The IFRIC continued its discussion of the accounting for non-cash distributions, formerly called 'demergers and other in-specie distributions' (see July IFRIC Meeting Notes). The discussion at this meeting concentrated on the following issues:

• How should an entity measure non-cash distributions and the corresponding dividends payable?
• At the time an entity makes the distributions, how should any difference between the dividends payable and the carrying amount(s) of the asset be accounted for?
• Should there be any exceptions to the measurement principle?
• Should IFRS 5 Non-current Assets Held for Sale and Discontinued Operations be applied to the assets to be distributed after an entity declares non-cash distributions?

How should an entity measure non-cash distributions and the corresponding dividends payable?

The IFRIC noted that when an entity declares a non-cash distribution to its equity holders, it has an obligation to deliver non-cash assets. Accordingly, the journal entry would debit distributable reserves (equity) and credit dividends payable.

With regard to the measurement of the dividends payable the IFRIC considered the following three alternatives:

Alternative 1

All dividends payable should be measured in accordance with IAS 39 Financial Instruments: Recognition and Measurement.

Alternative 2

All dividends payable should be measured in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Alternative 3

Dividends payable should be measured in accordance with IAS 37 or IAS 39 depending on the type of asset to be distributed.

The IFRIC tentatively decided that dividends payable should be measured in accordance with IAS 37 (Alternative 2).

Under alternative 2 the initial measurement of the dividends payable should be based on the fair value of the assets to be distributed as the fair value of the assets represents the best estimate to settle the obligation. The IFRIC emphasised that the focus of this project was on measurement of the liability, rather than asset measurement.

At the time an entity makes the distributions, how should any difference between the dividends payable and the carrying amount(s) of the asset be accounted for?

The IFRIC noted that the project addresses situations in which the entity distributes 'something valuable to its equity holders' and that in these situations the fair value of the distribution should be known.

The IFRIC pointed out that any difference between the carrying amount of the asset and the dividend payable (measured with reference to the fair value of the asset) should result in a credit entry to be made. The IFRIC noted that any credit amount arises as a result of the settlement of the dividends payable, that is, the derecognition of a liability.

The IFRIC tentatively decided that the difference arising at the time an entity settles its dividends payable should be recognised in comprehensive income.

Staff was directed to proceed with the project considering alternative accounting treatments of the credit entry in other comprehensive income. The paper is to be brought back to the next meeting.

Should there be any exceptions to the measurement principle?

The IFRIC then discussed whether any exceptions should be made to this measurement principle in situations in which the fair value of the distributed assets cannot be measured reliably, for instance, ownership interests not traded in active markets, intangible assets not recognised in the financial statements of the entity or common control transactions. The IFRIC tentatively decided that no exceptions should be made for ownership interests not traded in active markets or intangible assets not recognised in the financial statements of the entity. Regarding common control transactions the IFRIC tentatively concluded that common control transactions were outside the scope of the project, and therefore no exception was required.

Should IFRS 5 Non-current Assets Held for Sale and Discontinued Operations be applied to the assets to be distributed after an entity declares non-cash distributions?

The IFRIC acknowledged that a distribution is not a sales transaction. Consequently, the IFRIC tentatively decided that after declaration of the distribution, an entity should not apply the measurement and disclosure requirements in IFRS 5 to the assets to be distributed. However, IFRIC acknowledged that the disclosures required by IFRS 5 would be useful to users. Staff was directed to prepare a paper for the next IFRIC meeting that considers two alternatives:

1. A recommendation to the Board of amendments to IFRS 5 to include distributed assets within the scope of the standard.
2. Disclosures to be included within a draft Interpretation requiring disclosure of information equivalent to that required by IFRS 5. This alternative should ensure any such disclosures do not conflict with the requirements of other Standards.

At the July 2007 meeting the IFRIC decided not to add this issue to its agenda but asked the staff to develop guidance that might be recommended to the Board for inclusion in the appendix of IAS 18 Revenue.

