The IFRIC continued its deliberations of a proposed Draft Interpretation on the accounting treatment of non-cash distributions to owners. Much of the discussion focussed on the accounting for the assets to be distributed and whether and how and valuation adjustments should be reflected in the financial statements.

The IFRIC confirmed the decisions it reached at its last meeting. These included:

• A distribution is defined as an unconditional non-reciprocal transfer of an asset by an entity to its owners acting in their capacity as owners.
• The Draft Interpretation should address all non-cash asset distributions with one exception (the distribution of an asset that is ultimately controlled by the same parent entity before and after the distribution), from the point of view of the financial statements of the entity that makes the distribution.
• The measurement of all dividends/ distributions payable (cash and non-cash) should be addressed by a single standard: IAS 37 Provisions, Contingent Liabilities and Contingent Assets. In accordance with IAS 37, the liability is measured at the best estimate of the expenditure required to settle the obligation at the balance sheet date.
• At the time an entity distributes the assets to its owners (i.e. settles the distribution obligation), any difference between the carrying amount of the assets distributed and the carrying amount of the dividends payable should be recognised in comprehensive income (not an owner change in equity). [The issue of where in comprehensive income is discussed below.]
• Where within comprehensive income should the difference between carrying value of the asset and the IAS 37 measure of the distribution obligation be recognised?

The IFRIC staff presented their arguments supporting the view that the difference between the carrying value of the asset and the settlement value of the distribution obligation should be recognised in profit and loss, rather than as a component of other comprehensive income. They noted, in addition, that the staff did not think that the difference met the definition of an owner change in equity and had, for this reason, concluded that the difference could not be recognised directly in equity.

IFRIC members were split on this issue. Some supported the staff position unreservedly; some wanted the difference recognised in other comprehensive income at the time the distribution was irrevocable and recycled to profit and loss on the distribution date (it was not clear what the rationale for this treatment was). Others wanted to avoid comprehensive income entirely. Those who supported this treatment supported the liability measurement proposal but thought that the other component (the unrecognised valuation difference on the asset to be distributed) failed the definition of 'income' in the IASB Framework and should be therefore be excluded from comprehensive income.

A long and difficult debate ensued at the end of which the Chairman proposed a compromise. The Draft Interpretation would be drafted on the basis proposed by the staff (that is, any difference between the carrying amount of the asset and the IAS 37 measure of the distribution obligation should be recognised in profit and loss). The Basis for Conclusions would present an Alternative View in which the difference would be recognised directly in equity. The Invitation to Comment would direct constituents to consider both views when commenting on the Draft Interpretation. The IFRIC agreed to proceed on this basis.

Is an amendment of IFRS 5 required?

The IFRIC agreed to propose an amendment of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations to require assets held for distribution to owners to be measured initially (that is, at the date the entity is irrevocably committed to the distribution) in accordance with IFRS 5. This was to prevent the possibility for accounting arbitrage between two different approaches to asset disposals.

IFRS 5 disclosures would be required for assets to be disposed of through a non-cash distribution.

A minority of IFRIC members thought that it was unnecessary to amend IFRIC 5, but this view did not carry support.

Dividend reinvestment plans

The IFRIC agreed that the Draft Interpretation should not address dividend reinvestment plans. The IFRIC agreed with the staff that the choice offered to shareholders by dividend reinvestment plans was not relevant to non-cash distributions.

Next steps

The IFRIC staff will prepare a revised draft of the Draft Interpretation, including a revised Basis for Conclusions that includes the Alternative View on the treatment of the difference between the carrying amount of the asset to be distributed and the IAS 37 measure of the distribution obligation). This will be reviewed by IFRIC members out of session. If IFRIC members concur that the staff has rendered correctly its decisions, that draft will be sent to the December 2007 IASB meeting for a positive vote (the positive vote is required because of the proposed amendment to IFRS 5).

If the IASB approves the Draft Interpretation, it is likely to be published in early January 2008.

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

• AG33(d)(iii) - The issue 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 and thus is not an embedded foreign currency derivative requiring separation.
• 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 then concluded that further analysis is needed and that the staff should provide such an analysis including a recommendation on the action to be taken by IFRIC.

At the September IFRIC meeting it was concluded that both IAS 39.11A and IAS 39.AG33(d) need clarification and that both issues will be referred to the Board. The staff has been asked to provide suitable revisions to IAS 39.

As a result the following four alternatives were presented to the IFRIC:

• Alternative A - Extend the scope of IAS 39 to include all contracts that have the characteristics of a derivative (as set out in paragraph 9 of IAS 39).
• Alternative B - Extend the scope of IAS 39 to include, in their entirety, all contracts to buy or sell a non-financial item that could either be settled net, or that are not in accordance with the entity's expected purchase, sale or usage requirements
• Alternative C - Extend the scope of the Fair Value Option (FVO) in IAS 39. (the staff presented two sub-alternatives: permission of application of the fair value option to (a) some or all non-financial contracts or (b) non-financial non-contractual asses and liabilities)
• Alternative D - Clarify paragraph 11A and paragraph AG33(d).

