At the November 2013 meeting Staff presented three papers to the Committee (see below).

• Agenda Paper 2A - Scope
  • vesting conditions;
  • demographic risks; and
  • salary risks.
• Agenda Paper 2B – Distinction of components
  • distinction between non-variable and variable components; and
  • appendix A – analysis of how the proposed distinction is applied to various types of benefit promises.
• Agenda Paper 2C – Recognition and measurement
  • non-variable components;
  • variable components; and
  • “higher of” options.

Agenda paper 2A presents Staff’s analysis on the agreed scope for employment benefit plans and if they should include or exclude benefit promises with vesting conditions, demographic risk and salary risk. Staff recommends that benefit promises with vesting conditions and demographic risks should be within the scope of the project, and benefit promises with salary risk should remain beyond the scope of their project. Staff asked the Committee if they agreed with their recommendation and if they agreed to delete the exclusion of plans that are subject to future events other than salary risks.

The majority of Committee members agreed with the recommendation provided by Staff, in particular in relation to vesting conditions. There was some reservation with regards to the approach Staff had taken in relation to demographic and salary risk.

A member highlighted that the issue with demographic risk is that it covers a vast array of issues and therefore all demographic risks cannot be treated the same. Another member said that the demographic risks presented by Staff may not be included in a defined benefit scheme and therefore when setting up a model it will be difficult to include a variety of demographic risks. In disagreement another member commented that it makes sense to include demographic risks, for example the effects of mortality rates would affect all schemes. A member suggested that Staff should take a closer look at certain types of demographic risks rather than taking them all into consideration. He agreed with Staff that salary risk should be excluded. Another member suggested that Staff should be clearer on what is included and/or excluded on salary risk.

The Chairman concluded that although Committee members had different views and proposals, the majority of Committee members did not disagree with the proposal Staff presented. Therefore, Staff are to go ahead with the current scope and bring back more analysis on this scope to a future meeting.

Agenda paper 2B presented Staff’s discussion on the distinction between fixed and variable components for employee benefit plans that fall within the Committee’s agreed scope. A sample of benefit promise designs was provided in Appendix A of the paper. Staff recommended that instead of defining “fixed” components positively, promises that do not meet the definition of a variable component should fall within the non-variable component. Staff think that defining variable components as a return that references the actual plan assets would strike the best balance between improving the accounting for troublesome promises and limiting the effect of the change and asked the Committee if they agreed. The three views presented in the Staff paper for defining a variable component are as follows:

• view A - Promises of a return on contributions based on the return on actual plan assets held;
• view B - promises of a return on contributions based on the return on a specified class of assets; and
• View C - promises of a return on contributions based on any variability that includes a market reference.

A member started by agreeing with Staff that defining fixed component is easier and it is difficult to analyse a variable component positively. Another member asked Staff how many problematic plans this solution would capture. Staff replied that such an analysis would require more time.

Another member said that objective here is to address the accounting for a range of plans that have problems when adopting IAS 19. This member said View A would exclude a large number of plans that are problematic. It would also lead to different accounting for schemes that have similar plans but have different assets.

A member highlighted that addressing a large number of plans can be problematic and therefore agreed with Staff on limiting the scope and revisiting the issues with other plans at a later date. In agreement, other Committee members said that View A is too narrow. Another member said that the paper should focus on plans with guaranteed returns as IAS 19 cannot address the full scope of retirement plans.

The Chairman concluded that in general, View A was seen by the Committee as too limited and therefore Staff need to look at other options that capture plans with a notional balance. Staff are to bring this issue back to the Committee at a later meeting.

Agenda paper 2C discusses the recognition and measurement for employee benefit plans that fall within the Committee’s agreed scope, specifically recognition and measurement for:

• non-variable components;
• variable components
• “higher of” options.

Non-variable components

Staff noted the current accounting treatment for fixed promises is not problematic and previously the Committee indicated that they want to retain consistency between the proposals and current accounting treatments.  Staff recommended to the Committee that the existing defined benefit methodology as per IAS 19 should be applied for non-variable components of employee benefit plans that fall within the Committee’s agreed scope. 

