IAS 27 — Accounting for distributions of non cash assets to owners

Date recorded:

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.

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