The Committee Chair opened the meeting with a few opening remarks. He informed the Committee that the Trustees have finalised their review report over the Committee’s activities. He also noted that Laurence Rivat and Kazuo Yuasa have been re-appointed to the Committee and that John O’Grady and Sandra Peters have been appointed to Committee.

Over the last couple of years, the Committee has been working to address the accounting for put options written on shares held by non-controlling interest shareholders in the consolidated financial statements of controlling shareholders. Paragraph 23 of IAS 32 requires the controlling shareholder to recognise a liability for the present value of the redemption amount in the parent’s consolidated financial statements. However, there has been identified diversity in practice on the subsequent measurement of the ‘grossed up’ financial liability as a result of an inconsistency between the requirements for subsequently measuring financial liabilities in IAS 39 or IFRS 9 (through profit or loss) and the requirements for accounting for transactions with owners in their capacity as owners (directly in equity) in accordance with IAS 27 and IFRS 10.

The Committee had previously recommended that the Board amending IAS 27 and IFRS 10 to clarify that all changes in the measurement of the NCI put must be recognised in profit or loss. In March 2012 the Board acknowledged that IAS 32, IAS 39 and IFRS 9 provide the relevant accounting requirements and that changes in the measurement of NCI puts should be recognised in profit or loss, the Board decided against amending IFRS 10 because of concerns with amending that standard giving its pending effective date. As a result, the Board asked the Committee to address the diversity by publishing a draft interpretation.

Several Committee members expressed their view that the clarification should take the form of an amendment rather than an interpretation. However, one Committee member expressed significant concerns with the draft interpretation and questioned whether it would address all the diversity in practice highlighting the issue of forward options.

The Committee ultimately decided to issue a draft interpretation clarifying that in accordance with paragraph 23 in IAS 32 a NCI put gives rise to a financial liability that is initially measured at the present value of the redemption amount in the parent’s consolidated financial statements and that subsequent remeasurement of the liability would be measured in accordance with IAS 39 or IFRS 9. The draft interpretation proposes retrospective application and will be exposed for 120 days.

In 2011, the Committee discussed a request to clarify the accounting for contingent pricing in the outright purchase of a single item of property, plant and equipment (PPE) or intangible asset. The issues outlined in the submission included (i) when to recognise the liability for contingent prices and (ii) whether subsequent changes to the contingent price should be recognised in profit or loss or as an adjustment to the cost of the asset purchased.

At the time, the Committee noted a lack of specific guidance in IFRSs for contingent pricing in a non-business combination-related transaction. Although taking the issue onto its agenda with a view to develop an interpretation, the Committee elected to defer further work on this project until the IASB concluded its discussions on the accounting for variable payments as part of the leases project.

At this meeting, the staff outlined the tentative decisions reached by the IASB regarding the accounting for the variable payments as part of the leases project (while also summarising tentative decisions taken by the IASB on variable consideration as part of its revenue recognition project), and proposed a basis for accounting for contingent payments for the purchase of a single asset that is consistent with the proposals in both of these projects; that being:

• to exclude contingent payments that are not reasonably certain from the initial measurement of the cost of PPE or intangible asset and the financial liability.
• to account for the remeasurement of the liability each reporting period (i) as an adjustment to the cost PPE or intangible asset to the extent that it relates to future reporting periods and (ii) to profit or loss to the extent that it relates to the current or previous reporting periods.

In response to the staff proposal, many Committee members requested further clarity as to the tentative proposals in the leasing project. Specifically, the Committee members sought clarity as to the conceptual basis for excluding variable payments from the measurement of the lessee’s liability to make lease payments unless the variable lease payments are structured in such a way that they are in-substance fixed lease payments or based on an index or rate derived payment. They saw this as a practical expedient as opposed to providing a conceptual basis. Committee members also questioned whether any application guidance had been developed for purposes of bifurcating recognition of changes to the lessee’s liability between profit or loss (for changes arising from current periods) and adjustments to the right-of-use asset (for changes relating to future periods). They noted that guidance in this area would be particularly important in an asset acquisition environment where contingent payments may benefit a number of future reporting periods. However, the staff noted that no application guidance has been developed by the IASB.

Another Committee member noted that the definition of cost in IAS 16 states that it is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition... He therefore questioned whether this definition suggested that all contingent consideration should be included in the recognition of the cost of an acquired asset; a conclusion which may not be aligned to the staff’s analogised proposals given that the ‘reasonably certain’ requirement to recognise contingent payments and related classification of the remeasurement of the acquisition liability may result in certain payments being recognised directly in profit or loss without recognition in the cost of the acquired asset at any stage.

One Committee member then expressed concern that the staff proposals would result in an ‘ever- changing’ asset balance, and in many cases, the asset balance would exhibit significant variability between periods as contingencies become reasonably certain. Other Committee members acknowledged this concern, but noted that only changes in the acquisition liability relating to future periods would be recognised as an adjustment to the right-of-use asset (as liability changes arising from current or past periods would be recognised in profit or loss) which should limit changes in the cost of the acquired asset. They also noted that contingencies in an asset purchase environment would not be expected to extend a significant number of reporting periods beyond the period of acquisition (based on past experience). Therefore, most Committee members did not foresee the issue of an ‘ever-changing’ asset balance to be a significant issue.