The IFRIC members agreed to pursue alternative D, which would result in minor amendments to IAS 39, that could possibly be implemented via the Annual Improvements Process. The staff was asked to prepare draft clarification that, after IFRIC's consent, can be presented to the Board. It was pointed out by one IFRIC member that regarding AG33(d)(iii) the term 'commonly used' needs clarification.

Cash contributions

In September 2007 the IFRIC agreed to extend the scope of its customer contributions project to include cash contributions. Such contributions arise when a customer contributes cash to a supplier. As a result of receiving the cash, the supplier is required to construct or acquire an item of property, plant and equipment that is then used to supply goods or services to the customer. The property, plant and equipment is an asset of the supplier. However, the ongoing service arrangement may contain a lease of the asset to the customer.

In deciding to include cash contributions in its project on customer contributions, the IFRIC agreed that the contribution of cash has a similar economic effect to the contribution of an item of property, plant and equipment. The two should therefore result in similar accounting consequences.

The IFRIC considered how cash contributions should be accounted for by the entity receiving them. In determining how an entity should account for the receipt of a cash contribution, the IFRIC considered 5 possible approaches:

• Approach 1: the construction or acquisition of the property, plant and equipment is not a service to the customer.
• Approach 2: the cash contribution should be allocated between the construction or acquisition of the asset and the ongoing service based on fair value.
• Approach 3: Recognition of the cash contribution as revenue immediately.
• Approach 4: The construction or acquisition of an item of property, plant and equipment is a service to the customer but no revenue should be allocated to it.
• Approach 5: Two transactions take place. The construction or acquisition of an asset in return for a cash contribution and the provision of access to a supply of goods or services in return for contribution of that asset.

A number of IFRIC members expressed concern with the double recognition of revenue in Approach 5 and queried how customer contributions could be conceptually distinguished from the requirements of IFRIC 12 Service Concession Arrangements. One IFRIC member noted that the distinction was that when a customer contribution occurs it is the operator that ends up with the asset.

The IFRIC noted that the treatment of customer contributions ultimately will be dependent on specific facts and circumstances.

The IFRIC tentatively agreed (none objected) to support Approach 1.

Draft Interpretation

In September 2007 the IFRIC asked the staff to develop a draft Interpretation on customer contributions. The staff presented the draft Interpretation to the IFRIC.

The IFRIC considered the following issues as outlined in Agenda Paper 4A:

• Whether guidance on the accounting for contributions of property, plant, and equipment is appropriate: Tentatively agreed, subject to some redrafting, that the guidance was appropriate.
• Whether the Draft Interpretation should contain an exclusion from the principle in IAS 8 Accounting Policies, Changes in Estimates and Errors that a change in policy should be applied retrospectively: Tentatively agreed that the draft Interpretation should prescribe prospective application.
• Whether to develop further guidance on the measurement of fair value in the draft Interpretation: Tentatively agreed no further guidance would be provided.

Finally, the IFRIC considered a letter commenting on the current status of the project which disagreed with some of the tentative decision made to date. The IFRIC tentatively agreed not to make any further changes to the Draft Interpretation as a result of this letter.

The IFRIC directed staff to redraft the Draft Interpretation to reflect the decisions made and other editorial comments and re-circulate to IFRIC prior to release. The Draft Interpretation will not be discussed at another meeting prior to its release.

The IFRIC discussed the following items:

• IAS 19 Employee Benefits - Treatment of employee contributions
• IAS 19 Employee Benefits - Changes to a plan caused by government
• IAS 19 Employee Benefits - Death in service benefits

On all three items a comment letter was received and the items were discussed in the light of these comment letters.

The tentative agenda decision on treatment of employee contributions was confirmed by IFRIC. The staff was asked to incorporate some editorial changes, especially to clarify that increases in employee contributions should be taken into account when measuring the obligation if those increases reduce or eliminate an existing deficit. The agenda decision will then be published in the November 2007 IFRIC Update.

On the topic of changes to a plan caused by government the IFRIC decided to include the proposed wording from the comment letter received but to keep the first sentence of the last paragraph in the tentative agenda decision (ie option 3 as set out in Agenda Paper 6B, which is available on the IASB's website). The agenda decision will then be published in the November 2007 IFRIC Update.

The IFRIC then proceeded to the accounting treatment for death in service benefits. The IFRIC had a considerable discussion on the definition, identification and accounting treatment of 'service related' death in service benefits and how the comment letter received on this issue should be reflected in the tentative agenda decision wording.

