In November the IFRIC discussed a comment letter disagreeing with the wording in the tentative agenda decision that stated that when death in service benefits are provided as part of a defined benefit plan, they must be attributed to periods of service.

At this meeting the IFRIC discussed the following views on when death in services should be attributed to periods of service:

View 1:

Benefits should be attributed to periods of service if they are dependent on the length of service of an employee. Under this view paragraph 130 of IAS 19 Employee Benefits would be applied in analogy to death in service benefits.

View 2:

Benefits should be attributed to periods of service if they form part of a defined benefit plan. Under this view death in service benefits that are provided through a plan should be considered to be service related and be attributed to periods of service regardless of whether the benefit itself would be considered to be service related.

The IFRIC did not reach a conclusion but stated that the guidance in IAS 19 is ambiguous. It was decided to reissue a tentative agenda decision on the initial request on how to attribute these services to periods of service and to note that there is ambiguity in IAS 19 on when to attribute such services.

The IFRIC confirmed the decisions not to take the following items to the Agenda:

• IAS 19 Employee Benefits — Pension promises based on performance hurdles
• IAS 23 Borrowing Costs — Foreign exchange and capitalisable borrowing costs
• IAS 19 Employee Benefits — Definition of plan assets
• IAS 39 Financial Instruments: Recognition and Measurement — Scope of IAS 39 paragraph 2(g)

In doing so, the IFRIC had suggestions on the wording of the Agenda Decision notices. A final agenda decision will be published in the January 2008 issue of IFRIC Update.

• IAS 37 Provisions, Contingent Liabilities and Contingent Assets — Deposits on returnable containers

The IFRIC received a comment letter disagreeing with the wording in the tentative agenda decision that stated that the obligation to refund deposits on returnable containers is not within the scope of IAS 39 Financial Instruments: Recognition and Measurement. The comment letter noted that the obligation to refund the deposit is not an executory contract but a financial instrument payable on demand if the containers remain part of the property, plant and equipment of the supplier.

The IFRIC reaffirmed its decision not to add this issue to the agenda but did not reach a consensus on whether the obligation to refund the deposit is within the scope of IAS 39. The staff was asked to further explore this issue for discussion at a future meeting.

The IFRIC considered a request to clarify the treatment of lump-sum payments when a defined benefit plan gives plan members the option to receive a lump sum payment at retirement instead of ongoing payments.

The following views were discussed:

View A:

The lump-sum payment is not a settlement, that is, any gain or loss arising because actual experience differs from the best estimate will be treated as an actuarial gain or loss.

Supporters of this view consider settlements to be special events, not just part of the normal running of the plan. Hence, if the payments were part of the expected running of the plan, they would not be regarded as settlements. The staff pointed out that this view is also supported by guidance from two of the manuals published by the large accounting firms.

View B:

The lump-sum payment is a settlement, that is, any gain or loss arising because actual experience differs from the best estimate will be recognised immediately in profit or loss.

Supporters of this view note that the wording in paragraph 112 of IAS 19 Employee Benefits does not require special event but that 'a settlement occurs when the entity enters into a transaction that eliminates all further legal or constructive obligation for part or all of the benefits provided under a defined benefit plan'.

There seemed to be a majority for View B.

The IFRIC tentatively agreed not to add the issue to the agenda but asked the staff to further investigate the current accounting practice for lump-sum payments and to bring back a revised tentative agenda decision for discussion at a future meeting.

The IFRIC discussed a request to provide guidance on whether exploration and evaluation expenditure in extractive industries should be classified as arising from operating or investing activities in the statement of cash flows.

The staff analysis also included similar types of expenditures (such as advertising and promotional activities, research and development activities, staff training) and pointed out:

• In all such cases, the expenditure is intended to enhance entities' future income or cash flows but does not give rise to an asset that meets the recognition criteria in IFRSs. The expenditure is therefore recognised in profit or loss as an expense when it is incurred.
• IAS 7 Statement of Cash Flows appears to require the classification of expenditure that must be charged to expense when incurred as operating activities. However, IAS 7 does not specifically prohibit the classification of such expenditure as investing activities if it can be argued that it gives rise to an asset that it not recognised.
• The issue could most efficiently be resolved by recommending that the Board amend IAS 7 to clarify that only expenditures that result in recognised assets can be classified as investing activities.