The Committee agreed with Staff on their recommendation with regards to non-variable components.

Variable components

For a benefit promise with an asset-based return, the D9 approach proposes that an entity shall measure the liability at the reporting date at the fair value of the asset on which the benefit is specified. Concerns were raised specifically on how benefits that promised a variable return plus a fixed margin would be measured and whether an entity should reflect credit risk in the measurement. In addition, the IASB noted the difficulty in reconciling the attribution of the variable component and the fixed component of D9 plans. Staff presented their analysis under the following sections:

• measurement at fair value;
• unvested benefits;
• benefits that include a margin;
• credit risk; and
• attribution of benefits to periods of service.

Staff recommended as follows on the variable component of a benefit promise that falls within the scope:

• the plan liability should be determined at fair value at the reporting date based on the underlying reference asset;
• if a benefit is unvested at the reporting date, the measurement of the plan liability shall be determined by the extent to which the benefit is expected to vest in the future;
• the general principle identified for the measurement of the variable component should be applied to benefits that include a fixed margin. This would require the entity to measure the variable component at the fair value of an asset that replicates the same features (only relevant if the Committee decides that such benefits are included in the definition of the variable component in 2B).
• the measurement of the variable component should not consider credit risk, and therefore it should be measured based on the fair value of the underlying assets without adjustment; and
• the variable component of a benefit promise is allocated to periods of service in line with the benefit formula.

The discussion began with a member agreeing with staff that where the plan has a fixed component then using the underlying assets as a reference to determine fair value seems reasonable. However, the member was not sure how Staff would address composite type benefits as the idea of using a hypothetical asset to fair value the liability does not seems appropriate. The member agreed with Staff not to include credit risk.

Another member generally agreed with Staff but highlighted that the use of hypothetical assets to fair value the liability would increase complexity in this area. The member suggested that Staff should refer to paper 2B and define the real scope. In addition, the member would like to see how many schemes would be captured under this method.

In agreement another member can see the potential difficulty in using the fair value of hypothetical assets and asked staff if they should focus on vesting conditions rather than focusing on defined benefit plans versus defined contribution plans.

The Chairman highlighted to the Committee that they need to consider if they should invest more time and use further resources on this topic. He suggested that Staff should take the observations from this meeting and bring back a paper in the January 2014 meeting that assesses the comments made by the Committee. But the Committee needs to assess if the projects needs to be stopped as it is too broad.

Two members commented here. The first member said that he would prefer to have a narrow scope project rather than stopping the project altogether and the second member would like Staff to consider outreach to the National Standard Setters (NSS) to understand how this issue affects them.

“Higher of” options

Staff presented the objections the IASB raised in September 2013 in relation to the measurement of “higher of” promises at their intrinsic value and the results from comments letters. Staff also presented their analysis and on the measurement of promises that are the higher of two variable components. Staff requested any comments on “higher of” plans.

A member was unsure why intrinsic value was chosen rather than fair value. Other members agreed that fair value could have been chosen but it would lead to complexity, however intrinsic value can also be used. No further comments were made.

In April 2013, the Committee received a request to clarify the accounting for cash-settled share-based payment transactions that include a performance condition. The Committee observed IFRS 2 does not specifically address the impact of vesting conditions within the context of cash-settled SBP transactions and the Implementation Guidance in Example 12 of IFRS 2 illustrates measurement of cash-settled SBP transactions that includes a service condition in the same was as it would for equity settled SBP transactions that includes a service condition. The Committee tentatively decided that the measurement of equity-settled awards that include a performance condition should be applied by analogy to account for cash-settled SBP transactions that include a performance condition. The Committee asked the staff to draft a proposal for an annual improvement to IFRS 2 reflecting its conclusions at the September meeting.