Listening to some of the concerns expressed by Committee members, two Committee members questioned whether an analogy to the IASB’s leasing project was the best approach. They expressed other alternatives including:

• an analogy to IFRS 3 Business Combinations which would require the cost of the asset to include the fair value of the contingent consideration at the date of purchase, with subsequent changes to the contingent consideration being recognised in profit or loss.
• an analogy to IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities which would require the cost of the asset to include an estimate of the contingent consideration at the date of purchase, with subsequent changes to the liability adjusted against the cost of the asset.

However, the majority of the Committee expressed support for the direction proposed by the staff. They acknowledged, however, that proposing a basis of accounting that is consistent with proposals currently being deliberated may result in a need to re-examine this project at a later date (i.e. at completion of the leasing and revenue projects). Therefore, the Committee directed the staff to continue monitoring developments in the IASB’s leasing and revenue recognition projects with a view to provide a more developed proposal regarding contingent payments for the purchase of a single asset to a future Committee meeting. Assuming the proposals remain aligned with the IASB’s leasing project, the Committee intends to align the timing of issuance of a proposal with the release of the IASB’s revised exposure draft on leasing (i.e. second half of 2012).

The Committee previously considered a request to clarify the accounting for contractual costs to be incurred by an operator in a service concession arrangement. The request for clarification relates to whether these costs should be recognised at the start of the concession as an asset with an obligation to make the related payment, or treated as executory in nature and recognised over the term of the concession arrangement.

At previous meetings, the Committee tentatively decided that:

• the operator should account for a distinct good or service in accordance with the applicable IFRS if the concession fee arrangement gives the operator a right to a good or service that is distinct from the service concession arrangement;
• judgement should be used to determine whether the operator obtains control of the right of use of the asset and therefore whether the arrangement is within the scope of IAS 17 Leases when concession payments are linked to the right of use of a tangible asset; and
• payments which do not give the operator a right to a distinct good or service or a right of use that meets the definition of a lease should consider the type of service concession arrangement (i.e. if the service concession results in the operator having a contractual right to receive cash from only the grantor, then the concession payment is accounted for as an adjustment to the consideration in a manner consistent with IAS 18 Revenue; if the service concession arrangement results in the operator having only a right to charge users of the public service, then the concession payment is accounted for as incremental consideration for the intangible asset; and if the operator has both a right to charge users of the public service and a contractual right to receive cash from the grantor, then judgement should be applied which considers the amount of the contractual right to receive cash from the grantor as compared to the fair value of the operator’s services).

At this meeting, the Committee analysed the issue of variable concession fees in a service concession arrangement. Given that the IASB’s projects on lease accounting and revenue recognition currently consider the accounting for variable payments (as discussed in the IAS 16 and IAS 38 subtopic), the staff proposed that the principles used in those projects should also govern the accounting for variable concession fees in a service concession arrangement.

Similar to the feedback expressed during the IAS 16 and IAS 38 session, two Committee members expressed a preference for applying IFRS 3 by analogy.

Another Committee member expressed concerned with delaying issuance of an interpretation on this topic until the completion of the IASB’s leasing project (which would be necessary in the view of Committee members given the interplay of the principles in the leasing project to that which is described in the staff’s proposals for this project). However, the staff noted that an issuance of an interpretation which does not include within its scope the issue of variable concession fees would be viewed negatively by constituents who have expressed uncertainty as to the distinction between fixed and variable concession fees and related accounting for each, and likewise, advancing this project before the completion of the Board’s redeliberations on the leasing project poses significant risks given uncertainties on the future direction of the leasing project.

With little additional feedback, the majority of the Committee expressed support for the direction proposed by the staff.

The Committee directed the staff to prepare draft amendments to IFRIC 12 and other IFRSs cross-referenced in the IFRIC 12 amendment, which incorporates the above principles. The draft amendments will be considered at a future meeting. The Committee intends to align the timing of amendment issuance with the release of the IASB’s revised exposure draft on leasing.

The Committee previously considered a request to clarify whether IFRIC 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment should be applied by analogy to other levies charged for participation in a market on a specified date to identify the event that gives rise to a liability. The request for clarification relates to when a liability should be recognised for levies that are conditional on an entity participating in an activity on a specified date.

This issue has been discussed at multiple Committee meetings, with the most recent discussions occurring during the March 2012 meeting. At past meetings, the Committee developed certain underlying principles associated with recognition of a liability. The Committee noted that a constructive obligation to pay a levy that arises from operating in a future period is not created even if an entity is economically compelled to continue operating in that future period. Additionally, the going concern principle would not affect whether an entity recognises a liability at a reporting date for levies that arise from operating in future periods. The Committee noted that an obligating event is necessary to create the present obligation and an obligating event arises progressively if the activity that creates the present obligation occurs over a period of time (e.g., if the obligating event as identified by the legislation is the generation of revenues over a period of time). The Committee indicated that an entity would recognise an expense upon recognition of the liability, unless the levy is an exchange transaction in which the entity that pays the levy receives assets or future services in consideration for the payment of the levy.

