Definition of scope

Following on its November 2009 decision to add the matter to its agenda, the IFRIC discussed how to define the scope of its project on accounting for stripping costs in the production phase of a mine. The two main issues discussed were:

• whether the scope should include all extractive activities or only the extraction of minerals; and
• whether the scope should have an industry of activity focus.

One IFRIC member enquired whether staff has had consultations with constituents in industries other than mining, as the principles proposed in the accounting for stripping costs can equally be applied to other industries with similar activities. Another member also enquired why the proposed scope of the Interpretation has been limited to the mining industry. This member expressed a preference for defining the activities to be covered by the Interpretation as opposed to the industry. Several IFRIC members shared this view.

One IFRIC member agreed in principal with the view, but noted that practically and realistically it may not be possible for the IFRIC to develop an Interpretation with such broad scope in the foreseeable future as the IFRIC would require further education sessions on the other industries prior to concluding whether the principles would be appropriate. On that basis the member felt that the scope should be limited to the mining industry as the original request submitted to the IFRIC was from that industry. Another member remarked that if the IFRIC or the staff have already potentially identified areas where the proposed Interpretation can be applied, those areas should not be ignored at the moment.

During IFRIC deliberations, one member said that if the principles can be applied to other industries or activities, the Basis for Conclusions to the Interpretation can contain a paragraph similar that included in IFRIC 15, stating that the Interpretation can be analogised to other similar activities. The Chairman noted that in order for the IFRIC to conclude that the proposed Interpretation should allow analogy, it is first necessary to define its scope and formulate the appropriate accounting treatment. Analogy to other activities can only be decided on once the project has been completed.

Another IFRIC member stated that the proposed wording of the scope paragraph is overly complex and could be simplified by using 'wasted' material instead. Staff responded that although the wording has been proposed by the constituents, they agree with the suggestion.

The Chairman then reminded the IFRIC that it has a responsibility to hone in on where divergence in practice has originated and address that divergence. In this case, it was the mining industry, and the scope of the proposed Interpretation should be limited to that.

The IFRIC agreed that the scope of the interpretation should refer to the activity of overburden removal and should not be more specific.

The IFRIC then discussed whether the scope of the proposed Interpretation should be limited to the production phase or include the other mining activities as well. One IFRIC member noted that it is important to understand why the proposed scope is limited to the production phase. Another IFRIC member noted that limiting the scope to the production phase only will open the door for accounting arbitrage. For that reason, although both the development and production phases should be addressed in the proposed Interpretation, the production phase has to be clearly defined.

The Chairman explained that mines do not have difficulty in distinguishing between the development phase and the production phase as it is quite easy to determine when production has started. He also explained that the divergence in practice in accounting for stripping costs does not occur in the development phase, but rather once production has started, hence the request for an IFRIC Interpretation.

One IFRIC member remarked that the distinction is difficult in practice, as it is possible to have started production at one pit on the mine, but still be in the development phase for another pit. It is therefore important to understand what the unit of account is. Another member noted that the proposed definition of the production phase must remain consistent with the existing guidance included in IAS 16.

One member questioned whether the distinction between the development and production phase is really important. It was suggested that the proposed Interpretation should focus on when the definition of an asset has been met, in other words, when future economic benefits become available to the entity.

When asked whether any of the IFRIC members disagreed with the staff's proposal to confine the scope to the production phase, no IFRIC members disagreed.

The IFRIC was then asked whether there is agreement with confining further confining the scope to surface mining – a type of mining where soil and rock overlying the mineral deposit are removed. One IFRIC member noted that if the activities to which the proposed Interpretation applies are set out, it should not be necessary to limit it to surface mining. Another member remarked that practically, if the scope is not limited, inadvertent consequences will be created. This member was supportive of limiting the activities to which the proposed Interpretation can be applied, as long as those activities are clearly defined. The Chairman reminded the IFRIC that the activity the IFRIC was asked to provide guidance on was the removal of overburden in surface mining activities. None of the members seemed to disagree with the proposal.

The discussion then turned to whether the scope of the proposed Interpretation should be restricted only to circumstances where overburden removal activity results in a future economic benefit being created. Without much discussion, the IFRIC agreed with the proposal not to limit the scope to circumstances where a future benefit is created.