Staff presented their draft amendment to IFRS 2 with the conclusions and an assessment of the issue against the Committee’s agenda criteria, where they determined an annual improvement to IFRS 2 is needed. Staff propose this amendment to be exposed together with other narrow scope amendments to IFRS 2. Staff recommended amending paragraph 33 of IFRS 2 and adding paragraphs 33A-33B (presented in Appendix B in their paper) to clarify the effect that vesting and/or non-vesting condition have in measuring the liability. In addition, Staff recommended adding Example 12A (presented in Appendix B in their paper) to the Implementation Guidance of IFRS 2. Staff proposed their amendment to IFRS 2 should be applied to new awards on a prospective basis, first time adopters should take relief from exemptions for SBP transactions as per Appendix D of IFRS 1 and no consequential amendments to be made.

Staff asked the Committee if they agreed with their proposals.

A member said that the approach presented by Staff would increase transparency and decrease diversity in practice. However, the issue is the measurement of the obligation and the answer Staff have given is not correct. There are too many issues to address in one narrow scope amendment. Staff replied that they intend to put all IFRS 2 issues in one package to take to the Board.

Another member said that the draft amendment Staff presented does reflect what the Committee suggested in September. The member also suggested that in the amendment the wording between equity settled and cash settled plans should be consistent.

A member was unsure why the amendments should be applied on a prospective basis as retrospective seemed more correct. He added that companies would usually have the figures ready and therefore retrospective application would not be too difficult to make.

Another member requested Staff to clarify the wording presented in the amendment on market, vesting and non-vesting conditions as the current wording is difficult to read in the amendment.

The Chairman concluded that generally the Committee agreed with Staff but they need to revisit the wording of their proposals.

In November 2012, the Committee received a request for guidance on the determination of the rate used to discount post-employment benefit obligations. According to IAS 19 the discount rate should be determined by reference to market yields at the end of the reporting period on “high quality corporate bonds” (HQCB), however IAS 19 does not specify which corporate bonds qualify as HQCB. In practice, listed corporate bonds have usually been considered to be HQCB if they receive one of the two highest ratings given by a recognised rating agency. Due to the financial crises the rating of these bonds have decreased and therefore the issues arises if bonds falling below the “AA” rating can still be considered to be HQCB. After lengthy discussion, the Committee in July 2013 decided not to add this to its agenda because it noted that issuing additional guidance on, or changing the requirements for, the determination of the discount rate would be too broad for it to address in an efficient manner.

In this meeting Staff presented their analysis on the comment letters received on the tentative agenda decision and concluded that the Committee should finalise their decision not to add this issue to its agenda. Staff also presented the proposed changes to the wording of the tentative agenda decision.

The discussion began with a member agreeing with the recommendation presented by Staff. There was some concern raised by members on the concept of HQCB being referred to as an absolute notion.  A member asked a regulator (attending the meeting in an unofficial capacity) if they were happy with the wording. The Regulators were concerned with the wording and preferred the previous version presented.

A member said the paper presented by Staff does not answer the question of what is a HQCB. Another member said that the paper puts the minimum requirement for HQCB and therefore would restrict other bonds such as government bonds.

Another member asked if the use of the word of “significantly” (in the context of the change in measurement or discount rate) was necessary as it does not add clarity. Other members disagreed as they said that if the word “significantly” was not included then effectively a company would not be allowed to change its methodology at all. In determining the discount rate, usually entities would use an actuary’s assumptions, which may change from time to time. Therefore, the word “significantly” would be required to allow entities to adopt better methodologies.

A change in methodology would usually be captured under IAS 8 as a change of estimate. In addition, another member added that as the discount rate is an actuarial assumption and the bond used would be in accordance with management’s judgement, this would usually be disclosed as a significant judgment in the financial statements, which would be addressed in a different standard.

The Chairman summarised the Committee views as there was general agreement with the Staff recommendation with reservation on the “absolute notion”. The disclosure of the definitions or assumptions a company uses or makes in relation to what it considers high quality would not necessarily solve the underlying problem but it allows for more transparency in the financial statements. Therefore, he suggested that the agenda decision should include the requirement to disclose what an entity considers as being high quality. A few members volunteered to help Staff with drafting the final agenda decision.

The Committee received a request for guidance on the classification, in the consolidated financial statements of a group, of puttable instruments that are issued by a subsidiary but that are not held, directly or indirectly, by the parent. The question asked was whether these instruments should be classified as equity or liability in the parent’s consolidated financial statements.