At its May 2012 meeting, the Committee considered a ballot draft interpretation presented by the staff. The interpretation addresses the accounting for levies other than income taxes that are within the scope of IAS 12 Income Taxes, fines or other penalties imposed for breaches of legislation and contracts between a public authority and a private entity. The most significant changes to the draft interpretation since that provided by the staff during the Committee’s March 2012 meeting were the inclusion of core characteristics of levies within the scoping section of the draft interpretation and the addition of a Basis for Conclusions paragraph further describing that economic compulsion to continue operating in a future period does not create a constructive obligation to pay a levy.

One Committee member dissented to the draft interpretation; preferring instead that the IASB address the broad issue of payments to a governmental authority as part of a comprehensive project. She also noted that the interpretation fails to address the accounting for levies subject to a revenue threshold which she considered an important aspect of the project.

Other Committee members expressed support for moving forward with the issuance of an interpretation. However, a number of editorial comments were provided (both live and off-line). One such editorial correction was amending the draft interpretation to say that a liability to pay a levy is recognised progressively if the activity that creates the obligation occurs over a period of time (as opposed to saying a liability to pay a levy is recognised progressively if the obligating event occurs over a period of time, as was included in the ballot draft). No objections were raised by Committee members to this editorial change. The staff noted that it would handle any editorial comments during the evening and present a revised draft to the staff on Wednesday, 16 May.

On Wednesday, 16 May, the staff presented a revised draft interpretation (which was not made available to observers). One Committee member dissented to the release of the proposed interpretation, as outlined above, but no other objections were raised. According to the Committee’s Due Process Handbook, the draft interpretation will be provided to IASB members for negative assurance before being released for public comment.

The Committee has received a request for guidance related to the restructuring of Greek Government Bonds (GGBs) and whether such restructuring should result in derecognition of the whole financial asset, or only part of the financial asset.

The restructuring of GGBs includes a 53.5% forgiveness of the principal amount, a 31.5% exchange of the principal amount for 20 new Greek bond instruments with maturities of 11 to 30 years (with coupons of 2% from 2012 to 2015, then 3% from 2015 to 2020 and 4.3% from 2020 to 2042), and the remaining 15% of principal amount exchanged for short-dated securities issued by the European Financial Stability Facility. In addition, for each new bond, participants will also receive a security with an initial nominal amount of €100 where the holder is not entitled to receive principal or interest but instead the security is linked to the Gross Domestic Product of Greece.

Specifically, the questions asked of the Committee include whether the modification to the GGBs fall within the scope of paragraphs 17(a) or 17(b) and whether the lender can apply IAS 8 and analogise to the existing criteria for modifications of financial liabilities.

Paragraph 17(b) requires an entity to derecognise a financial asset when the entity transfers the financial asset and the transfer qualifies for derecognition. The term ‘transfer’ is not defined in IAS 39 but paragraph 18 states an entity transfers a financial asset if it transfers the contractual rights to receive the cash flows of the financial asset. Under the GGB modification, the transfer occurs between the holder of the instrument and the issuer of the instrument, rather than a transfer to another third party. The staff believes that paragraph 17(b) only applies to transfers between a holder and a third party rather than between a holder and an issuer and as this represents an extinguishment it should be assess under paragraph 17(a).

Paragraph 17(a) states that an entity shall derecognise a financial asset when the contractual rights to the cash flows from the financial asset expire. The staff believes that a modification of the contractual terms of a financial asset can, but will not always, result in the expiry of the right to the cash flows and derecognition of a financial asset. Therefore, it is necessary to determine whether the changes in the contractual terms of an instrument represents expiry of the rights to the cash flows of the original instrument or merely modifications to the original instrument. In the scenario of the GGB restructuring, a single instrument has been replaced with twenty individual instruments each with varying maturity dates and cash flow profiles, all bondholders received the same restructuring deal and the terms of the new bonds are substantially different from the original bonds including such items as the change in the governing law, the introduction of collection action clauses and modifications of the amount, term and coupons on the instrument.

IAS 39 does not specifically address the accounting from a lender’s perspective as to when derecognition applies to an exchange of debt instruments. As a result, questions have arisen on whether bondholders should develop an accounting policy by applying IAS 8 paragraphs 10 to 12. Paragraph 11 of IAS 8 requires that the first source of information to be used in making a judgment about the accounting policy is the requirements of IFRSs dealing with similar and related issues (in this case paragraphs 40 and AG62 of IAS 39 address the accounting for modifications of financial liabilities). The staff note that IAS 8 requires the use of judgment to develop and apply an accounting policy in the absence of an IFRS that specifically applies to the transaction. IAS 39.40 requires a financial liability to be extinguished and a new liability recognised when there has been a substantial modification of terms (paragraph AG 62 says a substantial modification occurs when the modified cash flows are at least 10% different). The staff expressed concern with introduction of a brightline analysis for financial assets using the substantial modification guidance because of the overlay of impairment considerations for financial assets but believe that the notion of a substantial change of terms is an appropriate analogy.

Based on consideration of the above guidance, the staff believe that the GGBs restructuring result in changes that could be considered an expiry of the rights to the cash flows of the original instrument or a substantial change of the terms of the financial asset. Either alternative would result derecognition of the surrendered bonds and recognition of the new bonds received in the exchange.

The Committee tentatively agreed with the staff analysis that the GGBs restructuring result in changes that could be considered an expiry of the rights to the cash flows of the original instrument or a substantial change of the terms of the financial asset. The Committee tentatively agreed not to add this item to its agenda as both approaches mentioned above would lead to derecognition.