The IFRIC agreed with the staff analysis not to add the issue to the agenda. The staff suggested that the agenda decision should address not only exploration and evaluation expenditure but all similar types of expenditures. The IFRIC asked the staff to redraft the tentative agenda decision for discussion at a future meeting.

The IFRIC discussed comments received on the draft Interpretation D21 Real Estate Sales. Of the 52 comment letters received 35 supported IFRIC's proposal to develop an Interpretation. However, many comment letters expressed concern regarding the current wording of D21.

The discussion focussed on the following aspects (the discussion overlapped):

• The need to clarify paragraphs 8 to 10 of D21 and their interaction
• Other clarifications on applying IAS 11 Construction Contracts or IAS 18 Revenue

The need to clarify paragraphs 8 to 10 of D21 and their interaction

The main issues raised by constituents were:

• Many constituents pointed out that the interaction between the indicators in paragraph 9 and 10 is not sufficiently clear. In particular clarification was requested regarding the hierarchy of the indicators, that is, how to account for contracts that have features of both paragraph 9 and 10.
• Regarding the indicator in paragraph 9(a), some constituents pointed out that 'construction services to the buyer's specification' is not articulated as a concept in IAS 11 and therefore did not support this indicator as an indicator of a construction contract. Accordingly, the concern was raised that applying this indicator will result in introducing a different revenue recognition principle.
• One respondent expressed a different understanding of the term construction contract in IAS 11. This constituent took the view that the term construction contract means that construction only takes place because of a sales agreement in place and that it relates to long-term contracts.
• Regarding the indicator in paragraph 9(b), some respondents felt that the indicator goes beyond the requirements of IAS 11.

The IFRIC had a thorough debate on the structure of the consensus and acknowledged that the consensus does not clearly articulate an underlying principle. IFRIC decided to restructure and clarify the consensus as follows:

• The first question needs to be: 'What has been sold under the real estate sales agreement? That is, a distinction needs to be made between (i) a right to acquire, use and sell the completed real estate at a later date and (ii) a right to control the underlying real estate in its existing partially-constructed state. In the first case IAS 18 is the applicable standard and in the latter case IAS 11 is the applicable standard.
• In a next step indicators should be given to help in assessing 'what has been sold' and in determining whether IAS 11 or IAS 18 is the appropriate standard. There seemed to be a consensus that the indicators currently in paragraphs 9(a) and 9(b) of D21 are not different approaches but follow the same principle. In this context the IFRIC noted that if the legal title does not pass as construction progresses (for instance, legal titles passes only after construction is finalised), this by itself does not exclude the application of IAS 11. On the other hand construction activities taking place may fail to meet the requirements of IAS 11.
• The assessment needs to be made for each component of a multiple-element sale agreement. The IFRIC tentatively decided that in these cases the consideration should be allocated to the components with reference to the relative fair values and that a reference to IFRIC 12 Service Concession Arrangements should be included in the basis for conclusions.
• The consensus should be summarised in a flow chart.

Other clarifications on applying IAS 11 or IAS 18

Add the 'ability to sell or pledge the underlying asset' as a feature in paragraph 9(b)

Some respondents recommended adding the ability to sell or pledge an asset to the list of indicators in paragraph 9(b). Without detailed discussion the IFRIC agreed to the staff's view that this indicator might not be understood properly and could lead to diversity in practice. It was agreed to add 'something' to the basis for conclusion to address this issue.

Applying IAS 18 – Continuing involvement

Some constituents suggested that the guidance in paragraph 13 of D21 should be clarified by an illustrative example.

The IFRIC decided that paragraph 13 of D21 should be amended to focus on the requirement of IAS 18, i.e. that revenue recognition is not permitted if the seller contains continuing involvement, and that any further guidance should be included in an illustrative example.

