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IAS 27 — De-mergers and other non-cash distributions

Date recorded:

Possible scope of the project

The IFRIC made the following tentative decisions:

  • Non-cash distributions are defined as unconditional non-reciprocal transfers of assets by an entity to its equity holders acting in their capacity as equity holders
  • All equity holders of an entity within the same class are treated equally
  • After the distribution, the entity that distributes the assets is no longer entitled to any future economic benefits derived from the assets distributed
  • Assets distributed can be any non-cash assets (including ownership interests in subsidiaries, associates and joint ventures)
  • The guidance would consider the treatment in the financial statements of the entity that distributes the assets only and the effect of non-cash distributions should be considered from the perspective of this entity.

The staff noted that situations in which equity holders of an entity within the same class are not treated equally are not addressed as such transactions might be more in the nature of exchange transactions or might imply that there are additional transactions between the equity holders. Such issues should be considered in a second step if deemed necessary.

The IFRIC discussed briefly whether cash options of the equity holders should be considered. There seemed to be a consensus not to address cash options but that the existence of such options should not scope out the underlying non-cash distribution in general.

Possible alternative treatments of the distributed assets

Based on the tentatively defined scope the IFRIC discussed the following issues:

  • Whether the assets distributed should be remeasured at the time of distribution, particularly what triggers remeasurement
  • If so, at what amounts the assets should be remeasured
  • How any difference between the carrying amounts and the remeasured amounts should be accounted for.

The staff presented the following alternatives:

Alternative 1:

An entity should not remeasure the assets distributed at the time of distribution, that is:

  • Distributions are recorded at the carrying amounts of the assets distributed immediately prior to the distribution.
  • No gain or loss is recognised in profit or loss.
  • Instead, the fair values of the assets distributed are disclosed in the notes to the financial statements.

Alternative 2:

An entity should remeasure the assets distributed at the time of distribution, that is:

  • Assets are remeasured to their fair values at the time of distribution. No exception to the fair value measurement requirement is given.
  • Any difference between the carrying amounts and fair values is recognised in profit or loss immediately.

The IFRIC had a thorough debate and was nearly equally split between the two alternatives.

IFRIC members in favour of alternative 1 noted that IFRSs (as they exist today) do not trigger remeasurement for distributions and that a distribution does not represent a disposal of assets. Accordingly, any differences between the carrying amounts and fair values of the assets distributed would not be realised. In addition, two IFRIC members were concerned that non-cash distributions do not meet the definition of income in paragraph 92 of the Framework as they do not result in an increase of assets or a decrease in liabilities.

IFRIC members in favour of alternative 2 argued that the assets concerned are realised at the time of distribution and that such a change triggers remeasurement. It was suggested that the accounting treatment for non-cash distributions should not differ from instances where the assets concerned are first sold and the cash is distributed to the equity holders afterwards.

One IFRIC member offered a different analysis: the distribution should be measured at fair value (since the shareholders were receiving something of value from the entity). The distribution was recognised and measured only once. It was the discharge of the distribution obligation that triggered remeasurement of the assets used to satisfy that obligation.

A straw poll of members suggested that there was sufficient support for Alternative 2 for the staff to explore this alternative further. To address the concerns of IFRIC members in favour of alternative 1 senior staff suggested to also elaborate the following approach when drafting the paper for the next meeting:

  • Assess whether an obligation is created by the declaration of a dividend to be satisfied through a distribution in-specie
  • If such an obligation is created, how this liability should be measured
  • Whether the realisation or notional realisation of the distributed assets used to extinguish this liability may give rise to a gain/loss, and where any gain or loss is presented in the financial statements.

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