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IFRS 11 — Finalisation of various agenda decisions

Date recorded:

The Chairman opened the session on IFRS 11 by saying that commentators had said that the Board should either accelerate the post-implementation review (PIR) of IFRS 11 or that parts of the agenda decisions should be forwarded to the Board as proposed amendments to IFRS 11. The Chairman asked the Committee if, subject to the discussions of this session, the guidance in the agenda decisions fulfilled the criteria for timely guidance.

One Committee member asked for when the PIR was scheduled. He said that the guidance in the agenda decisions would be better than nothing although it was limited in certain issues. The Director of Implementation Activities replied that the PIR was due to start in 2016 but would take some time. Also, amendments identified through the PIR could only be taken onto the IASB agenda after the PIR would have completed.

A Committee member said that the process was too developed to discard the agenda decisions. Another Committee member said that accelerating the PIR and the issuance of the guidance in the agenda decisions were not mutually exclusive. An observing Board member said that IFRS 11 would have to be separated from the PIR as the PIR was to consider IFRS 10, 11 and 12 together. There was no reason to accelerate IFRS 10 and 12.

The Visiting Fellow said that for the rest of the session the Committee was to discuss each of the seven agenda decisions. He said that staff proposed to make modifications to agenda decision A (“Classification of a joint arrangement: the assessment of ‘other facts and circumstances’”) to clarify that the parties were considered individually to assess the rights to the assets and obligations for the liabilities of the joint arrangement and that the term ‘obligation’ included constructive obligations. One Committee member suggested that each party should be considered for the assessment. Another Committee member expressed concern that including constructive obligations would go too far. He doubted that management intent could influence the assessment. A fellow Committee member said that rights should be enforceable, as drafted in the original agenda decision. Several Committee members agreed with those views. The Technical Principal asked whether obligations should be enforceable as well. One Committee member agreed. He said that all rights and obligations were enforceable and that obligations always included constructive obligations. A fellow Committee member replied that constructive obligations were not always enforceable. Another Committee member expressed concern that mentioning ‘enforceable’ might lead preparers to consider legally enforceable rights and obligations only.

The Chairman asked the Committee members if they preferred to retain the original wording without the modification proposed by staff. None of the members voted in favour. He asked if any Committee members objected to leaving the term ‘enforceable’ in the agenda decision. None of the Committee members objected.

The Technical Principal suggested removing the reference in the agenda decision that the Interpretations Committee had noted that rights and obligation had to be enforceable by nature. One Committee member asked whether this meant that they would not have to be enforceable. The Technical Principal said that often ‘enforceable’ was seen as legal enforceability.  Another Committee member was concerned that deleting this reference would remove the justification to use ‘enforceable’ elsewhere in the agenda decision. A fellow Committee member suggested merely deleting ‘by nature’ as a solution to this issue. All Committee members agreed with this proposal.

The Chairman asked if Committee members agreed with not adding ‘legal or constructive’ to obligations. All Committee members agreed with leaving as originally drafted.

The Visiting Fellow continued with agenda decision B (“Classification of joint arrangement: application of ‘other facts and circumstances’ to specific fact patterns”). In the section ‘output sold at a market price’, staff proposed to clarify that cash flows from the purchase of the output were not the only source of cash flows that could be considered. One Committee member said that adding ‘other funding’ to the agenda decision was incomplete and that it should be ‘obligations to provide funding’ instead. The Committee members signalled that they agreed with that.

The Visiting Fellow said that a similar change was proposed in the section ‘financing from a third party’. One Committee member said that the issue was really about the distinction between third party financing upfront and a facility to draw down on third party financing. The Chairman suggested that this should be clarified in the wording.

In the section ‘nature of output’, the staff suggested to amend the wording so it covered the cash flows between the parties to the joint arrangement and the counterparties of the joint operation’s liabilities. One Committee member suggested replacing ‘joint operation’s liabilities’ by ‘joint arrangement’s liabilities’ as the joint operation itself did not have liabilities. The Director of Implementation Activities agreed with the proposed change. None of the Committee members objected.

The Visiting fellow continued with the section “determining the basis for ‘substantially all of the output’”. Staff suggested changing the term ‘obligation for assets’ to ‘assumed risks for the assets’ in that section. One Committee member said that agenda decision A explained the concept of obligation for assets and hence retained the term. He proposed that for consistency reasons it should be retained in this agenda decision as well and explained in the same way to remove the ambiguity. Another Committee member said that he saw a conflict with the third party financing section. The section read like funding from other sources was not permitted whilst in one of the previous sections third party financing was permitted. The Director of Implementation Activities replied that third party financing was permitted during the life of the joint arrangement but that final liabilities should be settled by the parties. The Chairman asked whether this issue could be resolved by including the concept of obligation for assets from the previous agenda decision. The Committee member agreed. None of the Committee members objected to that proposed change.

