IFRS 3 Business Combinations – Acquisition-related costs in a business combination

The IFRIC confirmed its tentative agenda decision not to add the item to its agenda.

IFRS 3 Business Combinations – Earlier application of revised IFRS 3

The IFRIC confirmed its tentative agenda decision not to add the item to its agenda.

IAS 7 Statement of Cash Flows – Determination of cash equivalents

The IFRIC confirmed its tentative agenda decision not to add the item to its agenda.

IAS 27 Consolidated and Separate Financial Statements – Transaction costs for non-controlling interests

The IFRIC confirmed its tentative agenda decision not to add the item to its agenda.

IAS 28 Investments in Associates – Potential effect of IFRS 3 (as revised in 2008) and IAS 27 (as amended in 2008) on equity method accounting

Staff introduced the paper based on the tentative agenda decision and comment letters received and indicated that information on step acquisitions included in the draft tentative agenda decision was not included in the original submission received from constituents. One member expressed concern with including a response in the agenda decision that was not part of the original request for clarification and proposed that the final agenda decision should be based on the original submission and the IFRIC's draft response as agreed at its May meeting.

The IFRIC then discussed whether analogy to IFRS 3 with regards to accounting for contingent consideration is appropriate in as far as associate accounting is concerned. Some members pointed out the IFRIC has previously agreed that analogy is not appropriate and don't believe the IFRIC should change its position now. One member is of the opinion that there is no real problem as other IFRSs dealing with assets accounted for at cost, require any contingencies to be included in the cost of the asset. Another member requested having a separate debate on this issue at the September meeting. The Chairman mentioned that it is the Board's intention to rethink accounting for associates as a whole and that some consequential amendments will be made to IAS 28 following the finalisation of the revised IAS 31, which is anticipated in September.

The IFRIC agreed to remove the additional paragraphs added to the wording agreed in May and confirm the tentative agenda decision not to add the item to its agenda.

IAS 28 Investments in Associates – Venture capital consolidations and partial use of fair value through profit or loss

The IFRIC confirmed its tentative agenda decision not to add the item to its agenda.

IAS 28 Investments in Associates – Impairment of investments in associates

One member noted that, as the Board had already decided in its June 2009 meeting that it would include this issue within the exposure draft of Improvements to IFRS, no further discussion was needed. The Board had decided that impairment of associates measured at cost in the separate financial statements of the investor should follow IAS 39 requirements.

One member of the IFRIC noted that similar clarification would be needed for treatment of subsidiaries in the separate financial statements. The Chairman noted that this issue can be addressed through either the consolidation or financial instruments project.

The IFRIC decided to include some reference to these developments in its agenda decision. Final wording will be circulated to the IFRIC members for approval.

IAS 39 Financial Instruments: Recognition and Measurement – Hedging using more than one derivative as the hedging instrument

The IFRIC confirmed its tentative agenda decision not to add the item to its agenda.

IAS 39 Financial Instruments: Recognition and Measurement – Meaning of 'significant or prolonged'

The IFRIC received 10 comment letters regarding its May tentative decision. Two of these comment letters were from the regulators who were particularly concerned with the proposed wording that emphasised uniqueness of each equity investment and the use of judgement. Many IFRIC members expressed their concerns that this could lead to reduction of the amount of information available to users.

The IFRIC had an extended discussion of the issue as well as proposed changes in the agenda decision wording. The IFRIC members noted that the issue relates to the creation of criteria for individual financial instruments that the company has to apply the consistently. Nonetheless, the majority of the members noted that the changes in the wording proposed by staff go beyond the scope of an agenda decision.

Ultimately, the majority of the IFRIC members agreed that the May wording more clearly articulated the position of the IFRIC in most of the areas than the changes proposed by the staff. Nonetheless, the IFRIC agreed to modify the wording of the agenda decision and to include a reference to the existing disclosure requirements of IAS 1 and IFRS 7. After discussion, the IFRIC also decided to include a reference to consistency of the criteria applied. The IFRIC members proposed also minor changes to the structure of the agenda decision. Final wording to be circulated to the IFRIC members for approval.

