no general Standard on liabilities, so the sole reference would be the Framework. The redraft defined fair value of the assets distributed as the measurement attribute. Responding to comments by members, the staff agreed to change the words to state that the dividend payable is measured by reference to the fair value of the assets to be distributed (as stated in the original draft). It was noted that the reason IFRIC referred to fair value was to ensure that all non-cash distributions are measured consistently.

The staff noted that it has expanded the rationale in the Basis for Conclusions explaining why the difference between the carrying amount of the asset to be distributed and the dividend payable (if any) is recognised in profit or loss – rather than in equity. One IFRIC member proposed to keep the alternative view of equity treatment in the Basis for Conclusions. The Chairman reminded the IFRIC that final Interpretations usually do not contain alternative views and that any alternative included must be accompanied with reasons it had been rejected.

On the drafting changes made on the basis of other decisions made in the July IFRIC meeting, the members had a short debate on whether to require presenting the difference between the carrying amount of the asset to be distributed and the dividend payable (if any) as a separate item of profit or loss, because IAS 1.85 would already require separate presentation of material items. It was argued that this would increase discipline in presentation and avoid grouping such transactions with other gains from disposals.

The redraft also reflected the decision made by IFRIC to amend IFRS 5 to scope in non-cash distributions. The amendments to IFRS 5 would introduce guidance that would require entities to include the probability of shareholders' approval to the distribution in assessing the high probability of the transaction occurring, which is a requirement for IFRS 5 to apply. It was agreed that this guidance was also considered useful for 'normal' IFRS 5 transactions and that the IFRIC should recommend to the Board to include such guidance for other disposals covered by IFRS 5.

Discussion of the issue of the accounting mismatch

The IFRIC discussed this issue briefly. It was agreed that the accounting mismatch (asset to be distributed generally at cost, dividend payable by reference to fair value of that asset) is similar to other mismatches that occur frequently in IFRSs due to different measurement attributes applied. It was agreed not to ask the Board to allow upward measurement of the asset to be distributed above its cost and to keep the requirements as set out in the draft Interpretation. However, it was agreed to draft the Basis for Conclusions carefully to explain the rationale behind this conclusion.

Approve the staff proposal regarding minor issues

The staff explained that it would not discuss the minor issues unless IFRIC members wished to discuss particular issues. One member agreed with one comment made regarding the situation where the fair value of the dividend payable cannot be determined reliably. It was agreed to amend the Basis for Conclusions to make clear the rationale of IFRIC on its conclusion. Another IFRIC member agreed with a comment made on one of the illustrative examples. It was agreed to amend or delete the example.

Consider re-exposure

As the redraft of the Interpretation does not differ significantly from the original Draft Interpretation, IFRIC agreed that re-exposure was not required.

Approving the Interpretation

The staff then asked the IFRIC whether it approved the consensus reached in D23. The IFRIC confirmed the consensus with four dissenting votes.

November 2008: Ratification of IFRIC 17 by the IASB

The Board ratified, subject to written ballot, IFRIC 17 Distributions of Non-cash Assets to Owners as well as consequential amendments to IFRS 5 and IAS 10. No Board members indicated they would dissent.

A Board member was worried that the Interpretation would create legal problems in some jurisdictions, especially during the period between the declaration of a non-cash dividend and the date on which that dividend is settled. An entity making such a distribution could appear to be making a return of capital rather than a return on capital because it could appear (before the effect of the fair value adjustment related to assets used to settle the liability) to be distributing more than its available retained earnings. The Board debated this point, but ultimately agreed with the Interpretation as drafted and noted that the issue was not raised as a fatal flaw by any constituents during the IFRIC's due process.

The staff noted that a few constituents (primarily UK-based) commenting on the near-final draft had raised concerns about the following proposed deletion from IAS 10 paragraph 13:

If dividends are declared (i.e., the dividends are appropriately authorised and no longer at the discretion of the entity) after the reporting period but before the financial statements are authorised for issue, the dividends are not recognised as a liability at the end of the reporting period because they do not meet the criteria of a present obligation in IAS 37.

The Board discussed the constituents' concerns and concluded that the parenthetical comment did provide useful guidance about whether a distribution was irrevocable but that the comment was better placed in IFRIC 17 rather than IAS 10. Consequently, the phrase will be removed from IAS 10 and incorporated in IFRIC 17.

The Board also considered whether it was necessary or desirable to amend IFRS 5 to include a new defined term, 'costs to distribute'. The Board concluded that there was considerable potential for confusion between that term and the similar defined term in IFRS, 'costs to sell'. The Board agreed not to create a new defined term but to incorporate the elaboration of the term 'costs to distribute' in IFRS 5 paragraph 15A (new).

A Board member also questioned the lack of symmetry between IFRIC 17 and US GAAP with respect to spin-off transactions (especially for non-publicly accountable entities). There was no appetite to amend the Interpretation at this late stage.

The Board agreed revised wording prepared by the IFRIC staff reflecting the Board's decisions when approving IFRIC 17. The wording was not available to Observers.

November 2008: Final Interpretation

On 27 November 2008, the IASB issued IFRIC 17 Distributions of Non-cash Assets to Owners.