The IFRIC then returned to the first question on whether the scope should be limited to mining activities only. One IFRIC member was comfortable with the scope as articulated in the agenda papers and remarked that the IFRIC should perform the duties that it has been given. When asked for assistance by constituents, the IFRIC should be helpful and provide the guidance without turning requests away; otherwise constituents will stop asking for assistance. The Chairman concluded that the scope of the Interpretation will be kept short and precise.

The IFRIC agreed that the scope should be limited to accounting for the costs of removal of waste material in a surface mining activity during the production phase.

The IFRIC was reminded that it received a request in May 2009 to clarify the definition of vesting conditions and non-vesting conditions. In particular, the questions the IFRIC was asked to clarify are:

• Does there need to be a direct link between a performance target and the individual employee's service for a condition to be a performance condition?
• When determining whether a target qualifies as a performance condition, does it matter whether the specified service period is shorter or longer than the period over which the performance target should be met?

Several IFRIC members noted that they do not agree with the staff's analysis on the questions, acknowledging that this is evidence of the divergence that exists in practice and the need for guidance on the appropriate accounting treatment.

One member questioned what the most expedient and appropriate way would be to address the issue: as an annual improvement or as an IFRIC Interpretation. The staff identified three alternatives for addressing the issue:

• As an IFRIC Interpretation. A final Interpretation can most likely be issued within the next 12 months.
• As an Annual Improvements Project. The most likely outcome of this alternative will be the issuing of an exposure draft in August 2010, with a final Standard being issued in April 2011.
• A separate amendment to IFRS 2 Share-based Payment. This alternative will require permission from the Board for the IFRIC to carry out the amendment, with the likely timing similar to that of an IFRIC Interpretation.

One member then questioned why this matter should been taken on, while other IFRS 2 matters were rejected as IFRIC projects. Another IFRIC member responded that although he had a similar question, the reasoning is that this matter is arising from a recent amendment to IFRS 2 and that the IFRIC has to the opportunity to limit the divergence in practice before it becomes embedded.

It was suggested that if this matter is treated as a separate amendment to IFRS 2, the scope of the project should not be limited to this matter, but should also address other matters relating to IFRS 2. Some IFRIC members remarked that this route will not result in the matter being resolved quickly and that a comprehensive review of IFRS 2 should be left to the IASB.

The IFRIC agreed to add the matter to its agenda as an IFRIC Interpretation project.

The IFRIC redeliberated its tentative agenda decisions published in the November 2009 IFRIC Update.

IAS 38 Intangible Assets – Amortisation method

The IFRIC discussed the comments letters received to its November tentative agenda decision as well as new arguments presented. The IFRIC members were split in discussing whether to add the issue to the IFRIC agenda. As no alternative (finalisation of the agenda decision as drafted or adding it to the agenda) did get the required support, the IFRIC decided to finalise the agenda decision to reflect that IFRIC was unable to achieve consensus on that issue.

IFRS 2 Share-based Payment – Share-based payment transactions in which the manner of settlement is contingent on future events

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

One IFRIC member suggested that this decision might be revisited in light of the progress on the IFRS 2 – Vesting Conditions project. Most IFRIC members preferred that all more complex IFRS 2 issues were addressed together as part of the post-implementation review of IFRS 2.

IAS 27 Consolidated and Separate Financial Statements – Presentation of comparatives when applying the 'pooling of interests' method

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

IAS 27 Consolidated and Separate Financial Statements – Combined Financial Statements and Redefined Reporting Entities

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

IAS 18 Revenue – Receipt of a dividend of treasury shares

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

IFRS 4 Insurance Contracts and IAS 32 Financial Instruments Presentation – Scope issue for investments in REITs

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

IAS 32 Financial Instruments: Presentation – 'Fixed for fixed' condition

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

The IFRIC considered the comment letters received to the proposed amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards related to event-driven revaluations after the transition date but before the end of the entity's first IFRS reporting period.

The IFRIC discussed several specific issues raised by the constituents. The IFRIC reconfirmed the earlier Board decision that did not allow roll-back adjustment for comparative data. Even though some IFRIC members saw merit in a roll-back approach (data more useful than other deemed costs), the staff noted that no new arguments had been presented that would justify the change of the decision made by the Board at the June 2009 Board meeting.

The IFRIC agreed with the staff to clarify the wording of the amendment to better capture the rationale behind the amendment.

The IFRIC also agreed to specify that adjustments related to event-driven revaluation should be recognised directly in retained earnings (or a specific category of equity).

