At its November 2008 meeting, the IFRIC decided not to add this issue to its agenda.

The IFRIC directed the staff to identify the rights an entity acquires under REACH and the characteristics of REACH compliance costs that require an Interpretation. This information would permit the IFRIC to determine whether it can specify an appropriate scope for this project and, therefore, whether it should be added to the agenda.

The purpose of the discussion at the March 2009 IFRIC meeting is to decide whether this issue meets the criteria for being added to the IFRIC agenda.

The staff provided an analysis as to whether REACH costs meet intangible assets recognition criteria.

Identifiability

The staff believe that registration is a legal right as it is provided under EU law by an authority and, therefore, registration satisfies the identifiability criteria.

Control over a resource

The staff is of the view that the capacity of an entity to control the future economic benefits from the registration stems from legal rights provided under EU law by an authority. Once registration is completed the authority cannot arbitrarily withdraw the registration. Third parties do not have free access to the testing data.

Existence of future economic benefits

The staff is of the view that registration would meet the existence of future economic benefits criterion in two ways:

• Future economic benefits result from registration because registration allows the entity to sell or manufacture the substances or products in the EU and generate a stream of future cash inflow. Without the registration, the substances or products can no longer be sold or manufactured in the EU.
• An early registrant receives compensation of costs from later registrants.

The staff is also of the view that future economic benefits would be also assessed by analogy to paragraph 11 of IAS 16 Property, Plant and Equipment. REACH costs have the same characteristics as the assets installed for environmental or safety reasons. Paragraph 11 of IAS 16 states that those assets do not directly increase the future economic benefits but they are recognised as an asset because without them the entity is unable to manufacture and sell chemicals.

At the time when reimbursement of testing costs is made between an early registrant and later registrants, control over a resource criterion and existence of future economic benefits criterion would be no longer met by the amount of reimbursement (not entire amount of the total costs).

Probability that the expected future economic benefits will flow to the entity

The staff is of the view that meeting this criterion would depend on the probability of regulatory approval, and on the ability recover of the costs. Ultimately, assessment of this criterion would be a matter of judgement.

Classification of intangible assets and other recognition criteria

The staff noted that classification of intangible assets and further recognition criteria would depend on the following factors:

• Whether the substances are new substances or existing substances
• Whether testing data are acquired from a former registrant

When new substances are developed and registered, registration costs would be part of the development costs and should be recognised as internally developed intangible assets if they meet all the recognition requirements of IAS 38.57.

The registration cost of an internally generated intangible asset would be the sum of expenditure incurred from the date when the intangible asset first meets the recognition criteria in paragraphs 21, 22 and 57 of IAS 38. The cost of an internally generated intangible asset would comprise all directly attributable costs in accordance with paragraph 66 of IAS 38.

When existing substances are registered, the substances had been already on the market prior to the implementation of REACH regulation. Some guidance produced by major accounting firms indicates some alternative views:

• View 1: Those costs should be expensed as incurred as they would represent subsequent development costs of an existing product in accordance with paragraph 20 of IAS 38.
• View 2: Those costs should be recognised as internally generated intangible assets if they meet the criteria in paragraphs 21, 22 and 57 of IAS 38.
• View 3: Those costs should be recognised as separately acquired intangible assets similar to a product-specific license.

The staff is of the view that the registration costs for existing substances would also meet the asset recognition criterion when taking any views above, that is, even if taking view 1, the costs do not have to be expensed as incurred.

The staff concluded with the view that REACH costs would meet the intangible assets recognition criteria in accordance with IAS 38. The staff is of the view that the issue does not meet the agenda criteria because IAS would provide sufficiently clear intangible asset recognition criteria to apply without developing a specific Interpretation, and they did not expect diversity in practice. The staff proposal for tentative agenda decision wording is outlined in Appendix A to Agenda Paper 3.

The IFRIC members were then asked to provide comment on the staff analysis and conclusions.

One IFRIC member noted that the agenda decision wording could be read such that any cost that preserves an asset is able to be capitalised. In particular the IFRIC member was concerned that the analogy to paragraph 11 of IAS 16 is inappropriate. The concern is that if paragraph 11 of IAS 16 is applied to other kinds of costs by analogy it may be extended to other costs that should, in fact, be expensed.

Another IFRIC member raised the issue that there is some confusion about what the asset is that the IFRIC agenda decision is talking about. Is it a right to do business in a specific jurisdiction? The staff clarified that it is a right attached to a specific substance, rather than a right to do business.

It was further clarified that the asset being referred to is the registration of the substance, not the development of the substance.

Others raised the issue of lack of exclusivity relating to the right. Other IFRIC members noted that they were having difficulty in understanding the asset because the registration doesn't increase economic benefits; rather it just maintains economic benefits. Are assets only those that increase economic benefits, or can they be extended to also include those to maintain economic benefits? One IFRIC member pointed out that if an entity didn't register a substance, then they would have no benefits and they would no longer be permitted to use that substance. Another IFRIC member responded by saying that this goes back to the preservation argument (noted earlier), and she was uncomfortable with this.

One IFRIC member noted that the issue they are really trying to address is whether IAS 38 principles for intangible assets that provide a unique right can be applied to non-unique rights (such as REACH costs). This was a different issue to the one that the staff has addressed in the agenda paper.

The IFRIC made no decision as to whether to take this issue onto the agenda. The staff was directed to do more research on specific registration costs, and to identify generic requirements for such costs, including current practice for other registration costs and circumstances where they would or not would not be capitalised. The staff was also requested to confirm if there was diversity in practice or not.

The results of this additional research will be brought back to the next IFRIC meeting.