The IFRIC considered a request to add to its agenda a project to clarify accounting treatment for stripping costs in the production phase.

An educational presentation was made by Niall Weatherstone, Chief Advisor for Evaluation at Rio Tinto. The presentation clarified the technical and geological aspects of mining as well as significance of the stripping costs, especially in open pit mining. The main aspect of the presentation was treatment of waste and overburden. During production, waste and ore are mined together, and some of the waste represents an additional 'development' activity needed to secure access to the next level of ore ('push-backs').

The IFRIC noted that capitalisation of pre-production stripping costs (cost to remove waste before the actual ore is mined) is not contentious. The real issue is capitalisation of stripping costs in the production phase of the mine.

The IFRIC also noted that stripping activity in the production phase occurs because development might continue through removal of overburden in portions of the mine, to reach ore that would be extracted in the current or in later periods. As such, stripping creates a future economic benefit. Many IFRIC members thought that conceptually such costs should be capitalised as well. Nonetheless, some IFRIC members expressed concerns about whether such costs could be distinguished from normal production cost and whether artificial arbitrary rules would not have to be introduced.

The IFRIC considered four alternatives on accounting for stripping costs during production:

1. expense when incurred
2. capitalise as a cost of inventory as variable production cost (the US approach)
3. capitalise and attribute to reserves benefited in a systematic and rational manner (the Canadian approach)
4. capitalise using a strip ratio

Most IFRIC members thought that Alternative 3 was the conceptually right answer, but Alternative 4 could be used as an expedient. Some IFRIC members were concerned with this view, as they believed that the main difference between Alternatives 3 and 4 was that Alternative 4 explicitly considers future costs which would be inconsistent with the Framework. For some IFRIC members the most pertinent issue was the unit of account issue – is the unit of account one mine? Some IFRIC members raised other issues with both alternatives 3 and 4 (for example, reflecting the profitability of each layer of ore and reflecting how the business of the pit is managed).

The IFRIC noted that treatment of production stripping cost was very diverse all over the world. In particular, given transition of Canada to IFRSs, several conflicting practices would be present in IFRS jurisdictions.

One IFRIC member asked about the relationship of stripping cost and the draft Extractive Industries Discussion Paper (DP). The staff clarified that the DP is not expected to treat the production stripping costs in detail. The DP will acknowledge that capitalisation might be appropriate. Moreover, the staff noted that the IASB is not expected to finalise an extractive industries Standard for three to five years.

After discussion, the IFRIC agreed to add this project to its agenda and directed the staff to explore scope of the project, capitalisation alternatives, and possible amortisation methods. The discussion is expected to resume at the next IFRIC meeting.

The IFRIC deliberated comment letters received to D25 Extinguishing Financial Liabilities with Equity Instruments. Most constituents agreed with the basic feature of D25 – that issuance of an entity's equity instruments was consideration paid and that the extinguishment should be determined at fair value, with any difference between the carrying value of the financial liability and its fair value at extinguishment being recognised as profit or loss.

On the other hand, most constituents disagreed with the requirement to measure debt-for-equity swaps at the fair value of equity or fair value of the liability, whichever is more reliably determinable. Constituents felt that a preferred measurement basis should be specified to avoid an 'accounting choice' developing in practice. The IFRIC agreed to provide guidance on a preferred measurement basis.

Two IFRIC members expressed their concerns that a preferred measurement basis might not capture the variety of situations for these transactions. Nevertheless, most of IFRIC members held their views that equity better represented consideration paid in the transaction. Therefore, the IFRIC decided that fair value of the equity instruments issued should be the preferred measurement basis.

The IFRIC also agreed that if the debt-for-equity swap is measured using fair value of the financial liability extinguished, paragraph 49 of IAS 39 should not apply to its measurement, especially in the context of covenant violation. The IFRIC reached that conclusion as it believed that repayment on demand was not part of the original contractual terms and that the provision was non-substantive (the entity cannot pay it on demand).

The IFRIC also agreed that all the measurement should be applied at the transaction date, and transaction date should be defined with reference to IFRS 3 Business Combinations.

Regarding the scope, the IFRIC decided that the Interpretation should not apply to those debt-for-equity swaps where conversion terms were included in the initial contract of the liability extinguished (as there is no change of contractual terms). The scope exclusion for common control transaction proved to be more controversial. While some IFRIC members believed that common control transactions should be excluded from the scope of D25 as they represented a different economic substance, other IFRIC members noted that such an approach was not justified on the level of the reporting entity (separate financial statements).

Finally, the IFRIC agreed that common control transaction should be excluded from the scope of D25 if there is indication that the economic substance of the transaction is that of equity contribution. The Basis for Conclusions will indicate that capital contributions are accounted separately if reliably determinable.