The IFRIC also agreed to amend the transition requirements to better reflect the intention of the Board – to allow existing IFRS preparers, whose restructuring for a privatisation occurred in the past, but within the period covered by the first set of IFRS financial statement prepared in accordance with IFRS 1 to apply the proposed amendment retrospectively.

Some IFRIC members did not feel comfortable with the decrease in consistency and comparability of the financial statements. On the other hand, a majority of IFRIC members acknowledged IFRS 1 already contains exemptions intended to facilitate first time adoption of IFRSs.

On that basis, the IFRIC recommended to the Board to finalise the amendments subject to editorial drafting suggestions.

The IFRIC considered the comment letters received to the proposed amendments to IAS 27 Separate Financial Statements. After a short discussion the IFRIC decided not to finalise the amendments. The amendments would have been relevant if equity instruments are measured at cost. However, the recently-issued IFRS 9 Financial Instruments requires that all equity instruments must be measured at fair value.

Some IFRIC members expressed their view that IAS 36 Impairment of Assets would be the most appropriate standard on which to base impairment of investments in associates in the separate financial statements of the investor. Other IFRIC members disagreed. The IFRIC asked the staff to analyse the issue and provide additional analysis at a future IFRIC meeting with the aim to include the issue in the next year's annual improvements process. Finally, in a preliminary indicative vote, a slight majority of the IFRIC members expressed their preference for the new guidance to be based on IAS 36 requirements.

Some IFRIC members noted that this issue was too broad for an annual improvement and might be accommodated better by a separate Board project that would encompass the whole remit of accounting in the separate financial statements.

The IFRIC considered the comment letters received to the proposed amendments of IFRS 3 Business Combinations to clarify that the option to measure NCI at the proportionate share of the acquiree's identifiable net assets should be applied only to those NCI components that are present ownership instruments and entitle their holders to a pro-rata share on the entity's net assets.

Some IFRIC members felt that the amendment should be broader, considering not only this issue but the interplay of NCI with goodwill, impairment, and potentially even definition of equity. Nonetheless, the Chairman noted that this was a narrow amendment that should only clarify an inconsistency and not address all concerns and implications IFRS 3 might have created. He warned that IFRIC should not try to address all the known issues with IFRS 3 within that amendment. Two IFRIC members disagreed with this assessment and continued to support a broader project considering wider implications.

After a short discussion, in which several IFRIC members noted that this improvement might change the current practice and could have further implications, the IFRIC finally supported the staff proposal to proceed with the amendments. The IFRIC agreed with drafting suggestions making the amendment more clear and agreed to resolve several remaining inconsistencies between the proposed Basis for Conclusions and the amendment itself.

The discussion continued with identification of instruments to which the 'present ownership instruments representing proportional share in net assets' definition applied. The IFRIC agreed that it would be predominantly ordinary shares, with possible inclusion of specific types of preference shares in a limited number of jurisdictions.

On that basis, the IFRIC recommended to the Board to finalise the amendments subject to editorial drafting suggestions.

The IFRIC discussed the comment letters to the Board proposals. The IFRIC agreed with the concerns of some constituents that the new guidance referred to the superseded requirements of IFRS 3 (2004) and agreed to reproduce the guidance within the transitional requirements of this amendment.

On application, the IFRIC agreed that the proposed amendment be applied from the application of IFRS 3 Business Combinations (2008). The IFRIC acknowledged that early adopted of IFRS 3 (2008) that had applied IAS 39 Financial Instruments: Recognition and Measurement to contingent considerations balances from earlier business combinations would have to restate the balances (revert to original IFRS 3 (2004) treatment). The IFRIC noted that this requirement would provide better comparability.

On the other hand, a majority of the IFRIC agreed that first-time adopters should account for subsequent changes in these balances in accordance with IAS 39 if they relate to financial assets or financial liabilities.

Some IFRIC members expressed their view that such approach was overly burdensome for early adopters and were concerned that the IFRIC would send a wrong signal regarding early adoption of new standards.

After a short discussion the IFRIC recommended to the Board to finalise the amendments subject to editorial drafting suggestions.

The IFRIC also asked the Board to consider whether it would be more efficient to have all the related guidance to contingent considerations within one Standard.

Following publication of IFRS 9 Financial Instruments by the Board, the IFRIC formally removed from the annual improvement project the two remaining IAS 39 Financial Instruments: Recognition and Measurement issues that were included in the August 2008 exposure draft:

• Application of fair value option
• Bifurcation of an embedded foreign currency derivative.