Some Committee members wanted the issue to be more broad than just limited to GGBs as modification of financial assets is a fairly common issue. However the staff responded that because the GGBs are highly visible and relevant right now, they were attempting to balance the need to address this issue in a timely basis rather than trying to address all modification scenarios which could take much more time. Some Committee members expressed various concerns with the drafting of the tentative agenda decision. The Committee chair asked a subgroup of Committee members to work with the staff in drafting the tentative agenda decision.

The request for guidance also asked for clarification on how to account for the GDP-linked securities granted as part of the restructuring transaction described above. The submitter suggested four alternatives for the accounting for these instruments: 1) the instrument is ‘close’ to being a derivative and should be accounted for at fair value through profit or loss, 2) the instrument should be accounted for at amortised cost and paragraph AG8 of IAS 39 should be applied to account for the modification of cash flows, 3) the instrument is classified as available for sale, or 4) the instrument is not within the scope of IAS 39 and the entity should apply IAS 18 to recognise the revenues from the instrument and IAS 37 to account for a provision if needed.

The Committee tentatively decided not to add the issue of accounting for the GDP-linked security to its agenda. The Committee believes that the instrument falls within the scope of IAS 39 and would not meet the criteria for classification as either loans and receivables or held to maturity assets. Therefore the Committee believes that the instrument would be classified as available for sale unless one of the fair value through profit or loss criteria applied.

IAS 12 Income Taxes: Recognition of deferred taxes for a single asset in a corporate entity

The Committee had previously received a request to clarify the accounting for deferred tax in the consolidated financial statements of the parent when the subsidiary has only one single asset within the entity and the parent expects to recover the carrying amount of the asset inside by selling the shares in the subsidiary. The Committee noted significant diversity in practice in accounting for deferred tax when tax law attributes separate tax bases to the asset inside and the parent’s investment in the shares and each tax base is separately deductible for tax purposes (i.e. tax law considers the asset inside and the parent’s investment in the shares to be two separate assets). The divergent treatments included that some follow the tax perspective and recognise deferred tax related to both the asset inside and the shares, others recognise only the deferred tax related to the shares, and still others determine deferred tax by comparing the carrying amount of the asset inside the entity with the tax base of the shares and using the tax rate that applies if the parent recovers the carrying amount of the shares.

During the November 2011 Committee meeting, the Committee noted that IAS 12 requires the parent to recognise both the deferred tax related to the asset inside and the deferred tax related to the shares, if tax law considers the asset inside and the shares to be two separate assets and asked the staff to consider whether this issue could be addressed through annual improvements.

The staff believes that paragraphs 51 and 51A of IAS 12 are not sufficiently clear and propose to add paragraph 38A and an example and amend paragraph 51A to clarify the issue through the annual improvements process.

One of the Committee members raised a concern with the computations in the example while another Committee member questioned whether the example was necessary. The Committee members had mixed views on the staff proposal to amend through the annual improvements process.

To move the issue forward, the Committee chair suggested three potential alternatives. The first alternative was to proceed with the staff proposal to address through annual improvements. The second alternative was to approach the Board suggesting a limited amendment to IAS 12.  The third alternative is to reject the issue with the view that IAS 12 is too big of an issue to attempt dealing with this narrow scope issue.    The Committee members were fairly even split between proceeding with an annual improvement or approaching the Board with a limited scope amendment.  While proceeding with an annual improvement had a slight majority, because of the lack of consensus the Committee tentatively decided to further explore approaching the Board for a limited scope amendment to IAS 12.

IAS 16 Property, Plant and Equipment, IAS 38 Intangible Assets and IAS 17 Leases: Purchase of right to use land

During the March 2012 Committee meeting, the Committee discussed a request from a specific jurisdiction for clarification on the purchase of a right to use land and whether it should be accounted for as a purchase of property, plant and equipment, a purchase of an intangible asset or a lease of land. In this jurisdiction, entities are not allowed to own freehold title to land but instead purchase the right to exploit or build on the land.

The Committee identified characteristics of a lease in the fact pattern submitted and observed a right to use land is generally accounted for under IAS 17. However, the Committee noted the current Leases project is silent on whether a right of use asset is a tangible or intangible asset and that based on the tentative decisions to date in that project long term leases of land would not be excluded from the scope of that project.

The Committee asked the staff to prepare a tentative agenda decision. The agenda decision notes that the Committee identified characteristics of a lease in the fact pattern and that a lease could be indefinite with extensions or renewals and therefore the existence of an indefinite period does not itself prevent the right to use from being accounted for as a lease in accordance with IAS 17.  But because the fact pattern is specific to a certain jurisdiction, the Committee decided not to take the issue on to its agenda.

All Committee members agreed to the draft agenda decision not to take the issue on to the Committee’s agenda.

IFRIC 15 Agreements for the Construction of Real Estate: Clarification of the meaning of continuous transfer

Several times during 2011 the Committee discussed requests for clarification of the notion of continuous transfer or a good. During the November 2011 meeting, the Committee referred the topic to the Board for direction. The Board discussed this topic in February 2012 and the Board had varying views. Some thought that agenda paper 5A from the Committee’s November meeting should be included in a revised IFRIC 15 as an example to illustrate the application, but a majority did not support this inclusion.

