The last IFRIC meeting was held in November 2008. The January 2009 IFRIC meeting was cancelled due to the small number of agenda items for discussion.

Since the November 2008 IFRIC meeting, the Board and staff have taken several actions to progress in-process IFRIC related issues and to address a few new issues the Board felt required immediate attention. These are:

• IFRIC 9 – proposed consequential amendment to exclude from its scope embedded derivatives in contracts under common control and in the formation of joint ventures. The amendment to IFRIC 9 is expected to be finalised at the IASB meeting in March 2009.
• IFRIC 9 – reclassification of assets amendment. The amendment to IFRIC 9 was discussed during the February 2009 IASB meeting.
• IFRIC 14 – proposal to amend IFRIC 14 to eliminate an unintended consequence that arises from some voluntary prepayments to a defined benefit plan that is subject to a minimum funding requirement. The IFRIC 14 amendment was discussed by the IFRIC in a later session - refer to the notes below with regards to the tentative agenda decisions.
• IFRIC 16 – proposed amendment to remove the restriction which does not permit hedge accounting if the hedging instrument is held by the foreign operation that is being hedged.
• IFRIC 18 – approval of interpretation. The IASB approved IFRIC 18 Transfers of Assets from Customers at its January 2009 meeting.

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.

The IFRIC redeliberated its tentative agenda decisions published in the November 2008 IFRIC Update (see also our November 2008 IFRIC meeting notes).

IFRS 3 Business Combinations – Customer-related intangible assets

The IFRIC confirmed its view that the issue would best be resolved by the Board and decided to finalise the agenda decision.

IAS 32 — Classification of puttable and perpetual instruments

The IFRIC confirmed the tentative agenda decision published in the November IFRIC Update subject to minor drafting changes.

IAS 37 and IAS 38 — Regulatory assets and liabilities

The IFRIC confirmed the tentative agenda decision published in the November IFRIC Update in the light of Board's decision to add a project on regulatory activities to its active agenda.

IAS 39 — Derecognition of financial assets

The IFRIC confirmed the tentative agenda decision published in the November IFRIC Update.

IAS 39 — Fair value measurement of financial instruments in inactive markets

The staff presented revised wording for the tentative agenda decision on the issue as a result of a letter received by, and a meeting held with, the submitter. A majority of the IFRIC members were concerned over the signal the revised wording would send – that the view in the original submission would be sustainable. It was agreed to revert back to most of the original wording, but also to reflect the revised fact pattern.

The IFRIC in November 2008 discussed four issues:

• How the initial carrying value of an equity method investment should be determined
• How an impairment assessment of an underlying indefinite-lived intangible asset of an equity method investment should be performed
• How an equity method investee's issuance of shares should be accounted for
• How to account for a change in an investment from the equity method to the cost method

For issues 2 and 4, the IFRIC agreed in November 2008 not to add the item to the agenda. This decision was confirmed by the IFRIC.

The staff informed the IFRIC that the IASB staff is undertaking a project to address issues raised by constituents arising from the Business Combinations II project. Issues 1 and 3 would be addressed as part of that project. It was explained that some of the issues could end up as Interpretations, as agenda decisions, or as part of the IASB's annual improvements process.

In the light of this the IFRIC decided also not to add issues 1 or 3 to its agenda as they addressed by a concurrent Board project.

The staff presented the IFRIC with an issue about the definition of cash equivalent in IAS 7 Statement of Cash Flows. The submission asked whether money market funds that are readily convertible and subject to only an insignificant risk qualify as cash equivalents.

It was clear that the question was whether an entity had to look through the investment and make sure that all underlying investments meet the definition of a cash equivalent to conclude that the money market fund was a cash equivalent.

The IFRIC had a lively debate on the issue, in particular on the question whether an entity could be required to look at the underlying investments for the assessment. Many were concerned about applying the US SEC guidance staff referred to as a starting point.

The chairman in the end asked the staff to bring back a paper that would suggest a way to bring the IFRS guidance closer to US GAAP, as in this area the standards were deemed to be substantially converged. This might result in an agenda decision or in a proposal to change IAS 7.

The IFRIC debated a submission that asked for clarification whether tonnage taxes could be seen as income taxes. This is important for the income statement as income taxes are presented separately from other expenses. If tonnage tax was not an income tax it would form part of cost of sales if the income statement was classified by function.

Some IFRIC members were confused what was meant by a tonnage tax and whether it was based on capacity or actual goods transported. Additionally, some wondered whether this tax was in lieu of income taxes or in addition. Many saw tonnage taxes as a kind of income tax. Others noted that the definition of income taxes in IAS 12 requires taxes payable to be based on a net income figure – which was not the case under fact pattern of the submission.