IFRIC 12 Service Concession Arrangements – Scope of IFRIC 12

The IFRIC confirmed its tentative agenda decision not to add the item to its agenda.

IFRIC 18 Transfers of Assets from Customers – Applicability to the customer

The IFRIC confirmed its tentative agenda decision not to add the item to its agenda.

IAS 34 Interim Financial Reporting – Interim disclosures of fair value

The IFRIC confirmed its tentative agenda decision not to add the item to its agenda.

IAS 38 Intangible Assets – Compliance costs for REACH

The IFRIC confirmed its tentative agenda decision not to add the item to its agenda.

The IFRIC considered a request to add to its agenda a project to clarify non-vesting conditions or non-market conditions when the conditions are not within the control of the entity or employee, based on paragraph IG24 of IFRS 2 Share-based Payment.

The issues on which clarification were sought on were:

• Issue 1: Is a condition a non-vesting condition because there is no service condition or because there is a service condition that is dependent on another condition that does not related to the performance of the entity?
• Issue 2: When a condition affects the timing of the vesting but not whether the share-based payment vests, should it be treated as a vesting or non-vesting condition?

On issue 1, the staff noted that par IG24 is not part of the mandatory guidance of IFRS 2 and should therefore be read in the context of IFRS 2. Staff considered that the examples in IG24 are not a de facto definition of non-vesting conditions and that non-vesting conditions are those that do not meet the definition of vesting conditions. The staff concluded that in the example given in the submission the conditions interact in such a way that combined they meet the definition of vesting conditions in IFRS 2 as the employee is likely to be motivated to stay with the entity during the estimated length of time to reach the set target.

With regards to issue 2, the request noted that there are two views on the accounting treatment for such conditions;

• View 2(a) – some constituents support a true up for changes in the expected service period and expected rate of forfeiture. This approach is consistent with IG Example 2 of IFRS 2.
• View 2(b) – Other constituents would account for the effect of a non-vesting condition that affects the timing of the vesting in the same way as a market-based besting condition with the vesting period estimated on day 1 and not trued up.

The staff concluded that the condition that affects the timing of the vesting does not meet the definition of vesting conditions and as such do not determine the vesting period and considers both views inconsistent with IFRS 2.

The staff recommend to the IFRIC not to add the item to its agenda as IFRS 2 provides sufficient guidance on the definition of vesting conditions and therefore non-vesting conditions and the treatment of non-vesting conditions. As these issues were considered to be uncommon in practice and diversity in practice is not anticipated, the staff considered the issues too narrow to develop an interpretation.

One IFRIC member felt that the scope of the question is much broader than just the facts mentioned in the staff paper and that the real question to consider is how the interaction between conditions should be treated and what the accounting implications thereof were. Most of the IFRIC members disagreed with the staff's conclusion and indicated that they can't see how the staff could conclude that it was just a vesting condition. Members also disagreed that the issues were uncommon in practice.

It was agreed that the staff should research the question further before an agenda decision could be reached. The Chairman asked all members to assist staff with the research through their experience and providing real-life examples. The outcome of the research will determine whether the IFRIC adds the item to its agenda or refer it to the Board as an amendment to IFRS 2. No tentative agenda decisions were reached.

The IFRIC considered a request to clarify whether an entity should apply the measurement choice in IFRS 3 Business Combinations to all components of non-controlling interest (NCI).

The question related to whether the change from 'minority interest' to 'non-controlling interest' had broadened the scope of instruments to be included in NCI. Some are of the view that when the Board issued IFRS 3 (Revised) it intended the measurement choice in IFRS 3 (2008).19 to apply only those components of NCI that are equivalent to minority interest (MI) as defined in IAS 27 (2003). In addition, NCI components other than MI should be measured at fair value or the measurement basis required by IFRS. For example a share option under share-based payment awards should be measured in accordance with IFRS 2.