The Board’s advice to the Committee is to retain IFRIC 15 as drafted and the Board noted that a careful assessment needs to be made of the facts and circumstances of individual transactions when applying IFRIC 15.

The Committee had no comments or deliberations on this topic following the staff summary.

IAS 12 Income Taxes: Recognition of deferred taxes for a single asset in a corporate entity

The Committee had previously received a request to clarify the accounting for deferred tax in the consolidated financial statements of the parent when the subsidiary has only one single asset within the entity and the parent expects to recover the carrying amount of the asset inside by selling the shares in the subsidiary. The Committee noted significant diversity in practice in accounting for deferred tax when tax law attributes separate tax bases to the asset inside and the parent’s investment in the shares and each tax base is separately deductible for tax purposes (i.e. tax law considers the asset inside and the parent’s investment in the shares to be two separate assets). The divergent treatments included that some follow the tax perspective and recognise deferred tax related to both the asset inside and the shares, others recognise only the deferred tax related to the shares, and still others determine deferred tax by comparing the carrying amount of the asset inside the entity with the tax base of the shares and using the tax rate that applies if the parent recovers the carrying amount of the shares.

During the November 2011 Committee meeting, the Committee noted that IAS 12 requires the parent to recognise both the deferred tax related to the asset inside and the deferred tax related to the shares, if tax law considers the asset inside and the shares to be two separate assets and asked the staff to consider whether this issue could be addressed through annual improvements.

The staff believes that paragraphs 51 and 51A of IAS 12 are not sufficiently clear and propose to add paragraph 38A and an example and amend paragraph 51A to clarify the issue through the annual improvements process.

One of the Committee members raised a concern with the computations in the example while another Committee member questioned whether the example was necessary. The Committee members had mixed views on the staff proposal to amend through the annual improvements process.

To move the issue forward, the Committee chair suggested three potential alternatives. The first alternative was to proceed with the staff proposal to address through annual improvements. The second alternative was to approach the Board suggesting a limited amendment to IAS 12.  The third alternative is to reject the issue with the view that IAS 12 is too big of an issue to attempt dealing with this narrow scope issue.    The Committee members were fairly even split between proceeding with an annual improvement or approaching the Board with a limited scope amendment.  While proceeding with an annual improvement had a slight majority, because of the lack of consensus the Committee tentatively decided to further explore approaching the Board for a limited scope amendment to IAS 12.

IAS 16 Property, Plant and Equipment, IAS 38 Intangible Assets and IAS 17 Leases: Purchase of right to use land

During the March 2012 Committee meeting, the Committee discussed a request from a specific jurisdiction for clarification on the purchase of a right to use land and whether it should be accounted for as a purchase of property, plant and equipment, a purchase of an intangible asset or a lease of land. In this jurisdiction, entities are not allowed to own freehold title to land but instead purchase the right to exploit or build on the land.

The Committee identified characteristics of a lease in the fact pattern submitted and observed a right to use land is generally accounted for under IAS 17. However, the Committee noted the current Leases project is silent on whether a right of use asset is a tangible or intangible asset and that based on the tentative decisions to date in that project long term leases of land would not be excluded from the scope of that project.

The Committee asked the staff to prepare a tentative agenda decision. The agenda decision notes that the Committee identified characteristics of a lease in the fact pattern and that a lease could be indefinite with extensions or renewals and therefore the existence of an indefinite period does not itself prevent the right to use from being accounted for as a lease in accordance with IAS 17.  But because the fact pattern is specific to a certain jurisdiction, the Committee decided not to take the issue on to its agenda.

All Committee members agreed to the draft agenda decision not to take the issue on to the Committee’s agenda.

IFRIC 15 Agreements for the Construction of Real Estate: Clarification of the meaning of continuous transfer

Several times during 2011 the Committee discussed requests for clarification of the notion of continuous transfer or a good. During the November 2011 meeting, the Committee referred the topic to the Board for direction. The Board discussed this topic in February 2012 and the Board had varying views. Some thought that agenda paper 5A from the Committee’s November meeting should be included in a revised IFRIC 15 as an example to illustrate the application, but a majority did not support this inclusion.

The Board’s advice to the Committee is to retain IFRIC 15 as drafted and the Board noted that a careful assessment needs to be made of the facts and circumstances of individual transactions when applying IFRIC 15.

The Committee had no comments or deliberations on this topic following the staff summary.

The staff provided the Committee with an update of the post implementation review that is in process with regards to IFRS 8 which included an appendix of issues for investigation.

The staff provided the Committee with an update on the Committee’s current agenda and work in progress.  The staff also provided the Committee with a summary of the Trustee’s Review Report.

The Committee had previously received a request to clarify the accounting for deferred tax in the consolidated financial statements of the parent when the subsidiary has only one single asset within the entity and the parent expects to recover the carrying amount of the asset inside by selling the shares in the subsidiary. The Committee noted significant diversity in practice in accounting for deferred tax when tax law attributes separate tax bases to the asset inside and the parent’s investment in the shares and each tax base is separately deductible for tax purposes (i.e. tax law considers the asset inside and the parent’s investment in the shares to be two separate assets). The divergent treatments included that some follow the tax perspective and recognise deferred tax related to both the asset inside and the shares, others recognise only the deferred tax related to the shares, and still others determine deferred tax by comparing the carrying amount of the asset inside the entity with the tax base of the shares and using the tax rate that applies if the parent recovers the carrying amount of the shares.