The IFRIC reaffirmed that an entity is acting as a principal when it has exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. It was noted that determining whether an entity is acting as a principal or an agent depends on facts and circumstances and requires judgement.

Mainly based on the existing guidance in EITF 99-19 (US GAAP), the staff proposed the following features that, individually or in combination, may indicate that an entity is acting as a principal:

• The entity has the primary responsibility for providing the goods or services desired by the customer or for fulfilling the order. Indications that the entity has such primary responsibility include, for example:
  • the entity modifies the product or performs part of the services;
  • the entity has discretion in selecting the supplier used to fulfil an order from a customer;
  • the entity is involved in the determination of products or services specifications.
• The entity has inventory risk before or after the customer order, during shipping or on return.
• The entity has discretion in establishing prices directly or indirectly, such as by providing additional goods or services.
• The entity has credit risk.

Accordingly, an entity is acting as an agent when it does not have exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. One feature that may indicate that an entity is acting as an agent is that the amount the entity earns is predetermined, being either a fixed fee per transaction or a stated percentage of the amount billed to the customer.

The IFRIC tentatively decided to remove the sub-indicators under indicator (a) above. In addition to other editorial amendments, the IFRIC tentatively decided to include following guidance from paragraph 7 of EITF 99-19 in indicator (a):

'If a company is responsible for fulfilment, including the acceptability of the profit(s) or service(s) ordered or purchased by the customer.'

The IFRIC tentatively agreed to recommend the revised indicators to the Board for consideration. The IFRIC also confirmed its decision not to take this item to the Agenda (see below 'Review of tentative Agenda Decisions' published in July 2007 IFRIC Update).

The IFRIC continued their discussion of the accounting for non-cash distributions (see July IFRIC meeting notes). The discussion at this meeting concentrated on the following issues:

• How to account for the receipt of customer contributions
• Estimating the duration of the ongoing service (service period)
• Potential extensions of the scope

How to account for the receipt of customer contributions

The staff presented a flowchart illustrating the approach agreed at the July meeting:

• Step 1: Assess whether an item of property, plant and equipment (PPE) has been transferred
• Step 2: Assess whether the ongoing service arrangement contains a leaseback to the customer

With regard to step 1 the IFRIC decided not to provide detailed guidance on the notion of control of an item of PPE. Any Interpretation should reference to the existing guidance in IFRSs and just point out the key factors. Regarding step 2 the IFRIC decided that such assessment should be made with reference to IFRIC 4 Determining Whether an Arrangement Contains a Lease.

The IFRIC then discussed the accounting implications of the three accounting models arising from this approach. (For a detailed analysis and illustrative examples we refer to Agenda Papers 4A and the Appendix to Agenda Paper 4 available on the IASB website).

Contributions with no lease back

In this case the PPE is initially recognised on the balance sheet at fair value with a corresponding liability. The PPE is depreciated over its useful economic life. The obligation is recognised in income on a basis that reflects the provision of access to the ongoing services provided, that is, over the service period.

Contributions with an operating lease back

The only difference to contributions with no lease back is that part of the revenue arises from rental income rather than from the provision of a service.

Contributions with a finance lease back

The IFRIC believed that in this case no item of PPE has been transferred (step 1) and the transaction would therefore be outside the scope.

The IFRIC reaffirmed its tentative decision at the July 2007 meeting that PPE transferred by the contributor should be recorded at fair value in the financial statements of the service provider unless the application of IFRIC 4 results in a finance lease back.

Estimating the duration of the ongoing service (service period)

In July 2007 the IFRIC noted that the service provider would need to assess whether the contribution resulted in any ongoing obligation. If so, this obligation should be recognised in the balance sheet and the contribution should be recognised in income over the periods in which the obligation is satisfied.