The IFRIC discussed the comment letters received in response to the Board proposal to enhance the disclosures for financial instruments. Without much discussion, the IFRIC recommended to the Board to finalise the amendments subject to editorial drafting suggestions.

The IFRIC discussed the comment letters received in response to the Board proposals to allow partial use of fair value for measurement of associates in consolidated financial statements. Most IFRIC members supported the amendment subject to drafting and editorial amendments that would better explain the amendment in the proposed Basis for Conclusions.

The IFRIC considered a comment that an implication of the proposal might be that a 1% share in a 30%-owned associate would be accounted for using the equity method and remaining 29% using the fair value exemption. The IFRIC noted that it would be the consequence of the model used (split accounting). Several IFRIC members challenged the economic sense and usefulness of such accounting. Nonetheless, no different proposal how to solve this issue was proposed.

The IFRIC briefly discussed consistency of this proposal with the requirements of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and agreed that IFRS 5 served a different purpose.

On that basis, the IFRIC recommended to the Board to finalise the amendments subject to editorial drafting suggestions.

The IFRIC also discussed the possible amendment of IAS 31 Interests in Joint Ventures (as a similar provision currently applies for Joint Ventures). The Technical Director explained that the new Joint Ventures Standard is scheduled for publication in March, so amendment to IAS 31 would not be practicable (as it would have to be re-exposed in any case). The staff would analyse the requirements of the new Standard and this amendment to IAS 28 Investments in Associates and analyse how a similar requirement could be incorporated in the new Joint Venture Standard requirements.

The IFRIC discussed the comment letters received in response to the Board proposals to amend IAS 34 Interim Financial Reporting to emphasise the disclosure principle and to add further guidance.

The IFRIC in principle agreed with the amendments, subject to clarifications of the terminology used and subject to specifying which disclosure requirements were required (what the principle was and which generic and specific events should be disclosed).

On that basis, the IFRIC recommended to the Board to finalise the amendments subject to editorial drafting suggestions.

The IFRIC discussed a request to consider the appropriate accounting treatment of differences that might arise as a result of adoption of IFRS 8 Operating Segments. In particular the discussion focused on whether the incremental goodwill impairment charge (that would have been recognised in the prior years if cash generating units were grouped by reference to IFRS 8 and not to IAS 14 Segment Reporting) determined as a result of retrospective application of IFRS 8 should be presented as a prior year adjustment or a current period event.

The IFRIC first considered the fact that the issue relates to a one-off event – adoption of IFRS 8 for the annual periods starting on or after 1 January 2009 – and as such any guidance could not be provided in time for 2009 year-ends. Due to these time considerations, the IFRIC agreed not to add the issue to its agenda.

In the following discussion whether the adjustment should be prior-year adjustment or a current year charge, multiple arguments were presented in support for each of these alternatives. Supporters of current year adjustment argued that IFRS 8 was a pure disclosure standard and thus it would be inappropriate to change measurement of goodwill in prior periods due to changes in presentation and disclosures. Supporters of prior year adjustment argued that IFRS 8 application represented a change of accounting policy and should be thus accounted for retrospectively. In addition, they argued that this adjustment related to impairment of goodwill in prior years due to aggregation criteria that did not exist anymore. Given the diversity of views, the IFRIC did not express any preference for a single view in the tentative agenda decision.

The IFRIC briefly discussed the merit of developing an interpretation for 2010 to achieve comparability of comparative information for 2010 year-ends. This view did not receive any significant support. Most IFRIC members noted that complex transition requirement could be difficult and might lead to diversity in practice for a limited period. That complexity should be outweighed by the benefits from improved financial reporting resulting from application of a new Standard.

The IFRIC discussed a request for guidance on determining the functional currency of an investment holding company and, in particular, the issue whether the underlying economic environment of subsidiaries should be considered in determining the functional currency in the separate financial statements of the investment holding company.

Without much discussion, the IFRIC agreed that determination of functional currency of any company required the use of judgement and must be based on all the facts and circumstances. The IFRIC concluded that any guidance it could provide would be nature of implementation guidance only and consequently decided not to add the item on its agenda.

Further discussion focus on drafting of the tentative agenda decision, with several IFRIC members emphasising that there is no concept of a 'group functional currency'.