The IFRIC could not reach final agreement on this point. The Chairman proposed to ask the staff to provide a redrafted wording. If the IFRIC members would accept it, it would be published in the November 2007 IFRIC Update. If the concerns that some members expressed were so that they would object, the whole agenda decision must be revisited and rewritten (possibly leading to bring the issue still on the agenda). That would defer a final agenda decision for at least two more IFRIC meetings.

The IFRIC received a request that concerned with the measurement of the defined benefit obligation in respect of pension promises based on a performance hurdle. Performance hurdles may take various forms ranging from straightforward bonuses to more complex arrangements relating to additional sponsor contributions or years of deemed service. The issue is how such non salary compensation in defined benefit plans should be accounted for in accordance with IAS 19 Employee Benefits.

The IFRIC concluded that IAS 19 provides sufficient guidance how to treat such hurdles and agreed to the staff recommendation not to add this item on IFRIC's agenda. Except for editorial changes it also agreed on the proposed wording for the tentative agenda decision.

In some industries, eg brewers, heating gas, entities distribute their products in returnable containers. These entities often collect a deposit for each container delivered and have an obligation to refund this deposit when containers are returned by the customer. The issue is how the entity's obligation to refund the deposit for returned containers should be accounted for.

During the discussion it emerged that different scenarios could be subsumed under amounts that are repayable on the return of an item. To avoid providing application guidance on IAS 18 Revenue the IFRIC agreed on the staff recommendation (i.e. apply IAS 37 Provisions, Contingent Liabilities and Contingent Assets instead of IAS 39 Financial Instruments: Recognition and Measurement), but asked the staff to delete paragraph three of the proposed wording for rejection except for the second part of the last sentence.

In August 2007, the IFRIC received a request for it to issue guidance on the accounting for foreign exchange differences associated with capitalised borrowing costs. Such foreign exchange differences may result in gains or losses for an entity. The request asked for guidance on two questions. Firstly, to what extent should foreign exchange differences be regarded as an adjustment to interest costs? Secondly, when an entity hedges its exposure to foreign exchange movements, to what extent should costs associated with the hedging instrument be considered to be part of the borrowing costs that may be capitalised? At this meeting, the IFRIC will consider whether to add a project to its agenda to develop guidance on the accounting for such foreign exchange gains and losses.

The IFRIC emphasised that the major reason for not picking up this issue is the latest revision to IAS 23 Borrowing Costs, where the Board did not provide guidance on that topic. However, the IFRIC Coordinator proposed that two possible amendments should be brought to the Board's attention to clarify accounting for such gains and losses:

• Only the interest component of the foreign exchange gains or losses should be taken into account
• Gains and losses should be treated symmetrically

It was also noted that this could be done in the next Annual Improvements Process.

The IFRIC decided not to take the item on its agenda and that staff make editorial changes to the proposed rejection wording.

In April 2005, the IFRIC received a request for it to issue guidance on the accounting for insurance and investment policies issued to a pension plan by an entity that employs the staff included in the plan (or by a subsidiary that is consolidated in the same group as that entity). The submission asked how such contracts should be accounted for when determining plan assets in accordance with IAS 19 Employee Benefits. At this meeting, the IFRIC will consider whether to take a project onto its agenda to develop guidance on the accounting for such policies.

The IFRIC agreed on the staff recommendation not to add this item to the IFRIC's agenda.

In September 2007 the IFRIC received a request for it to provide guidance on the appropriate interpretation of paragraph 2(g) of IAS 39 Financial Instruments: Recognition and Measurement. This paragraph exempts from the scope of IAS 39 'contracts between the acquirer and a vendor in a business combination to buy or sell an acquiree at a future date'. The submitter requested guidance on the following questions:

• Does this scope exception apply only to binding contracts to acquire shares that constitute a controlling interest in another entity, or does it apply more widely to options that, if exercised, would result in the acquisition of such a controlling interest?
• If the exception applies only to binding contracts to acquire shares that constitute a controlling interest in another entity, does it apply to any binding contract, or only to contracts that cover the period necessary to complete a business combination once its principal terms have been agreed?

The IFRIC had a lively discussion on what type of contracts qualify for the exception in IAS 39.2(g), if analogies can be drawn to other scenarios and how conditionality should be considered. The IFRIC asked the staff to redraft the rejection wording to reflect the discussions. If the IFRIC members give their consent to the redrafted version the tentative agenda decision will be published in the November 2007 IFRIC Update. Otherwise it will be on the agenda for the next IFRIC meeting again.

The IFRIC was asked to confirm the IFRIC's work in progress table as provided in Agenda Paper 8 (to be found on the IASB's website). Besides minor request for corrections the IFRIC agreed to delete items that have been referred to the Board and where the Board has taken the items on its agenda

Friday 2 November 2007

The meeting had been scheduled to continue on Friday 2 November, but IFRIC completed its work in one day.