After some debate it was decided not to add the item to the agenda, make clear what was meant by tonnage tax in the submission, that it did not represent an income tax, but to note that preparers were free to add subtotals to separate this tax from other operating expenses.

The staff introduced the submission by highlighting that the submitter asked for more disclosures about temporarily idled and under construction property plant and equipment. It was noted that IAS 16 Property, Plant and Equipment contained disclosure recommendations for this, but that this guidance was not mandatory.

It was clear for most IFRIC members that this was not a request for interpretation, but to change the standard. It was also noted that IAS 1 already requires disclosures about major items that are necessary to understand the financial statements, but that requirement leaves some room for judgement and might not be applied consistently around the world.

The IFRIC decided not to add the issue to its agenda and agreed with the proposed tentative agenda decision wording subject to drafting changes.

In the submission guidance was asked for clarifying the application of the scope exemption in IAS 32 Financial Instruments: Presentation for venture capitalists and similar entities. In particular, it was asked whether in a situation where a group has a venture capital operation that holds an investment in an entity (and has an optional exemption from IAS 28 Investments in Associates) and also holds shares in that entity via another subsidiary. Would the entity have to assess significant influence based on the total investment and apply the equity method on the investment as a whole?

This triggered a long discussion. Some IFRIC members believed that the whole investment is the unit of account. Others thought that assessing significant influence was separate from applying the equity method (that is, the total investment is considered for assessing influence, but the equity method is applied only to the non-VC portion).

Many IFRIC members considered the wording in IAS 28 as ambiguous and did not concur with the staff view that IAS 28 is clear in requiring assessing the total investment of the group and apply, if required, equity accounting to the whole investment.

It emerged from the debate that the diversity around the table could be indicative for diversity in practice. Most IFRIC members seemed to have sympathy for developing an Interpretation on this issue. Staff was asked to perform further research including an assessment of the IFRIC agenda criteria and to bring back a paper at a later meeting

The staff noted that the submitter had filed a very specific fact pattern, on which basis the staff made the analysis and asked whether the instrument (which participated in the losses of the entity) is subject to paragraph AG8 of IAS 39 Financial Instruments: Recognition and Measurement for non-floating rate instruments.

The staff recommended not to add the issue to the agenda as the guidance in IAS 39.AG8 was applicable and clear. While all IFRIC members seemed to agree with this conclusion, some were concerned over the assumptions made, particularly that the instrument does not contain an embedded derivative. It was agreed to make clear, in the final wording for the tentative agenda decision, that the assumption that the instrument does not contain an embedded derivative is accepted as a fact, and not specifically addressing that issue does not necessarily mean that the IFRIC concurs with this conclusion.

The staff presented the IFRIC with the fact pattern to be analysed. In the submission it was asked how to apply the definitions of categories to loans originated with the intention of syndication where the arranger fails to find sufficient commitments from third parties. The question was whether the surplus kept (that is, the failed part of the syndication) is always classified as held for trading or whether there are circumstances it could be classified as loans and receivables.

The IFRIC concurred with the staff analysis that intention to sell the surplus loan immediately or in the near-term always results in held for trading classification.

It was further noted that the October 2008 amendments to IAS 39 Financial Instruments: Recognition and Measurement permitted an entity to reclassify under circumstances financial assets out of the held for trading category. It was agreed that the agenda decision should note that fact.

The submission asked how to determine the discount rate to be used when market-determined prices are not available. The staff noted that IAS 41 Agriculture did provide guidance for these situations.

After brief discussion the IFRIC agreed with the staff proposal not to add the item to its agenda.

The IFRIC decided not to add this issue to its agenda as the Board has already taken the proposed changes to its agenda and hence, the IFRIC criteria for adding it to the agenda were no longer met.

The submission asked for guidance how to account for initial selling and marketing costs incurred during construction of real estate. After IFRIC 15 Agreements for the Construction of Real Estate was issued, many real estate projects are now in the scope of IAS 18 Revenue, which contains no guidance on this issue.

The staff recommended not adding the issue to the agenda.

After brief discussion, the IFRIC agreed with the staff recommendation. It was agreed that the final guidance should not emphasise specific Standards for analogising, but should make clear that there is sufficient guidance available on which costs are not eligible for capitalising.

The chairman closed this part of the meeting noting that during the recent months the quality of the submissions had declined and that some of them seemed not clear and/or did not go through an appropriate thought process. The chairman expressed hope that this would change again in the future.

IFRIC work in progress

The IFRIC coordinator gave a brief update on the progress of IFRIC activities, noting that two Interpretations have been issued since the last meeting and all other items on the list had been discussed at this meeting. The chairman added that any issues for the IFRIC arising from the implementation review of Business Combinations II would be brought to the IFRIC at the May 2009 meeting.

This closed the public session.