An alternative view is that IFRS 3 (2008) defined NCI as a collective term and sets out the measurement requirements for the aggregate. Nothing in IFRS 3 prevents an entity from measuring components of NCI at other amounts. Practice in applying IFRS 3(2004) demonstrated that some MI components are measured at fair value or other measurement basis.

The IFRIC noted that the measurement basis of NCI is a pervasive and important issue for business combination accounting, and that it was apparent from the staff analysis that divergent views were emerging. The IFRIC considered the staff recommendation that the issue should be referred to the Board for potential inclusion as an annual improvement.

One IFRIC member suggested that the first question to be answered is whether 'the equity in a subsidiary...' in the definition of NCI refers to the net assets of another entity or to its equity instruments, as some equity instruments do not have net assets assigned to them, for example, share options. Other members wanted to know what the Board's intention was with changing the definition of MI to NCI.

After a long discussion of the various equity instruments and their claim on the net assets of an entity, the IFRIC tentatively agreed not to add the item to its agenda, noting that measurement of NCI should be based on the option allowed in IFRS 3 and that components of NCI other than MI should first be measured in accordance with other IFRSs and that the remaining net asset value should then be attributed to NCI. The IFRIC also agreed to refer the matter to the Board.

The IFRIC received a request to clarify how to account for unreplaced and voluntarily replaced share-based payment awards in a business combination.

With regards to unreplaced awards, constituents asked:

• whether unreplaced awards are part of the consideration transferred or part of the NCI
• whether unreplaced awards should be remeasured at the acquisition date and on what measurement basis
• whether an entity should allocate some of all of the value of the unreplaced awards to post-combination expense.

Classification as non-controlling interest

IFRIC agreed that the unreplaced awards of the acquiree meet the definition of non-controlling interest.

Measurement date and basis

IFRIC agreed that unreplaced awards should be measured at their market-based measure at the acquisition date.

Apportionment of consideration transferred and post-combination expense

IFRIC agreed that the acquirer is bound by the terms of the unreplaced awards and that a portion of market-based measure should be allocated to NCI. Only that portion of market-based measure that relates to undelivered employee services should be included in post-combination expense.

Share-based payment awards that the acquirer chooses to replace

IFRIC agreed that when an acquirer voluntarily issues replacement awards to unexpired share-based payments, the replacement awards represent consideration transferred as it is an issue of equity instruments of the acquirer in exchange for unexpired awards of the acquiree. This situation is no different from honouring a change of control provision in the existing terms of the award.

One IFRIC member was confused as to how the staff reached its conclusion as IFRS 3 states that there is difference between the accounting for those awards that the acquirer voluntarily replace and those that it is obliged to replace. The staff considered this distinction to apply only to those share-based payment wards that would have expired and are voluntarily replaced by the acquirer.

The IFRIC reached a tentative decision to refer to matter to the Board as a complete rewriting of B56 of IFRS 3 is required. Concerns were raised that IFRS 3 is a converged standard and that consultations need to happen with the FASB in order for the wording to be changed. The Chairman remarked that just as the IFRIC had to convince itself of the significance of the matter, the FASB will have to convince itself.

The IFRIC received a request to add to its agenda an issue with respect to the write-down of a disposal group to the lower of its fair value less costs to sell and its carrying amount when the write-down exceeds the carrying amount of non-current assets.

The submission points out four alternative views:

• limit the recognised loss to non-current assets only
• limit the recognised loss to net assets of the disposal group
• limit the recognised loss to total assets of the disposal group
• limit the recognised loss to the non-current assets and recognised a liability for the excess to ensure that the disposal group is measured at fair value less costs to sell.