During the November 2011 Committee meeting, the Committee noted that IAS 12 requires the parent to recognise both the deferred tax related to the asset inside and the deferred tax related to the shares, if tax law considers the asset inside and the shares to be two separate assets and asked the staff to consider whether this issue could be addressed through annual improvements.

The staff believes that paragraphs 51 and 51A of IAS 12 are not sufficiently clear and propose to add paragraph 38A and an example and amend paragraph 51A to clarify the issue through the annual improvements process.

One of the Committee members raised a concern with the computations in the example while another Committee member questioned whether the example was necessary. The Committee members had mixed views on the staff proposal to amend through the annual improvements process.

To move the issue forward, the Committee chair suggested three potential alternatives. The first alternative was to proceed with the staff proposal to address through annual improvements. The second alternative was to approach the Board suggesting a limited amendment to IAS 12. The third alternative is to reject the issue with the view that IAS 12 is too big of an issue to attempt dealing with this narrow scope issue.

The Committee members were fairly even split between proceeding with an annual improvement or approaching the Board with a limited scope amendment. While proceeding with an annual improvement had a slight majority, because of the lack of consensus the Committee tentatively decided to further explore approaching the Board for a limited scope amendment to IAS 12.

During the March 2012 Committee meeting, the Committee discussed a request from a specific jurisdiction for clarification on the purchase of a right to use land and whether it should be accounted for as a purchase of property, plant and equipment, a purchase of an intangible asset or a lease of land. In this jurisdiction, entities are not allowed to own freehold title to land but instead purchase the right to exploit or build on the land.

The Committee identified characteristics of a lease in the fact pattern submitted and observed a right to use land is generally accounted for under IAS 17. However, the Committee noted the current Leases project is silent on whether a right of use asset is a tangible or intangible asset and that based on the tentative decisions to date in that project long term leases of land would not be excluded from the scope of that project.

The Committee asked the staff to prepare a tentative agenda decision. The agenda decision notes that the Committee identified characteristics of a lease in the fact pattern and that a lease could be indefinite with extensions or renewals and therefore the existence of an indefinite period does not itself prevent the right to use from being accounted for as a lease in accordance with IAS 17. But because the fact pattern is specific to a certain jurisdiction, the Committee decided not to take the issue on to its agenda.

All Committee members agreed to the draft agenda decision not to take the issue on to the Committee’s agenda.

Several times during 2011 the Committee discussed requests for clarification of the notion of continuous transfer or a good. During the November 2011 meeting, the Committee referred the topic to the Board for direction. The Board discussed this topic in February 2012 and the Board had varying views. Some thought that agenda paper 5A from the Committee’s November meeting should be included in a revised IFRIC 15 as an example to illustrate the application, but a majority did not support this inclusion.

The Board’s advice to the Committee is to retain IFRIC 15 as drafted and the Board noted that a careful assessment needs to be made of the facts and circumstances of individual transactions when applying IFRIC 15.

The Committee had no comments or deliberations on this topic following the staff summary.

The Committee received a request for clarification on the accounting under IFRS 3 Business Combinations for contingent payments to selling shareholders in circumstances where those selling shareholders become employees. In particular, the Committee was asked to clarify whether IFRS 3. B55(a) is conclusive in determining that an arrangement in which payments to an employee that are forfeited upon termination of employment is remuneration for post-combination services and not part of the consideration for an acquisition.

B55 If it is not clear whether an arrangement for payments to employees or selling shareholders is part of the exchange for the acquiree or is a transaction separate from the business combination, the acquirer should consider the following indicators:

(a) Continuing employment—The terms of continuing employment by the selling shareholders who become key employees may be an indicator of the substance of a contingent consideration arrangement. The relevant terms of continuing employment may be included in an employment agreement, acquisition agreement or some other document. A contingent consideration arrangement in which the payments are automatically forfeited if employment terminates is remuneration for post-combination services. Arrangements in which the contingent payments are not affected by employment termination may indicate that the contingent payments are additional consideration rather than remuneration.

The staff noted that the wording used in IFRS 3. B55(a) is, on its own, conclusive or appears determinative. However, the staff was of the view that the paragraph should be amended because it is not consistent with the inconclusive language used:

1. in the principle stated in IFRS 3. 52: “A transaction entered into by or on behalf of the acquirer or primarily for the benefit of the acquirer or the combined entity, rather than primarily for the benefit of the acquiree (or its former owners) before the combination, is likely to be a separate transaction..”;
2. in IFRS 3. BC 120: “The boards also concluded that the focus of the principle should be on identifying whether a business combination includes separate transactions that should be accounted for separately in accordance with their economic substance rather than solely on assessing whether a transaction is part of the exchange for the acquiree…” ;
3. in its application guidance stated in IFRS 3. B54: “Whether arrangements for contingent payments to employees or selling shareholders are contingent consideration in the business combination or are separate transactions depends on the nature of the arrangements. Understanding the reasons why the acquisition agreement includes a provision for contingent payments, who initiated the arrangement and when the parties entered into the arrangement may be helpful in assessing the nature of the arrangement” and
4. in IFRS 3. B55(d): “Incremental payments to employees—If selling shareholders who do not become employees receive lower contingent payments on a per-share basis than the selling shareholders who become employees of the combined entity, that fact may indicate that the incremental amount of contingent payments to the selling shareholders who become employees is remuneration”. The staff also noted that the current wording of IFRS 3. B55(a) is not consistent with this paragraph because the entire amount of the contingent payments is remuneration (if the entire amount of the contingent payments are forfeited upon termination of employment), while according to IFRS 3. B55(d) the incremental amount of the contingent payments may be remuneration and the remaining amount may be part of the consideration for the business combination. In other words, the only way to reconcile these two paragraphs is to consider paragraph B55(a) as an indicator.

