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Review of Tentative Agenda Decisions Published in September 2010

Date recorded:

The Committee re-deliberated its tentative agenda decisions published in the September 2010 IFRIC Update.

IAS 12 Income Taxes - Recognition of deferred tax assets for unrealised losses on available-for-sale debt securities

At the May 2010 Committee meeting, the Committee published a tentative agenda decision to not add to its agenda a request to provide guidance on how to determine whether to recognise a deferred tax asset ("DTA") related to unrealised losses on available-for-sale ("AFS") debt securities.

The Committee agreed at the September 2010 Committee meeting to have the staff bring back an updated analysis for consideration at this meeting.

The question focuses on whether a reporting entity's intent and ability to hold an AFS debt security until the unrealised losses reverse is akin to a tax planning opportunity and whether recognition of a DTA relating to the unrealised losses can be assessed separately from the recognition of other DTAs.

The Committee agreed to address the issue through the Annual Improvements process. The Committee's proposed amendments include adding language within IAS 12 which differentiates the future taxable profit to utilise the deductible temporary difference by the appropriate character (e.g., ordinary income or capital gains). The proposals also clarify that an action which results in the reversal of an existing deductible temporary difference without creating or increasing taxable profit in the future is not a tax planning opportunity. And finally, the proposals will also clarify that an entity should only recognise the deferred tax asset to the extent it is probable they will have sufficient taxable profit, exclusive of reversing temporary differences and carryforwards.

IAS 19 Employee Benefits - Accounting for statutory employee profit sharing arrangements

At the September 2010 Committee meeting, the Committee published a tentative agenda decision not to add to its agenda a request for clarification related to the accounting for certain statutory employee profit-sharing arrangements (the specific arrangement in question is one in which a government mandate requires that 10% of taxable income, rather than accounting income, to be shared with employees). The tentative agenda decision referenced that although the profit sharing plan is calculated on a tax basis, it meets the definition of an employee benefit plan and therefore is required to be accounted for in accordance with IAS 19.

CINIF, the Mexican accounting standard-setter, objected to the tentative agenda decision feeling that the deferred component meets the definition within IAS 37, the deferred components exist because temporary differences occur as a result of past events and there will be outflows of resources resulting from the temporary differences, and the employees have already provided the services which created the benefits related to the deferred portion and the services were provided in a specific year in the past.

After brief deliberations, the Committee agreed to finalise the tentative agenda decision.

IFRS 2 Share-Based Payment - Share based payment awards settled net of tax withholdings

In September 2010 the Committee published a tentative agenda decision not to add to its agenda a request to consider the classification of a share-based payment transaction in which the entity is required by law to withhold a specified portion of the shares that would otherwise be issued to the counterparty upon exercise (or vesting) of the share-based payment award. Given the high level of interest and concerns expressed over the issue, the Committee discussed the issue at great length. The commentators expressed their concerns over the agenda decision as they felt that it does not reflect the existing diversity in practice and it has the potential to change the current practice without a proper due process. Several commentators suggested that the guidance around whether the employer acts as an agent or principal would provide an appropriate answer.

The Committee was deeply split it its discussion. Some Committee members agreed with the agenda decision as drafted (subject to small clarifications), others would prefer inclusion of the guidance related to agent and principal in this situation. Other Committee members were unconvinced, as they pointed out that agent/principal could mean different degrees of latitude (i.e. is the assessment based on the price risk that the employer bears, or should it be based on identification of the primary obligor).

The discussion also centred on the question if there is a need for a specific exemption from IFRS 2 requirements in this area, similar to US GAAP that would allow the tax portion to be classified as equity settled. The Committee chairman reminded the Committee that the commit is not entitled to create exemptions from the principles in the Standards and that it is the question for the Board. One of the Board members present at the table agreed and noted that the Board has no capacity to have a look at any limited IFRS 2 project in the near future.

Another IASB member that also attended the discussion noted that in his opinion the sole fact that the entity withholds shares (without bearing any price risk) should not influence classification of the share-based payment, as the arrangement should be considered as a whole. He analogised that treatment to withholding payroll tax and noted that it does not change accounting for payroll expense.

Some Committee members were vary about adding the issues to the agenda as they noted that the tax law around the world is diverse and any amendment/interpretation has to be generic enough as the Committee does not provide Implementation Guidance.

As such the Committee asked the staff to provide additional analysis of the issue and classification of the whole arrangement. Based on the analysis the Committee will decide whether to take it on as an Interpretative project or whether a new tentative agenda decision will be issued.

IAS 1 Presentation of Financial Statements - Current/non-current classification of callable term loan

The Committee confirmed the tentative agenda decision published in the September 2010 IFRIC Update without any editorial changes.

IAS 36 Impairment of Assets - Calculation of value in use

The Committee discussed the tentative agenda decision published in the September 2010 IFRIC Update. The Committee agreed with the commentators that the wording of the decision can be made clearer in a way that that in specific circumstances application of Dividend Discount Model (DDMs) to calculate value of use of a CGU is consistent with principles of IAS 36. The Committee also decided to clarify the agenda decision for a definition of a DDM as well as application for separate financial statements (where DDM is applicable for determining the value of the investment) and consolidated financial statements (where the application is limited to specific circumstances). Finally, the Committee agreed to finalise the agenda decision, subject to further drafting suggestions.

IAS 32 Financial Instruments: Presentation - Put options written over non-controlling interests

The Committee discussed the tentative agenda decision published in the September 2010 IFRIC Update. The staff noted that the agenda decision provoked large number of comment letters that expressed concerns about the existing conflict between standards, possibility of enforcement as well as due process. The staff also reminded the Committee that the Financial Instruments with Characteristics Equity has been delayed and it is very unlikely that will address the issue in the foreseeable future.

The representatives of the regulators expressed their deep concerns about the lack of clarity of the issue that is widespread and noted that quick action in this area is required (whether by the Committee or by the Board).

Given the new development and the need for urgent action, some Committee members suggested developing an Interpretation accompanied with amendment to other Standard(s). The Chairman noted that that would require positive endorsement by the Board for exposure document. The staff will analyse the issue further and develop further.

The Committee also instructed the staff to ask the Board for direction at the November meeting (i.e., ask whether in light of the new development it wants to take the project itself or the Committee shall develop the guidance). The Committee noted that in case amendments to other standards would be required or the committee is unable to reach consensus, the Board could use the work performed, post 2011 in its own project. The Committee will discuss the issue, together with the feedback from the Board at its January meeting.

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