Annual Improvements

Date recorded:

The IFRIC Coordinator reported that the July 2009 IFRIC meeting had been a relatively full day and had resulted in a number of Agenda Decisions being issued in final, the most significant of which was perhaps on related to IAS 39 and the meaning of 'significant or prolonged' in IAS 39.61 (see the IAS Plus report of the July 2009 IFRIC Meeting for further information).


Write-down of a disposal group (IFRS 5)

The Board agreed that the staff should prepare a full agenda proposal to address an issue identified by the IFRIC to resolve a conflict between IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and IAS 36 Impairment of Assets. In addition, the proposal should include the solution suggested by the staff together with the proposed Basis for Conclusions. The solution suggested was to align the presentation of disposal groups in IFRS 5 with that for associates - this results in displaying the disposal group as a single line, measured at fair value less costs to sell. This would be included in the next round of annual improvements (2010-2011).


Debt-to-equity swap in a restructuring (IAS 32 and IAS 39)

The Board noted that the IFRIC, noting the significance and pervasiveness of the issue, had decided to develop an Interpretation with respect to the application of IAS 39 when an entity issues its own equity instruments in settlement of its existing debt instruments in a restructuring. The IFRIC had reached a tentative consensus at its July meeting and would meet by teleconference on 4 August at 1200 London time, with the intention of confirming its draft consensus. The Draft Interpretation would be issued as soon as possible thereafter with the usual 60 day comment period. The IFRIC would seek to confirm the consensus in November 2009, if possible, or in January 2010. The Board approved the approach and commended the IFRIC for acting as swiftly as it was.

Some Board members were concerned that the exchange of debt for equity resulted in a gain being recognised in profit and loss, but other Board members defended this result noting that it was the only logical result of the extinguishment of a liability for no cash outlay. The IFRIC was likely to conclude that the equity instruments issued should be measured at the fair value of the equity instruments issued or the fair value of the liability extinguished, whichever provides the most relevant measure.

A Board member asked what would be the accounting if the debt was held by a majority shareholder. The IFRIC Coordinator noted that IFRS had no measurement guidance for related party transactions. Judgement would be required and the transaction would need to be assessed to determine whether the shareholder was acting in their capacity as an owner before the appropriate accounting could be determined.


Measurement of Non-controlling Interest (IFRS 3)

The staff noted that IFRS 3 and IAS 27 (as issued in 2008) amend the definition of non-controlling interest (NCI) to 'the equity in a subsidiary not attributable, directly or indirectly to a parent'. They also noted that some constituents had suggested that the amended definition of NCI widened the scope of instruments to include, for example, the equity components of convertible bonds, warrants, options over own shares and options under share-based payment plans (not held by the parent). IFRS 3.9 (2008) permits a measurement choice of acquisition date fair value or the proportionate share of the acquired entity's identifiable net assets. There are differing interpretations of how the latter measurement should be applied.

The Board agreed that components of NCI other than the present ownership instruments that entitle the owners to a proportionate share of the net assets of the subsidiary should be measured at fair value or using the measurement basis required by IFRS. For example, a stock option under share-based payment awards should be measured in accordance with the method in IFRS 2 and the equity component of a convertible bond should be measured in accordance with IAS 32.

This item will be included in the 2009-2010 Annual Improvements.


Un-replaced and voluntarily replaced share-based payment awards

The Board agreed that un-replaced awards are non-controlling interests and are measured at a market-based measure in accordance with IFRS 2 on the date of acquisition; and that the application guidance in IFRS 3 paragraphs B57 to B61 [the split between consideration and post-combination compensation expense] should be adopted for the apportionment of the market-based measure of the un-replaced awards to the consideration transferred and post-combination expenses.

This item will be included in the 2009-2010 Annual Improvements.


Meaning of 'general borrowings' (IAS 23)

One Board member noted that in his opinion it is not appropriate to exactly match the qualifying asset with the liability. Another Board member acknowledged the apparent inconsistency between IAS 23.10 and IAS 23.14 and supported the staff in proposing amendment to IAS 23 to limit the capitalisation to general borrowings taken for an unspecified purpose.

Nonetheless, the majority of the Board was of the opinion that the standard is clear enough, any further allocation criteria would be rule-based and this amendment would not lead to improvement of financial reporting. Moreover, the Board was concerned that any amendment could lead to the need for further amendments to this standard that are of nature of application guidance.

The Board finally decided not to include this issue in annual improvements process.


Classification of rights issues (IAS 32)

Finally, the Board considered the urgent issue arising from the IFRIC meeting regarding classification of rights denominated in a foreign currency. The staff proposed a fast-tracked amendment to IAS 32 to deal with a narrow issue of classification of rights denominated in foreign currency distributed pro rata to all the shareholders as an exception to the principle developed in IAS 32. The Board agreed that as the issue is urgent and widespread, urgent amendment of IAS 32 is necessary.

One Board member noted that the issue shall be not limited to the narrow issue, but to all the instruments for all instruments where the price is defined in the fixed amount in a foreign currency. This proposal received a mixed reaction.

While many members would be prepared to support such proposal under normal circumstances, they felt that it would be such a significant change for a fast-tracked ED that not all the consequences of the change could be carefully assessed by the Board and the constituents. Moreover, as director of the capital markets pointed out, broadening of the issue could cause problems in developing of the liabilities and equity project. Even with the narrow amendment some conclusions in this project has to be revisited in order to link these two conclusions together. Moreover, some of the Board members were concerned that broadening of the scope could also lead to structuring opportunities. The Board finally agreed that the amendment should be extremely narrow; limited to rights denominated in foreign currency distributed pro rata to all shareholders.

The Board discussed the transition and effective date and agreed on the staff proposals that the amendment should be applied retrospectively and that the intended effective date should be included in the ED (90 days after it is published with early adoption permitted).

The Board agreed the timetable for the project, with ballot to be circulated during the week commencing 27 July, ED issued in the week commencing 3 August with a 30 days comment period (as the issue is narrow and matter urgent). The Board intends to analyse the comment letters at the September meeting where it also plans to finalise the amendment. Final amendment would be issued in late September or early October.

The Board approved the ED, subject to drafting and balloting, with one member dissenting.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.