Moreover, the staff was of the view that the Board had not intended to use conclusive language in IFRS 3. B55(a). The staff also performed outreach with national standard-setters and noted that the issue is widespread and significant diversity exists in practice. The staff also noted that the issue could be resolved efficiently within the confines of IFRS 3 and that the Committee would be able to reach a consensus on the issue on a timely basis. There is currently no IASB project on IFRS 3. As such, the staff proposed an amendment to IFRS 3. B55(a) to clarify that a contingent consideration arrangement in which the payments are automatically forfeited if employment terminates is a strong indicator that the arrangement is remuneration for post-combination services.

A Committee member felt that the Board had intentionally used conclusive language in IFRS 3. B55(a) whereas a few other Committee members believed that the Board had not intended to use conclusive language. Several Committee members were supportive of the staff’s proposed amendment to revise IFRS 3. B55(a) as a strong indicator. However, some other Committee members expressed concern that it was unclear what the parameters of a strong indicator were and that this could cause more diversity in practice. In addition, some Committee members noted that adopting the proposed amendment could also create a GAAP difference given that the US views IFRS 3. B55(a) as a determinative factor and that this could have repercussions for the converged standard. A Committee member suggested asking the Board what they had intended at the time of the issuance of the standard.

Given the mixed views expressed by Committee, the Committee tentatively decided to seek the Board’s views on what they thought was the right answer and then to bring back the issue for further discussion at a later Committee meeting.

The Committee received a request to clarify the meaning of the word “effective” as used in IFRS 1.7.

The question arises from a perceived discrepancy between IFRS 1.7 and IFRS 1.BC 11. IFRS 1.7 states that “an entity shall use the same accounting policies in its opening IFRS statement of financial position and throughout all periods presented in its first IFRS financial statements. Those accounting policies shall comply with each IFRS effective at the end of its first IFRS reporting period, except as specified in paragraphs 13-19 and Appendices B-E.” The staff noted that this would imply that the entity has a choice between using a current version of an IFRS or adopting a new version early (where permitted to do so). However, IFRS 1.BC 11 states that “paragraphs 7-9 of the IFRS require a first-time adopter to apply the current version of IFRSs, without considering superseded or amended versions.” The staff noted that this would imply that the entity should use the new version of the IFRS.

IFRS 1.8 states that an entity “may apply a new IFRS”, and its example illustrates that if a new IFRS is not yet mandatory but permits early application, an entity is permitted, but not required, to apply that IFRS in its first IFRS financial statements. As such, the staff was of the view that the principle in IFRS 1 is to apply the old version that is still effective. If a new IFRS is not yet mandatory but permits early application, that IFRS is permitted, but not required, to be applied. This appears to conflict with IFRS 1.BC 11 and as such IFRS 1.BC 11 needs clarification.

The staff noted that the issue is widespread and significant divergent interpretations of the meaning of “effective” in IFRS 1 exists in practice. The staff also believe that the issue could be resolved efficiently within the confines of IFRS 1 and that the Committee would be able to reach a consensus on the issue on a timely basis. There is currently no IASB project on IFRS 1.

A Committee member reiterated that the principle in IFRS 1 is clear and that where there appears to be a conflict between the standard and the basis for conclusions, the standard is authoritative.

The Committee tentatively agreed with the staff’s recommendation to amend the Basis for Conclusions subject to drafting changes.

The Committee received a request seeking clarification on IAS 41.25. The staff sent out a request for information to the International Forum of Accounting Standard Setters (IFASS) to help assess the Committee’s agenda criteria.

The staff was of the view that the concern raised by the submitter arose because the example in the last sentence of IAS 41.25 refers to the fair value of the land and other assets. Although it is debatable whether the previous definition of fair value (i.e., before the IASB issued IFRS 13) reflected an asset’s highest and best use, IFRS 13 is clear that it does when that asset is required to be measured at fair value by another IFRS. As such, the staff was of the view that the question is whether the example in the last sentence of IAS 41.25 requires the use of fair value (which assumes the highest and best use of a non-financial asset) for the raw land and land improvements when using the residual method.

The staff noted that it is important to note that the objective in IAS 41 is to measure the fair value of the biological assets, not all the assets in the group. When using the residual method in IAS 41.25, the land is an input into the fair value measurement of the biological assets. Therefore, if the highest and best use of the biological assets is its current use, for internal consistency the other assets in the combined assets would generally also reflect their values in their current use.