The IFRIC had a lengthy discussion and mixed views were expressed. The following questions were raised:

• What is the obligation of the provider: to grant initial access to the asset, to provide ongoing access to the asset and/or to provide an ongoing service?
• Should the service period be the period for which the customer has the right to receive access to the asset and/or ongoing services (for example, under a contract or under statute) or the period over which the customer is expected to receive access to the asset and/or the ongoing services (that is, taking into account contract renewals)?
• Does the accounting treatment differ in situations in which the PPE is contributed by one party but access to the asset and ongoing service and/ or the ongoing service is received by another party? In these cases it was acknowledged that the contributor normally contributes the asset in return for an ability to access a service rather than a right to access the service; for example, a property developer may contribute an electricity sub-station to facilitate the development of a number of houses. The developer does not itself use the asset or service, rather the ultimate customer who purchases a house within the development receives the access to the service.

With regard to the first two issues, some IFRIC members noted that in some jurisdictions industries are regulated (for example, energy suppliers) and therefore the obligation to grant access could be considered to be perpetual. Others mentioned that the legal contract period may be unreasonably short compared to the expected life of the service contract.

Regarding the third issue some believed that there would be no further obligation in cases where the service provider is only required to grant initial access to the asset. Other IFRIC members were concerned about full revenue recognition on day 1 as, in their view, it does not appear reasonable that an item of PPE is contributed and the other party 'is obliged to do nothing'.

No decisions were made; however, there was a consensus that the service period should not exceed the useful life of the PPE.

The staff was directed to include in the draft Interpretation indicators how the revenue arising from the credit entry should be allocated to future periods taking into account the views and concerns expressed at this meeting. The draft Interpretation should also identify the different types of performance obligations that may arise.

Potential extensions of the scope

The IFRIC tentatively decided to extend the scope to contributions of PPE or cash which is contributed for the construction or acquisition of specific items of PPE.

The IFRIC intends to discuss a draft Interpretation reflecting these decisions at the next meeting.

At the July 2007 meeting the IFRIC decided not to add this issue to its agenda but asked the staff to draft a tentative agenda decision as well as potential amendments to IFRS 2 Share-based Payment (particularly paragraph 3) and consequential amendments to IFRIC 11 IFRS 2: Group and Treasury Share Transactions (see July IFRIC meeting notes).

The alternative approach

The staff brought to attention of the IFRIC an alternative approach. That is to add this issue to the agenda and to amend IFRIC 11 to clarify that both arrangements in question are within the scope of IFRS 2 and to specify how the employee services received by the subsidiary should be measured in its financial statements. The staff noted that this would be a more efficient approach as the amended Interpretation is expected to be effective significantly earlier than the amended IFRS 2.

The IFRIC reached a consensus that the proposed amendments to IFRS 11 would be within the boundaries of an interpretation and decided to add this project to the agenda. In addition the IFRIC agreed to suggest amendments to IFRS 2 to the Board for inclusion in the annual improvement process.

Subject to editorial comments the IFRIC agreed to the proposed amendments (omitted from observer notes) and asked the staff to bring back the revised wording for approval at a future meeting.

New issue

The IFRIC was also asked whether the following arrangement should be addressed in the proposed amendments to IFRIC 11:

• A subsidiary grants rights to its equity instruments to its employees, and
• The employees of the subsidiary are entitled to put the equity instruments of the subsidiary to the parent for cash at an amount that is based on the price of the equity instruments of the subsidiary.

There seemed to be a consensus that such an arrangement should be treated as equity-settled in the financial statements of the subsidiary and therefore would be outside the scope of the proposed amendments to IFRIC 11. The IFRIC asked the staff to make clear in the revised wording that this type of arrangement is not addressed.

