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Linkage of Transactions

Go To List of IFRIC Issues Entities sometimes enter into two or more transactions or contracts where the accounting treatment varies depending on whether the transactions/contracts are accounted for separately or together. The IFRIC will discuss whether, in some circumstances, it is necessary to look at the overall effect of the contracts, taken together, in order to determine the 'correct' accounting treatment. Discussion at IFRIC Meeting April 2002: Background discussion of the issue. No conclusions reached. Discussion at IFRIC Meeting July 2002: IFRIC agreed on the following points: It is necessary to consider all of the terms and conditions of an arrangement and their effect when determining the appropriate accounting treatment. If a right or obligation is non-substantive—ie it has no effect in practice, it should have no effect on the accounting treatment. When one contract (or feature of a contract) completely undoes another, the combination should be viewed as a nullity. The form of a transaction does not affect whether transactions should be linked or the consequent accounting treatment. Similarly, the fact that rights and obligations are contained in two or more contracts as opposed to one should not affect the accounting treatment. When a transaction is priced on off-market terms, this indicates that there is another feature or transaction that needs to be identified and that the transactions may need to be linked. However, it is not necessary that transactions are at off-market prices before linkage needs to be considered. When preparing consolidated accounts, transactions with different companies in the same group may need to be linked when accounting for the combination from the perspective of the group. This reflects the basic principle of consolidation that group financial statements reflect transactions entered into by the various members of the group as those of a single economic entity. When a Standard or Interpretation applies to two or more linked contracts in their entirety, that Standard or Interpretation should take precedence over the requirements set out above. Discussion at IFRIC meeting February 2003: The IFRIC concluded that the draft interpretation should not address situation where one contract should be divided into two or more components and agreed on certain disclosure requirements. IFRIC also agreed to expand the name of the project to "Reporting of Linked Transactions". The IFRIC also concluded that the guidance for when to link transactions should be characterised as indicators. The staff asked the IFRIC members whether the final conclusions should be documented as an interpretation or given to the Board to be issued as a standard. The IFRIC concluded that preparation of a pre-ballot draft for an Interpretation should continue unless instructed by the Board that this should be issued as a Standard. November 2006 Subsequent to February 2003, this project was merged into IFRIC's project on IAS 11 Combining and Segment Contracts, which was ultimately removed from IFRIC's agenda in November 2006