The staff set out a three-step approach to applying the requirements of IFRS 5 and noted that IFRS 5 is not clear on how to account for an impairment loss of a disposal group if triggered by a fair value change in a financial liability. Members questioned whether the allocation of the impairment loss in such a case to scoped-in assets is meaningful for users. Some IFRIC members also felt that the allocation of impairment loss to each asset within a disposal group would not provide additional information to the users. One member made the remark that IFRS 5 was originally written to deal only with non-current assets and that the inclusion of disposal groups may have happened without the necessary thought-process on how all the requirements would apply to disposal groups. The majority of the IFRIC members agreed with the staff's analysis and thought that the question should be expanded to ask what will happen if the value of the disposal group is negative – should an entity then recognise a 'provision for disposal'?

The IFRIC reached a tentative decision to refer the matter to the Board with the recommendation that paragraph 23 of IFRS 5 should be amended to additionally refer to paragraph 105 of IAS 36 (which limits the reduction of the carrying amount of an asset), so that no assets will be reduced to zero and only a liability recognised.

The staff introduced the first issues relating to amended IAS 23 (2007) by noting that the IFRIC has received requests to clarify the meaning of general borrowings. The issue relates to the question whether a borrowing made to acquire a specific asset other than a qualifying asset could/should be excluded from general borrowings when assessing the amount of general borrowing costs that are to be capitalised.

The staff noted that two views have developed in practice. These were outlined in the staff paper as follows:

• View A: The definition of general borrowings in paragraph 14 of IAS 23 means that all borrowings other than borrowing made specifically for the purpose of obtaining a qualifying asset have to be taken into account when calculating the capitalisation rate.
• View B: The general principle in IAS 23 that the entity shall capitalise borrowing costs that would have been avoided if the expenditure on the asset had not been made allows allocation between general borrowings and other borrowings made specifically for the acquisition of other assets.

The staff believe that there is a conflict between specific and general principles of IAS 23 and support the view that the borrowings made specifically for the acquisition of other assets are excluded from the calculation of the capitalisation rate for general borrowings. The staff believe that the IFRIC should refer this issue to the Board to amend IAS 23 as a part of Annual Improvement process in this respect. They therefore recommended that the IFRIC should not add the issue to its agenda.

One IFRIC member disagreed with the staff analysis and noted that in the practice another method has developed based on opportunity costs allocation. Another IFRIC member noted that any guidance in this area would be of nature of implementation guidance only and that the standard has many issues to be addressed in this way as paragraph 14 is difficult to be applied in practice. Another IFRIC member noted that even though significant judgement of is required in determination of general borrowing the amounts concerned would generally not be material.

One IFRIC member responded that in her opinion the standard is sufficiently clear in what are the requirements for capitalisation but that the results it produces can be counterintuitive. The Chairman noted that the revised standard is relatively new and that it would require more time to assess how the constituents apply it. Another member disagreed as in her opinion there is already divergence in practice, nonetheless any guidance in this respect would be implementation guidance only.

The IFRIC members discussed the issue of potential divergence in practice. They concluded that even when the practitioners applied the requirements of IAS 23, they would end up with different capitalisation rate. Nonetheless, the majority of the members did not believe that this diversity would hamper comparability of financial statements. Finally, the IFRIC tentatively decided not to add the issue to its agenda as the members were unable to reach conclusion on the issue and did not expect significant diversity in the practice. The staff were asked to rewrite the agenda decision accordingly.

The staff began the discussion by noting the increase in submissions related to current economic environment. The issue relates to a case when an entity issues its own equity instruments in settlement of debt in a restructuring.

The issues raised by the staff paper were analysed as the following four issues:

• whether the issuing equity instruments is one form of consideration
• whether the initial measurement of equity in the connect of the debt to equity swap is fair value
• whether this fair value is determined as fair value of the extinguished liability or issued equity
• whether any gain on extinguishing of liability is shall be reported in profit or loss.

The staff analysed the issues and noted that in their opinion issuing of the equity instruments is indeed one form of consideration and the new shares issued should be measured at the fair value of the liability extinguished with any difference between the carrying amount of the financial liability extinguished and its fair value recognised in profit or loss. Their analysis was based on the general principles of IFRS that equity is a residual and should be measured by the changes in assets and liabilities as stated in the Framework and IFRS 2 and on consistency with IFRIC 17.

