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IFRIC D23 — First redeliberations

Date recorded:

IFRIC D23 Distributions of Non-cash Assets to Owners is aimed to provide guidance on the accounting for non-cash distributions to owners. The purpose of this session was to present to the IFRIC a comment letter analysis along with recommendation of the staff on how to proceed with D23.

The issues addressed were:

  • General approach in D23
  • Applicability of IFRS 5 for the asset to be distributed and timing of recognition of the liability

General approach in D23

The staff highlighted in its overview of the comment letter analysis that the following significant concerns were expressed by commentators:

  • The scope is too narrow by excluding common control transactions
  • Fair value measurement of the liability and reference to IAS 37 is not appropriate
  • The difference between book value of the asset distributed and the distribution liability should not be recognised in profit or loss

Based on those concerns the staff proposed the following:

  • Continue with the project
  • Include common control transactions
  • Provide an consistently applicable accounting policy choice to measure the dividend liability at either fair value or book value of the assets to be distributed
  • Keep the disclosures proposed in D23

The staff noted that under the fair value approach taken in D23 most respondents would support recognition of the difference in profit or loss. One IFRIC member asked if the staff analysed whether those respondents would accept recognising the difference directly in equity. The staff answered it did not analyse this.

The IFRIC coordinator explained that most of the transactions that the draft Interpretation attempts to address arise in common control situations. However, some IFRIC members expressed their concerns about the dramatic change in scope. The chairman proposed first to answer the question if common control transactions should be within the scope of the draft Interpretation before proceeding to the remaining issues. Some of the IFRIC members said that in the case of inclusion of common control transactions this would trigger re-exposure.

The IFRIC discussed at length whether common control transactions should be within the scope. Some IFRIC members noted that while the scope should not be extended it should be made clear, possibly in the Basis for Conclusions, what transactions IFRIC considers to be within the scope of the draft Interpretation.

The staff highlighted that even with a scope excluding common control transactions, constituents consider an Interpretation useful. There seemed to be agreement around the table that the scope should not be broadened, but that the scope should be clarified.

Most IFRIC members were against providing an accounting option as proposed by the staff although it might be appropriate if the scope would be extended to include common control transactions.

However some IFRIC members had difficulties with the proposed measurement of the liability and acknowledged that this was shared by commentators. Notably, the reference solely to IAS 37 caused concern. One IFRIC member highlighted that often the liability recognised would be a financial liability as defined in IAS 32 and hence, in the scope of IAS 39. Others proposed to prescribe the measurement attribute 'fair value' instead of referring to IAS 39 which requires applying the best estimate which some considered not to be equal to fair value.

The chairman noted that the IFRIC rejected the staff proposal to provide for an accounting option.

Applicability of IFRS 5 for the asset to be distributed and timing of recognition of the liability

The staff then presented the comment letter analysis regarding the proposed amendment to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations resulting from the deliberation of D23. Both the IFRIC and the Board concluded that IFRS 5 should apply to non-cash distributions although this is not a sales transaction. The staff noted that the majority of commentators agreed.

The IFRIC discussed whether IFRS 5 should also be amended to allow fair value measurement above the carrying amount that would avoid creating a mismatch between the measurement of the dividend liability and the asset to be distributed in settlement of that liability.

The IFRIC reaffirmed its position that the assets (groups) should be within the scope of IFRS but that allowing measurement above the carrying amount would be a big change to the principle of IFRS 5.

The staff then asked the IFRIC when the assets should be reclassified in accordance with IFRS 5. The possible options would be commitment date or obligation date, notably in jurisdictions where shareholder approval is necessary. After a short discussion, the IFRIC agreed that the principles of IFRS 5 should apply and that any shareholder approval would be included in the assessment of high probability (one IFRIC member dissented).

The staff then brought to IFRIC's attention the question when to recognise the liability, which is not addressed by the draft Interpretation. The staff recommended that this should be covered by the final Interpretation. It further proposed that this should be dependent on the requirement of shareholders' approval in a jurisdiction. If shareholder approval of a distribution declared by management is required, the liability would be recognised on the date of shareholders' approval. Otherwise, it would be recognised on the date of declaration by management.

There seemed to be agreement with the staff recommendations.

The staff was asked to provide a redraft of D23 based on these conclusions and to prepare a paper on possible ways of addressing the accounting mismatch between dividend liability and asset to be distributed in extinguishment of the liability.

It was noted by some IFRIC members on that occasion that when businesses are distributed there might be unrecognised assets and that there could be a difference between the liability and the assets recognised even if they were measured at fair value.

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