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IFRS 11 — Analysis of Implementation issues

Date recorded:

The Interpretations Committee received several requests with regard to the application of the requirements of IFRS 11.

In November 2013, the IFRS IC had already discussed these issues and prioritised two of those issues for further discussion. One of them was whether an assessment of ‘other facts and circumstances’ should take into account facts and circumstances that do not involve contractual and (legal) enforceable terms.

The staff analysed this issue and established two possible views on this topic:

  • View A: The assessment of other facts and circumstances should be based on enforceable rights and obligations that arise from contractual or other legal terms.
  • View B: The assessment of other facts and circumstances does not need to be based on enforceable rights and obligations that arise from contractual or other legal terms.

The staff found that some parts of the Standard could be read in favour of View A while others could be read in favour of View B.

Therefore, the staff recommended the Committee to take this problem onto their agenda. This recommendation is also supported by the fact that this is a significant implementation issue in practice.

The implementation director pointed out that when looking at the overall guidance (including educational guidance published by the IASB), the guidance points more towards View A, however he is not sure whether this is the only way to read the guidance.

One Committee member said that the Standard is clear that other facts and circumstances should be evaluated whether they could represent rights and obligations. He therefore favours view A. However, he said, it needs to be discussed who can enforce these rights and obligations, i.e. whether they need to be enforced by a third party or if it is sufficient if the arrangement can enforce those rights and obligations. In his view the Standard is clear that it does not necessarily have to be enforceable by third parties.

Another Committee member agreed. She said the paper does not reflect the main issues in the “other facts and circumstances” evaluation that she sees in practice, which revolve around the question if there always need to be direct rights and obligations and if not, to what extent indirect rights and obligations are considered. She admits, though, that she also comes to View A when reading the Standard. One example in the Standard says that a joint arrangement is a joint operation (even if it is a legal entity) if the partners take substantially all the output from the joint arrangement. She wonders if there is any other example in the Standard to assess if an entity has rights to the assets and obligations for the liabilities of a joint arrangement.

One Committee member agreed and asked whether there should be a link to the understanding in IFRIC 4 where there also needs to be an assessment. He believes there is some guidance that could be useful.

It was mentioned by a Committee member that the design of the joint arrangement should be taken into account (similar to IFRS 10).

An IASB member said that she was only there for the end of the project and mentioned that there are so many varieties in practice that “other facts and circumstances” was the only way to ring-fence all of them.

Another IASB member said that they did not have any other examples in mind except for the one mentioned above (i.e., the partners take substantially all of the output) and gave some insight to the example.

The chairman summarised that first, the contract is evaluated and if there is nothing else, the rights and obligations from that contract are determining the classification. If there is something else, those other facts and circumstances need to be considered to assess whether they change the rights and obligations of the partners. He admits that this is enormously simplified for illustration purposes.

The Committee discussed some examples of joint arrangements with different features.

One Committee member said that the Board was thinking of many varieties but did not write them in the Standard. Therefore constituents do not understand what is meant by other facts and circumstances and thus see it very broadly.

The Committee discussed how they want to proceed with this topic.

Upon taking a vote the majority of the Committee members were in view A and therefore agreed to publish an agenda decision to not take the issue onto the IFRS IC agenda.

The implementation manager suggested bringing examples to the next meeting that could be used to illustrate how the staff thinks other facts and circumstances create rights and obligations. The Committee could then create some educational guidance upon that.

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