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IAS 16 – Contingent pricing of property, plant and equipment (new)

Date recorded:

IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets - Contingent pricing of PPE and intangible assets

The Committee received a request for guidance on how to account for contingent payments for the separate purchases of property, plant and equipment (PPE) or intangible assets. The purpose of the Committee discussion was to determine whether the issue be taken onto the Committee's agenda and be dealt with through an interpretation.

There was a general consensus within the Committee that the contingent price in a purchase agreement is an element of the cost of the asset purchased although some Committee members acknowledged there may be situations where the contingent payment would not be an element of the cost of the asset (for example, if the contingent event is completely unrelated to the purchased asset).

The Committee also generally agreed that the contingent price should be recognised as a financial liability only to the extent that the buyer does not have control over the realisation of the event that triggers the contingent price. However, the distinction was made between having theoretical control and the fundamental assumption that a buyer would have rational economic intentions (for example, if a contingent price was based on the level of production - despite the buyer being able to control production and therefore, in theory, being able to control the contingent price, any rational buyer would want to maximise profits and therefore wouldn't decrease production simply to avoid the contingent payment). The Committee agreed that rational economic intentions would underpin the determination of control.

As set out in Agenda paper 10, there are two views in respect of accounting for subsequent changes in the financial liability:

  • View 1: the subsequent changes in the financial liability are the remeasurement of a financial liability and are independent of the asset. Accordingly, the remeasurement should not be adjusted against the carrying amount
  • View 2: the subsequent changes to the amount payable represent changes to the cost of the asset. Therefore adjustments should be reflected as increases or decreases to the carrying amount of that asset under the cost model.

There was general agreement that if the contingent payment meets the definition of an asset in IAS 16/IAS 38 then the amount should be recognised as a part of cost of the asset. However, the conflict with IAS 39 was also specifically acknowledged, which it was suggested could be dealt with by amending the literature.

One Committee member suggested that contingent consideration should be dealt with in the same way as IFRS 3 (2008): i.e. Cost = Purchase Price + Fair Value of Contingent Consideration. Any subsequent changes to the value of contingent consideration should then go to profit or loss, which would avoid conflict with IAS 39. There was some level of support for this suggestion within the Committee, although it was noted that this would lead to a cost based on an estimate that is not to be corrected for future events.

The staff's preliminary assessment of the agenda criteria is as follows:

(a)

The issue is widespread and has practical relevance.

The issues described in this document are widespread and are of practical relevance.

(b)

The issue indicates that there are significantly divergent interpretations (either emerging or already existing in practice). The Committee will not add an item to its agenda if IFRSs are clear, with the result that divergent interpretations are not expected in practice.

There are currently differing views as to how to account for contingent prices upon initial recognition and for subsequent changes, which lead to different treatments.

(c)

Financial reporting would be improved through elimination of the diverse reporting methods.

Financial reporting would be improved by clarifying this issue. The accounting for contingent price arising from the purchase of separate items of property, plant and equipment (IAS 16) or intangible assets (IAS 38) is outside the scope of IFRS 3. An appropriate interpretation from the IFRS Interpretations Committee would enhance comparability among companies' financial reporting.

(d)

The issue can be resolved efficiently within the confines of existing IFRSs and the Framework, and the demands of the interpretation process.

The issue is sufficiently narrow in order to be addressed by an interpretation of the IFRS Interpretations Committee.

(e)

It is probable that the Committee will be able to reach a consensus on the issue on a timely basis.

Although there is a lack of guidance, the staff believe the solution proposed is consistent with current IFRS literature. Therefore, at this stage of the analysis the staff does not foresee any major reason why the Interpretations Committee should not reach a consensus on a timely basis.

(f)

If the issue relates to current or planned IASB project, is there a pressing need for guidance sooner than would be expected from the IASB project? (The IFRIC will not add an item to its agenda if an IASB project is expected to resolve the issue in a shorter period than the IFRIC would require to complete its due process).

The issue does not relate to a current Board project.

The Committee agreed that the issue meets the agenda criteria, but summarised that there are a number of other related issues to be considered, namely:
  • What does cost mean? What are the components of cost to be included?
  • In respect of the timing of recognition:
    • Are analogies to IFRS 3 / IFRIC 1 appropriate (whereby an estimate is made when the acquirer gets control of the asset)?
    • A liability is not recognised in situations under the control of the acquirer?
  • If one route is determined as preferable and therefore it is deemed that the acquirer doesn't account for the financial liability in accordance with IAS 39 - should this be treated as an exception?
  • If an approach was determined which is not entirely consistent with the current business combinations literature, will this maintain the tension in respect of knowing when a bundle of assets are not considered a business?

The Committee members agreed to submit particular examples to the staff, in order to assist them in their analysis. It was tentatively agreed to restrict the consideration to PP&E only at this stage, since otherwise the extent of the issue will be too great for the Committee to deal with as an interpretation.

The Committee requested the staff provide an analysis at the next meeting which describes the issues that the Committee should be addressing, and describes the scope of the paper. The Committee also requested that the staff look at divergence in practice and consider different approaches (although it was requested that choices should be limited).

The Committee tentatively agreed to add this issue to its agenda.

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