The IFRIC discussed the issue whether preference shares should be classified as a financial liability or as equity when it has a contractual obligation to deliver cash to the holder at the discretion of the issuer's shareholders.

The IFRIC considered several situations when preference shares had been issued with terms that would require classification as an equity instrument in accordance with IAS 32 Financial Instruments: Presentation, prior to consideration of the shareholders discretion.

The IFRIC agreed with the staff analysis that considered broader issues including distinction between the reporting entity and its shareholders, the extent to which a reporting entity could control the actions of its owners, and previous IFRIC discussions on similar issues.

Because the Board is working on a project on Financial Instruments with Characteristics of Equity (FICE), the IFRIC agreed not to add the issue to its agenda. Several IFRIC members noted that answers on this question would result from the interaction of the FICE project, the Common Control Transactions project, and the Reporting Entity chapter of the Conceptual Framework. The IFRIC noted that it was possible that this particular issue would not be addressed directly by the FICE project, but given the fact that it would change the setting and conditions of the request, the IFRIC asked the staff to consider this particular issue in the FICE and Common Control projects.

Consequently, the IFRIC agreed not to add the issue to the agenda.

The IFRIC discussed the request to provide guidance whether retrospective adjustment was needed to assets recorded in accordance with previous GAAP to reflect the revised costs that are eligible for capitalisation in accordance with an entity's chosen IFRS accounting policy in a situation where an entity has previously capitalised costs, but changed its accounting policy for these costs upon adoption of IFRS 1 First-time Adoption of International Financial Reporting Standards.

At the start of the discussion most IFRIC members seemed to indicate that they would prefer retrospective adjustment, as IFRS 1 did not contain any specific exemption for these situations and it was a general change of accounting policy that was to be accounted for retrospectively in accordance with IAS 8 Accounting Policies, Changes in Estimates and Errors (rather than to be accounted for as change of accounting estimate).

Nonetheless, on application of the specific issue related to IAS 19 Employee Benefits – change from previous GAAP 'corridor' approach consistent with IAS 19 where some of the actuarial gains and losses are recognised in profit or loss to a method of recognition of all actuarial gains and losses in the period in which they occur in through OCI – most IFRIC members felt that capitalisation of costs in accordance with IAS 2 Inventories or IAS 11 Construction Contracts does not depend on whether they would be recorded in profit or loss or in OCI. Those IFRIC members believed that if conditions for capitalisation were met and reporting entity could identify the specific costs that relate to direct costs (for example, the part of the actuarial gains and losses that relates to direct labour) those could be included in costs of assets even though they would otherwise be recognised in OCI and not in profit or loss.

The IFRIC agreed that the staff should analyse the issue of capitalisation of costs recognised outside of profit or loss and provide further analysis for the March 2010 meeting. The IFRIC members agreed that they would also analyse the practical experience with such accounting and any diversity in practice that existed. The Chairman remained concerned that such accounting would lead to undue complexity (identifying portions of OCI entries) but that given the possible wider use of OCI that issue should be properly analysed.

The IFRIC agreed to rediscuss the issue based on the additional analysis at its March 2010 meeting.

The IFRIC rediscussed the issue, which was previously discussed at the November 2009 IFRIC meeting. The staff noted that based on the additional outreach performed there was a widespread diversity in practice that was not limited only to the energy sector.

Nonetheless, the staff noted that, when IFRS 9 Financial Instruments was being finalised, the IASB agreed to reconsider the scope of IAS 39 Financial Instruments: Recognition and Measurement at a later stage of the IAS 39 replacement project. The financial instruments team already considered that issue in connection the current project on Hedge Accounting. Since the Board will amend IFRS 9 and consider changes to scope of IAS 39 and hedge accounting soon (IFRS 9 is expected to be finalised in 2010), the staff asked the IFRIC not to add the item to its agenda as it would be addressed by the Board. The IFRIC agreed.

The IFRIC formally agreed with the staff proposal not to add the issue to the agenda.

IFRIC Work in Progress

The IFRIC coordinator gave a brief update on the progress of IFRIC activities. Apart from issues already discussed at the January meeting he identified several issues that were currently being analysed and would be presented to the IFRIC at the March meeting. These include:

• IAS 19: Definition of plan assets
• IAS 21: Recycling of currency translation adjustment on reduction in investment in associate
• IAS 26: Accounting for plan assets in the financial statements of retirement benefit plans
• IAS 34: Disclosure of segment information about total assets