Way forward

The staff was asked to redraft D21 taking into account the decisions made at this meeting. A revised draft will be discussed at the March 2008 meeting.

The staff presented to the IFRIC their analysis of comment letters received on the IFRIC's draft Interpretation D22 Hedges of a Net Investment in a Foreign Operation.

The staff noted that the majority of the comments received welcomed that IFRIC deals with this issue. It also noted that the areas of concern in the comment letters where the same as the ones the IFRIC aimed to address:

• Which parent entity can hedge its net investment risk?
• What can be hedged, that is, what is the amount eligible for hedge accounting and how it is determined?
• Where the hedging instrument can be held and whether its location affects hedge effectiveness?

The staff pointed out that the fundamental issues have to be addressed firstly and after that minor and drafting issues could be dealt with.

On the first issue the IFRIC agreed that no further deliberation is necessary. One IFRIC member noted that the final Interpretation must be clear, why an entity can hedge twice from a risk management perspective, but not achieve hedge accounting treatment. Another IFRIC member pointed out that the words in the Interpretation must make clear that a foreign operation can be hedged for the same risk twice or more with two or more parents provided different net assets are hedged by these parents.

On the second issue, one commentator has raised the issue if the amount of net assets to be eligible for hedge accounting can be determined either on a 'sum of net assets of the individual foreign operations' basis or if it could be determined on a sub-consolidated net assets basis.

The IFRIC had a lengthy discussion on the topic and concluded that many concerns could be addressed by looking at a detailed example (to be drafted by the staff on the basis of an example from one of the comment letters). One IFRIC member noted that such an example must be clear about the reporting entity looked at and whether the focus is its separate financial statements or consolidated financial statements. It was also highlighted that the terminology must be consistent to avoid confusion. One IFRIC member noted that the principles that have already been agreed on must be revisited and probably be revised in the light of the conclusions drawn from such a detailed example.

The IFRIC agreed with the staff, and some IFRIC members highlighted again that all designations must be in accordance with the risk management policies and that the final Interpretation should not force entities to change their hedging strategies.

The IFRIC then discussed the third issue on the location of the hedging instrument. Some commentators expressed concern about the IFRIC's tentative conclusion that the location of the hedging instrument should not have influence on the effectiveness of the hedging relationship. This conclusion was based on a reference made to the Implementation Guidance on IAS 39 Financial Instruments: Recognition and Measurement (IAS 39 IG F.2.14).

The staff noted that they believe the conclusion made is correct but believe a more compelling rationale for this conclusion seems to be appropriate. It argued that the rationale rests on the purpose of net investment hedging and that this purpose should not be affected by the location of the hedging instrument.

The IFRIC members seemed to have a general sentiment that it should not matter where the hedging instrument is located. One IFRIC member expressed some concern about the recycling of the deferred gains or losses. Some IFRIC members also expressed the view that no matter what kind of hedging strategy an entity employs for risk management purposes, in the consolidated financial statements of the ultimate parent it should not make a difference.

The IFRIC agreed that these issues should also be addressed in the detailed example to be drafted by the staff as proposed in the discussion on the previous issue. One IFRIC member highlighted that the focus of the example should not be solely on the hedged item but the example should explicitly deal with hedging instrument. The next steps are that the staff will draft the detailed example and seek early input and feedback from the IFRIC members. This example will then be discussed at the March IFRIC meeting with the goal to reach final agreement on the principles of the draft Interpretation.

IFRIC work in progress

The IFRIC was asked to confirm the IFRIC's work in progress table as provided in Agenda Paper 5 (to be found on the IASB's website). The IFRIC coordinator noted that all of the active issues on the list had been discussed at this meeting with the exception of three items:

• The draft interpretations on IAS 18 Revenue - Customer Contributions and IAS 27 Consolidated and Separate Financial Statements - Accounting for distributions of non-cash assets to owners will be published on 17 January 2008 with comment periods ending by the end of April 2008. The comment letter analysis on the two draft interpretations is expected to take place at the July 2008 meeting.
• An issue relating to derecognition is awaiting the allocation of staff resources