The IFRIC also decided to provide additional guidance on how the Interpretation should be applied to partial extinguishments. The IFRIC noted that in that case the entity should assess whether some of the consideration paid relates to a modification of the part of the liability extinguished. If it does, the entity should allocate the consideration paid between the part of the liability extinguished and the part of the liability that remained outstanding. The IFRIC decided not to provide any further specific guidance on that allocation.

The IFRIC also confirmed the transition requirement proposed in D25 – retrospective application. Further, the Interpretation should be effective for annual periods beginning on or after 1 April 2010, with earlier application permitted.

Finally, the IFRIC approved the consensus and asked the Board to approve the Interpretation at its November meeting.

IAS 23 Borrowing Costs — Meaning of 'general borrowings'

The IFRIC confirmed the tentative agenda decision not to add the item to its agenda. The IFRIC discussed the implications of the Board decision not to include this issue in the annual improvement process. After a short discussion over possible changes to the tentative agenda decision and implication of such a decision on the due process, the IFRIC decided to confirm the original tentative agenda decision.

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations — Write down of a disposal group

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

IFRS 3 Business Combinations — Un-replaced and voluntarily replaced share-based payment awards

The IFRIC confirmed the 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 unit of account for forward contracts with volumetric optionality. The IFRIC discussed the forward contracts to buy and sell a fixed quantity of a specified commodity at a fixed price over the term of a contract that grants the buyer the flexibility to purchase quantities of the same commodity also at this fixed price.

The IFRIC was told that such contracts are common for business reasons in a variety of industries. From the perspective of the selling entity these contracts could be seen as a forward contract and a written option. The issue discussed was whether the forward and the written option should be analysed as two separate contracts for accounting purposes even though they are in a single contract and how this interacted with the 'own use' scope exception from IAS 39 in IAS 39.5.

The IFRIC discussed four accounting alternatives:

1. a single contract outside of scope of IAS 39
2. a single contract in of scope of IAS 39 (the whole contract accounted in its entirety as a derivative at fair value through profit or loss)
3. two units of account, the own use exception applied to the forward contracts and written option component accounted as a derivative
4. accounting policy choice between Alternative 2 and Alternative 3

The IFRIC noted that any of these four alternatives might be a reasonable interpretation of IAS 39. For this reason, some IFRIC members concluded that the issue should be referred to the Board for consideration.

Nonetheless, a majority of the IFRIC members felt that more study is needed to understand how these requirements are applied in practice and directed the staff to investigate a variety of industries (not just utilities). Few members of IFRIC indicated that, from their experience, the full contract is treated as outside of IAS 39 (Alternative 1) as they are treated under the 'own use' exception (for instance, securing of capacity).

In addition, the Chairman noted that in the meantime, he would find out the plans of the Board regarding scope of IAS 39 in the context of its current fast-track project to replace IAS 39.

The IFRIC agreed to rediscuss this issue at its next meeting.

The IFRIC received two requests for guidance on the meaning of 'consumption of economic benefits' of an intangible asset with a finite useful life. The staff explained that the requests are similar to questions raised in March 2008 and can be rephrased as whether the pattern of consumption of economic benefits should reflect values (for example, revenue) or only quantities (units).

One member disagreed with the staff's recommendation not to take the matter onto the agenda as one of the requests submitted to IFRIC listed as an example an intangible asset recognised in accordance with IFRIC 12. The real question that needs to be answered is, in accounting for a licence to operate a tangible asset, whether one should look through the licence to the underlying tangible asset and amortise the intangible based on the consumption of the tangible. Another IFRIC member agreed that there is divergence in practice on this issue and that IFRIC should add the item to its agenda, as amortisation depends on the interpretation of economic benefits, which in some cases seem to indicate revenue streams.

Another member concurred, pointing out that under IAS 17 the economic benefits of an operating lease are defined in terms of revenue, and that amortisation based on the revenue stream of an intangible would appear to be consistent with IAS 17.

Another IFRIC member noted that IAS 38 seems to be clear that an intangible asset is amortised based on the expected usage, rather than revenue. Because of these differences, this member agreed with the staff's proposal not to add the item to the agenda.

A vote was taken, and only five members voted to add the issue to IFRIC's agenda. The discussion then turned to the proposed wording of the agenda rejection notice and whether the IFRIC should make the bold statement that amortisation can only be based on the straight-line basis or on the units-of-production method and not on revenue streams (or values). One member mentioned that in the US they have concluded that no method can be ruled out completely as the facts and circumstances differ between arrangements.

After discussion, IFRIC agreed to use the wording of IAS 38 to explain the basis for amortisation of intangible assets. The agenda decision will also make clear that preparers must apply judgement when choosing an amortisation method and that IAS 1 requires disclosure of the significant judgements made in the preparation of the financial statements.

The IFRIC received a request to clarify the classification and measurement of share-based payment transactions in which the manner of settlement is contingent on future events.

