IAS 16, IAS 38 and IFRIC 12 — Variable payments for the separate acquisition of property, plant and equipment and intangible assets

Date recorded:

The Committee previously considered a request to clarify the accounting for variable fees in a service concession arrangement. The request for clarification relates to whether these costs should be recognised at the start of the concession arrangement 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 its November 2012 meeting, the Committee discussed the initial accounting for variable payments. The Committee could not reach a consensus on whether the fair value of all variable payments should be included in the initial measurement of the liability on the date of purchase of the asset; or the variable payments that are dependent on the purchaser’s future activity should be excluded from the initial measurement of the liability until the activity is performed.

However, the Committee believed the subsequent accounting for variable payments could be decoupled from initial accounting considerations. The core issue in subsequent accounting is whether the remeasurement of the financial liability to make variable payments should be recognised in profit or loss, or should be included as an adjustment to the cost of the asset. General consensus for recognising remeasurement of the financial liability to make variable payments as an adjustment to the cost of the asset was reached in the November 2012 meeting.

To start the discussion in the current meeting, the staff noted feedback from preparers supporting the adjustment of the cost of the asset. The staff noted that preparers asked for a retrospective catch-up adjustment to the depreciation because of the change in the amount of cost. However, the staff believed the depreciation and amortisation under IAS 16 and IAS 38 should be applied prospectively. A retrospective catch-up adjustment to depreciation has been discussed in connection with the Leases project, but the staff believed the Committee should not consider the effect of that future standard as such accounting is not present in current standards (except for some purchase price adjustments made within the specified window). The preparers had also asked whether the foreign currency effects would be capitalised as part of the asset, but those items should be recorded on the statement of comprehensive income in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates.

The staff presented to the Committee two alternatives for the wording of proposed amendments to IAS 16 and IAS 38. The staff recommended Alternative A, which addressed only the accounting for the revision of the estimates of payments (i.e., the estimates of payments that were included in the initial measurement of the financial liability) in accordance with paragraph AG8 of IAS 39. The second alternative (Alternative B) addressed also the subsequent accounting for variable payments that are dependent on the purchaser’s future activity.

Committee members expressed varied levels of support for both alternatives. Several members expressed concerns with Alternative A being too open for interpretation. It was also agreed that the initial accounting topic was not to be discussed in the amendments, which led the majority of the Committee members to support Alternative B.

When put to vote, there was clear support for B with the addition of some introductory language to the Standard on the possibility of the cost including one or more fixed or variable payments, where timing of payments may affect both initial and subsequent measurement of cost. A reference to IAS 39 was requested to be included in the text discussing the initial recognition of the liability while the Standard should mention that direct costs may not be included in the amount of the liability but are included in the asset recognised.

A second vote was held on whether examples are needed to illustrate the effect of these amendments, but this was not supported by the Committee members as the examples would have to address the initial accounting topic in order to be helpful. Instead, Committee members supported the inclusion of the flowcharts in the staff paper in the amendments to the Standard or to the Basis for Conclusions.

The final draft for the agenda decision will be circulated among a couple of Committee members and also discussed with the project team on the Leases project before being submitted to the IASB.

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