The IFRIC considered a request to clarify the treatment of employee contributions in cost-sharing pension plans. The accounting issues raised in the submission were whether:

• the service cost should reflect the cost-sharing nature of the arrangement;
• any surplus that must be used to adjust members' benefits or required contributions should be treated as an addition to the liability;
• any additional contributions that are expected to be required from members to finance a deficit should be treated as a deduction from the liability

The IFRIC agreed with the staff analysis that there was sufficient guidance in IAS 19 Employee Benefits to answer the issues. The staff was asked to adapt its analysis for inclusion in the tentative agenda decision.

The IFRIC discussed a request to provide guidance on how to account for changes in a defined benefit plan resulting from government action: as an actuarial gain or as a past service cost.

Mainly based on the guidance in paragraphs 73, 86 and 88 of IAS 19 Employee Benefits the staff analysis pointed out:

• When a change in a plan caused by a government affects the employer's cost of providing the benefits (that is,actuarial assumptions), this change should be accounted for as an actuarial gain or loss
• When a change in a plan caused by a government affects the benefits to be received by the employees for services before the change, this change should be accounted for as a past service cost.

The IFRIC agreed with the staff analysis that there was sufficient guidance in the Standard, however, acknowledged that the principles are sometimes difficult to apply in practice. The staff was asked to adapt its analysis for inclusion in the tentative agenda decision.

The IFRIC considered a request to provide guidance on the attribution of death in services and other non-service related benefits to periods of service.

The staff noted that differing views exist as to how the Projected Unit Credit Method should be applied to such benefits. However, the staff believed that the issue is not sufficiently significant and that any guidance would be guidance on the application of the Projected Unit Credit Method.

The IFRIC agreed with the staff's conclusion. The staff was asked to adapt its analysis for inclusion in the tentative agenda decision.

The IFRIC confirmed its decisions not to take the following items to its agenda:

• IAS 18 Revenue – Guidance on identifying agency relationships
• IAS 19 Employee Benefits – Post employment benefits: Benefit allocation for defined benefit plans
• IAS 39 Financial Instruments: Recognition and Measurement – Hedging future cash flows with purchased options
• IFRS 5 Non-current Assets Held for Sale and Discontinued Operations – Disclosure

In doing so, the IFRIC had suggestions on the wording of the agenda decision notices.

In the May 2007 IFRIC Update the IFRIC published its tentative agenda decision regarding the application of two paragraphs of IAS 39 Financial Instruments: Recognition and Measurement:

• AG 33(d)(iii) – The issue particularly relates to assessing the economic environment in which the transaction takes place in the context of determining whether a currency is commonly used in contracts to buy or sell non-financial items.
• Paragraph 11A – The issue relates to whether the fair value option in this paragraph can be applied to all contractual arrangements with one or more embedded derivatives, including contractual arrangements with hosts outside the scope of IAS 39.

The IFRIC reviewed the responses to both tentative agenda decisions. In the light of the issues raised by respondents, the IFRIC agreed that the staff needed additional time to analyse those issues further to be in a position to recommend any action to the IFRIC.

The staff presented a paper outlining the outcomes of research into the issues raised:

• Both the original commentators on the tentative agenda decision and the national standard setters contacted subsequently confirmed that considerable confusion regarding the application of AG33(d) exists in their jurisdictions. Consequently, they expect diversity in practice.
• In relation to the fair value option in paragraph 11A, respondents confirmed the information provided by the original commentators on the tentative agenda decision. That is, the fair value option in paragraph 11A is being applied to contracts with embedded derivatives and non-financial hosts provided they meet the conditions in that paragraph. However, the staff research seems to indicate that this application is limited almost entirely to 'normal' purchase and sale contracts that are not otherwise within the scope of IAS 39. Some respondents indicate that they are not aware of paragraph 11 A being applied to any other types of contracts.

The IFRIC discussed the two issues and noted that the issues are interrelated. Staff was directed to pursue the project further and prepare a paper to be presented to the Board. The paper is initially to be brought back to the IFRIC at a future meeting.

The IFRIC also deferred to a future meeting its decision on whether to confirm the tentative agenda decision.