The Visiting Fellow went on to agenda decision C (“Classification of joint arrangements: consideration of two joint arrangements with similar features that are classified differently”). Staff proposed to finalise this agenda decision without modifications. One Committee member said that the agenda decision stated that the legal form of the separate vehicle affected the rights and obligations of the parties. She proposed to modify it to read that it only might affect the rights and obligations. The Director of Implementation Activities proposed to use the wording of IFRS 11 which stated that the legal form was relevant in the assessment. All Committee members agreed with that.

Staff proposed major modifications to agenda decision D (“Accounting by the joint operator: recognition of revenue by a joint operator’) with regard to the revenue recognition of the joint operators when the joint operation sold its output to the parties. One Committee member asked whether it was of relevance that the joint operation sold its output at market price. The Director of Implementation Activities said that this reference could be deleted if requested by the Committee. One Board member said that this agenda decision would not be suitable to consider revenue recognition and suggested to delete the proposed addition. He agreed with the inclusion of guidance on how to eliminate internal transactions. The Chairman asked whether this guidance had been discussed in previous meetings. The Director of Implementation Activities negated that. The Chairman called a vote on omitting the amendments. Ten of the eleven members present voted in favour of omitting. The member who did not vote in favour said that the agenda decision stated that revenue was not recognised if the parties took all of the output. He said that there could be circumstances where the parties would not take all of the output and had to recognise revenue. One Committee member replied that the introduction to the agenda decision stated that all output would be taken by the parties.

One Committee member said that the agenda decision stated that sales to third parties did not include sales to other parties to the joint arrangement. He expressed concern that the term ‘other parties’ was ambiguous. One Committee member suggested rephrasing by using the wording from the Standard, i.e. ‘third parties do not include a party that participates in, but did not have joint control of, a joint operation’. All Committee members agreed.

The Visiting Fellow introduced agenda decision E (“Accounting by the joint operator: the accounting treatment when the joint operator’s share of output purchased differs from its share of ownership interest in the joint operations”). The agenda decision described why the issue was too broad for the Interpretations Committee. However, staff recommended retaining the discussion in the tentative agenda decision with the changes marked up in the agenda paper. One Committee member said that the phrase “but to bring this matter to the attention of the IASB” was obsolete as all items discussed in the Interpretations Committee would be brought to the IASB’s attention. All Committee members agreed with deleting this phrase.

Next on the agenda was agenda decision F (“Accounting in separate financial statements: accounting by the joint operator in its separate financial statements”). The Visiting Fellow recommended retaining this agenda decision. An observing IASB member said that the agenda decision stated that rights and obligations were the same whether separate or consolidated financial statements were prepared. In his view, this was not true under a scenario where a parent had an indirect interest in a joint arrangement, i.e. through a subsidiary. One Committee member said that the rights would be assessed from the perspective of the reporting entity. The Director of Implementation Activities suggested adding that rights and obligations were the same in respect of that interest. All Committee members agreed.

The Visiting Fellow moved on to agenda decision G (“Accounting in separate financial statements: accounting by the joint operation that was a separate vehicle in its financial statements”). Staff suggested clarifying that the Interpretation Committee did not want to imply that financial statements of a joint operation would not necessarily have to recognise the same assets and liabilities to which the operators had rights and for which they had obligations. One Committee member said that before it had been decided that an agenda decision should not talk about contractual or legal obligations. One Committee member suggested deleting the entire paragraph where the amendment was proposed as it was confusing to him. Another Committee member disagreed as the paragraph helped clarify which was the reporting entity, i.e. the joint operation or the separate vehicle. One Committee member suggested retaining the clarification that the joint operation was the reporting entity and suggested only deleting the clarification that this needed to reflect the joint operators’ rights and obligations arising from contractual arrangements with the joint operation. The Chairman called a vote on that proposal. All Committee members were in favour.

The Visiting Fellow continued by saying that on a different topic (“Classification of joint arrangements: consideration of an industry-specific case”) the Committee had decided not to issue an agenda decision. The ESMA representative said that she would prefer to have an agenda decision on this topic. The Chairman called a vote on drafting an agenda decision on this issue. Only one of the eleven Committee members present voted in favour.

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