The IFRIC discussed, inconclusively, several possible sources of guidance on contingent settlements in IFRSs. The Chairman asked whether the IFRIC wanted to take the matter onto its agenda, and all IFRIC members declined. However, one member pointed out that in the agenda paper the staff has admitted that IFRS 2 does not contain a clear principle and that paragraphs 35-40 of IFRS 2 had to be 'interpreted' before reaching the conclusion in the staff's paper. It therefore appears to be necessary to interpret the existing principles in IFRS 2 to reach an acceptable answer. Another discussion followed on whether the issue was widespread in practice and several members indicated that they have experienced similar situations.

The Chairman then directed the IFRIC onto the question of how such arrangements should be measured. A couple of members expressed concern about the subsequent measurement of a compound instrument where there is a change in circumstances. One member said it would be more appropriate to treat these conditions as vesting conditions, but pointed out that the question on whether this would meet the definition of a vesting condition has not yet been investigated.

The IFRIC concluded that these matters will be better addressed as part of a comprehensive review of IFRS 2 rather than through a 'quick fix' amendment. The IFRIC will recommend the matter to the Board for inclusion in its IFRS 2 review project.

Staff introduced two requests asking for guidance on the presentation of comparatives when the 'pooling of interest' method is applied to common control business combinations as well as other related issues regarding combined financial statements.

Several members disagreed with addressing these specific questions without resolving the bigger issue of accounting for common control transactions.

A general discussion followed on whether there are any principles in IAS 27 that the IFRIC can interpret that will resolve these questions. The IFRIC concluded that it could not identify clear principles for resolving the specific issues and, therefore, decided not to add these matters to its agenda until the larger issue of common control transactions is addressed by the Board.

The IFRIC received a request for guidance on how an investor, in its separate financial statements, should account for dividends received in the form of the investee's treasury shares.

Staff explained that the original request asked for guidance only in the situation where all ordinary shareholders are offered a pro-rata dividend of treasury shares. In analysing the request, the staff added another situation where there is also a cash dividend alternative.

The IFRIC agreed that in the first situation, in accordance with paragraph 29(a) of IAS 18, the investor would not recognise any revenue as the dividend did not change the economic interest of any of the investors – their ownership shares in the investee remained unchanged.

When discussing the second situation, one member was of the opinion that the presence of a cash alternative should not change the substance of the transaction and, therefore, this member does not agree with the staff's conclusion that revenue should be recognised. Another member indicated that if the cash alternative has economic substance, the investor has received some value and should recognise revenue.

The IFRIC had a very long discussion on whether revenue should be recognised in situations where there is a cash alternative and how 'economic substance' should be interpreted. The question on measurement of revenue in such a situation was also raised. The IFRIC could not reach a consensus either on the amount of revenue to be recognised or whether revenue should be recognised at all.

After much deliberation, the Chairman pointed out that the request only dealt with the first situation on which the IFRIC seemed to reach consensus and that any agenda decision should only deal with that. The IFRIC then agreed with the staff's conclusion on the first situation and asked for the draft agenda decision to be amended to only deal with that situation.

A request was submitted to the IFRIC to seek guidance on the liability/equity classification of financial instruments with specific features issued by Real Estate Investment Trusts (REITs). The staff provided background information on the nature of REITs. Staff noted that because a REIT has a contractual obligation to distribute 90% of distributable profit, some believe that there is a guaranteed benefit (as defined in IFRS 4) and, therefore, these investments should be accounted in accordance with IFRS 4.

Several members expressed their surprise that the staff could consider these investments to be guaranteed benefits. One member suggested that if this was true, all financial liabilities will be regarded as guaranteed benefits and accounted for under IFRS 4. Another member pointed out that although paragraph 35 of IFRS 4 refers to 'financial instruments', it should be read as 'insurance contracts'. The IFRIC agreed that investments in REITs should be accounted for in accordance with the requirements of IAS 32 with regards to compound instruments.

The IFRIC agreed not to add the matter to its agenda but proposed a significant redraft of the agenda decision to remove any reference to IFRS 4 and to refer only to IAS 32.

The IFRIC resumed its debate on more general 'fixed for fixed' condition in IAS 32. The staff presented a comprehensive overview of questions received on classification of financial instruments divided in two broad categories: foreign currency situations and pre-determined condition situation.

Given a great variety of the questions, differences of views on the scope of the project, and the fact that the IASB expects to issue an exposure draft on Financial Instruments with Characteristics of Equity (FICE) in the second quarter of 2010, the IFRIC decided not to take the project on the agenda. The IFRIC noted that even though the issues represent a major problem in the practice, it is more appropriate that the issue should be in the scope of the FICE project.

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 except for the IFRS 2 issue on 'classification of conditions'. The staff noted that it was engaged in dialogue with constituents on that issue (vesting and non-vesting conditions) and the result of its analysis will be presented at the January IFRIC meeting.

At the request of one IFRIC member, the staff clarified that several additional requests have been received and are being analysed. If sufficient progress is made in the analysis (including some clarification with the parties that submitted those requests), these might be presented for January IFRIC meeting.

This closed the public session.