The alternative opinion from the submission referred to paragraph 33 of IAS 32, according to which no gain or loss shall be recognised in profit or loss on purchase, sale, issue or cancellation of an entity's own equity instruments.

A significant majority of IFRIC members agreed with the results of the staff analysis, some, however, for different reasons. One IFRIC member thought of the swap as two transactions; modification of liability with its subsequent change to equity for the fair value; another based her analysis on the fact that debt and equity were substantially different instruments. Nonetheless, some IFRIC members noted that according to some literature the overall transaction can be also thought as equity transaction. Another speaker noted that this transaction cannot be thought as the transaction with shareholders in the capacity of owners as it is primarily a transaction with creditors, thus supporting the proposed accounting treatment.

Majority of the IFRIC members, nonetheless, noted, that the fair value of liability in the time of restructuring may be difficult to obtain. Therefore, they proposed an approach similar to US GAAP where fair value of either extinguished liability or fair value issued equity is used as measurement basis depending on the fact which is more reliable and more easily determinable.

After significant discussion the IFRIC members noted that even though they believe that the proposed view is the only acceptable interpretation given the current IFRS requirements, there is need for clarification of the requirements. After assessing the issue against the agenda criteria the IFRIC decided to take the issue on the agenda and develop and interpretation of the standard to make it clear that the proposed accounting treatment is the only solution. The IFRIC noted that it would aim to issue such an interpretation in early 2010. As such it asked its chairman to consider the possibility to have a video conference to facilitate drafting of the interpretation in August.

The staff presented two additional issues occurring lately to the IFRIC.

Rights issues denominated in a foreign currency

One related to a current issue around the world related to classification of rights issues. The staff noted that based on the current IFRS requirements and based on the previous conclusion of IFRIC if the exercise price of the right was fixed in a foreign currency, the entity would have not received a fixed amount for the issue of the shares. Thus the instrument does not fulfil the criteria of equity instrument and must be classified as liability in its entirety according to IAS 32.

In the current economic environment, contrary to the previous periods, the issue has become much more widespread. As more and more companies issue rights in more than one currency (e.g. when listed in more than one jurisdiction or based on regulatory requirements) application of this requirement leads to counterintuitive results, creating a huge practical issue. While the rights are outstanding the changes in entity's own share price are reflected in profit or loss.

The IFRIC noted that in 2005 it proposed an amendment of IAS 32 to the Board on a broader fixed to fixed issue. The Board decided not to amend the standard at that time as piecemeal changes to an already complex standard would create additional complexity just as the standard was issued. Moreover, at the time neither the Board nor IFRIC believed that the issue can lead to significant diversity in practice. However, the effects of the financial crisis and increased volatility in share prices as well as FX rates have led to exacerbation of the issue in practice.

A Board observer noted that this result was not intended by the Board and in his opinion the current treatment contradicts the rationale behind the current standard. He agreed that as the practice developed this issue it has to be urgently addressed.

After a short discussion the IFRIC decided to refer the issue to the Board to take immediate action as the results from current requirements are clearly not in accordance with the economics of the underlying transactions. As the IFRIC members believe it is a very narrow issue that can be addressed speedily, the issue could be discussed on the upcoming July Board meeting.

Conversion options

The second issue related to a collar on conversion options. The submission related to a financial instrument that will or may be converted into a number of the entity's own equity instruments subject of a collar. After a brief discussion the IFRIC noted that there are not sufficient principles in the current IFRSs to develop an interpretation on this issue as in the practice there is wide diversity in the issued instruments with similar features. Therefore, it decided to direct the query to the liabilities and equity technical team as part of the project in this area.

IFRIC work in progress

The IFRIC coordinator gave a brief update on the progress of IFRIC activities. No additional outstanding projects apart from those discussed were identified.

This closed the public session.