However, the staff also noted that the conclusion depends on how an entity measures its land in the statement of financial position. That is, it depends on whether it uses the cost model or the revaluation model in accordance with IAS 16. IAS 16.29 states that an entity shall choose either the cost model or the revaluation model as its accounting policy and shall apply that policy to an entire class of property, plant and equipment. IAS 41 does not apply to land related to agricultural activity that should be covered by IAS 16. Therefore, the IAS 16 valuation model an entity has chosen for land in general would be applied to the measurement of land that is a part of the combined assets. The staff noted that a distinction needs to be made between entities that are using the cost model in IAS 16 to value the land associated with the biological assets and those that use the revaluation model.

The Committee Chair informed the Committee that the staff is intending to recommend to the Board to take on a limited project on bearer biological assets and that the staff is intending to speak to emerging markets about biological assets issues. This may resolve this short-term live issue.

The Committee tentatively disagreed with the staff’s proposal to recommend to the Board an annual improvement to IAS 41 to clarify that when using the residual method in IAS 41.25: (a) if the entity uses the cost model to measure the land, the value of the land (and other assets in the combined assets) used as an input into the fair value measurement of the biological assets would reflect its current use; and if the entity uses the revaluation model to measure the land, the value of the land (and the other assets in the combined assets) used as an input into the fair value measurement of the biological assets would reflect its highest and best use (i.e., its fair value).

Several Committee members agreed that the fair value of the biological assets should remain the same irrespective of whether the cost model or the revaluation model is used to value the land. In addition, several Committee members also agreed that the use of a residual method is voluntary and not mandatory, and therefore, if the application of the residual method results in a nil fair value of biological assets, then that may indicate that the residual method is not the appropriate method of valuation and the entity should revisit its valuation techniques.

The Committee tentatively agreed to recommend that the Board take on a limited project on bearer biological assets to resolve this live issue. In the interim, to address this live issue, the Committee tentatively agreed to issue an agenda rejection notice along the lines of noting that an answer that produces a fair value of zero for biological assets indicates that the wrong approach or valuation technique has been used. The issue lies with the selection of the valuation technique and not the mandatory application of IFRS 13.

The Committee Chair noted that the Committee will receive an update on the Board’s decision on the biological assets project and outcome of the emerging markets discussions at the next meeting as well as a draft tentative agenda decision for the Committee’s review.

The Committee received a request to clarify the accounting for contribution-based promises (i.e. how to measure the present value of the defined benefit obligation related to contribution-based promises) in accordance with IAS 19 (2011) Employee Benefits. An underlying concern in the submission was whether the revisions to IAS 19 in 2011, which clarified the treatment of risk-sharing features related to defined benefit obligations, affect the accounting for contribution-based promises.

At this meeting, the staff presented its research and analysis to date on the issue and requested views and guidance from the Committee as to how to proceed with the issue.

The Committee tentatively chose not to address the accounting for contribution-based promises at this point. The Committee tentatively agreed that the accounting for contribution-based promises would not be affected by the 2011 amendments to IAS 19. However, if these contribution-based promises include risk-sharing arrangements, then those components would be affected by the 2011 amendments to IAS 19 which clarified the treatment of risk-sharing arrangements. Based on the analysis described above, the Committee tentatively decided not to add this narrow issue to its agenda.

The staff also asked the Committee whether it wanted to take a fresh look at how to account for contribution-based promises or reactivate the project on Draft Interpretation D9 and consider how it could be revised and completed, possibly with a re-exposure, or to address a more narrow scope issue within IAS 19 and if so, how the Committee would like the staff to proceed.

The staff and several Committee members noted that the Committee had previously dealt with this issue in 2002-2006 via D9 but had subsequently decided to refer the issue to the Board. This issue is currently not on the Board’s agenda.

Given the nature of the issue and the increasing importance and use of contribution-based promises, the Committee tentatively decided to pursue this issue in line with the agenda criteria using D9 as a starting point.

The Committee received a request to address issues related to rate-regulated activities (i.e. to clarify whether a population of customers can be regarded as a single unit of account, and if so, whether a regulated entity should recognise a regulatory asset or liability when the entity has a right to recover specific costs, or an obligation to refund some amounts of collections irrespective of whether services are rendered in future periods).

Several Committee members noted that the fact pattern that was brought before the Committee did not relate to regulated activities but that rather, if an entity was entitled to receive or pay amounts without the need to provide future services (e.g. if the entity was shut down), that entity should recognise either a receivable or payable within the relevant IFRS standards.

To address the wider issue of rate-regulated activities, the staff noted that the Committee previously reached a conclusion when it discussed whether it would be appropriate to recognise a regulatory asset in 2005. The Committee had then concluded that an entity should recognise only assets that qualify for recognition in accordance with the IASB’s Conceptual Framework and relevant IFRSs such as IAS 11 Construction Contracts, IAS 18, IAS 16 and IAS 38. The Committee tentatively agreed that its past conclusions are still valid because no major changes have been made to these IFRSs since the Committee reached that conclusion.

The staff also noted that in the Board’s project on rate-regulated activities, the Board in 2010 had concluded that the issue could not be resolved quickly, and therefore included requests for views in its Agenda Consultation published in July 2011.

Due to the significance of the issues to those operating in a price-regulated environment, the Committee tentatively decided that it will include this issue on its work-in-progress list and bring the issue to the Board’s attention and ask the Board to address the issue and then based on the Board’s decision, either include a tentative agenda decision or reassess this issue as necessary.