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IAS 27 Consolidation: Non-cash Distributions

Go To List of IFRIC Issues 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: A recommendation to the Board of amendments to IFRS 5 to include distributed assets within the scope of the standard. 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.