The Committee discussed this issue in the July 2013 meeting, where the Committee tentatively decided not to add this issue to its agenda, because it concluded that in the light of the existing guidance in IAS 32, neither an interpretation nor an amendment to a Standard was necessary. Two comment letters were received on the tentative agenda decision, both of which agreed with the decision not to add this issue to the Committee’s agenda.

After considering the comments received on the tentative agenda decision, Staff recommended that the Committee should finalise its decision not to add this issue to its agenda. The proposed wording of the final agenda decision is shown in Appendix A of the Staff paper.

The Committee agreed with the Staff’s recommendation and had no comments on the final agenda decision.

In January 2013, the Committee received a request to clarify the transition provisions of IFRS 10

Consolidated Financial Statements and IFRS 11 Joint Arrangements. The transition provisions of IFRS 10 and IFRS 11 provide relief from retrospective application in specific circumstances. However, IFRS 10 and IFRS 11 do not provide specific relief from retrospective application in respect of the application of IAS 36 Impairment of Assets, IAS 21 The Effects of Changes in Foreign Exchange Rates or IAS 23 Borrowing Costs. Retrospective application of these Standards could be problematic when first applying IFRS 10 and IFRS 11.

The Committee discussed the issue in its July 2013 meeting and noted that:

1. if retrospective application of the requirements of IFRS 10 is impracticable because it is impracticable to apply retrospectively the requirements of other Standards, then IFRS 10 (paragraphs C4A and C5A) provides relief from retrospective application; and
2. the only changes resulting from the initial application of IFRS 11 would typically be to change from proportional consolidation to equity accounting or from equity accounting to recognising a share of assets and a share of liabilities. In those situations, IFRS 11 already provides relief from retrospective application. Consequently, the initial application of IFRS 11 should not raise issues in respect of the application of other Standards in most cases.

On the basis of the analysis above, the Committee tentatively decided not to add this issue to its agenda.

Staff presented analysis of comment letters received to the Committee and recommended that the Committee should not add this issue to its agenda and presented the final agenda decision wording.  

A member raised concern on the sentence in the agenda decision “The Interpretations Committee also noted that within the context of assessing control, the relevant activities of investees under IFRS 10 would be largely the same as significant financial and operating policies under IAS 27 Consolidated and Separate Financial Statements (2008).” The member explained that IAS 27 and IFRS 10 are not the same and this sentence should not be included. Staff agreed to take this sentence out.

Another member was concerned with the use of “impracticable”. In his opinion this word meant impossible and not capable of completing with human resources. Another member added that in practice, “impracticable” has been applied narrowly however this does raise the question that in practice “impracticable” can be interpreted differently.

The Chairman concluded that apart from the sentence discussed above the Committee agreed with the wording in the final agenda decision.

In August 2013, the Committee received a request to clarify whether three different transactions should be accounted for separately or be aggregated and treated as a single derivative. The three transactions are as follows:

• Transaction 1 – bond purchase: Entity Alpha purchases a certain amount of medium-long term bonds (the ‘Bond’) from Entity Beta, through one or more purchase transactions within a certain period and with the same settlement date;
• Transaction 2 (interest rate swap): Entity Alpha enters into one or more interest rate swap contracts with Entity Beta for hedging purposes for an overall notional amount equal to that of the Bond. The trade date and the start date of the interest rate swap are the same as the purchase date and the settlement date respectively of the Bond in Transaction 1. Under the interest rate swap contract, Entity Alpha receives a variable rate of interest (index + spread X) and pays a fixed rate of interest equal to the fixed coupon rate of the Bond. Where there is foreign exchange risk, this is also hedged with a cross-currency interest rate swap ; and
• Transaction 3 (repurchase agreement): Entity Alpha and Entity Beta enter into a repurchase agreement (the ‘Repo Agreement’). The trade date of the Repo Agreement is the same as the settlement date of the Bond and also the maturity date of the Repo Agreement matches the maturity date of the Bond. Under this transaction, Entity Alpha sells the Bond at the spot price to Entity Beta and it uses the cash received in this transaction to finance the purchase of the Bond in Transaction 1.

With regard to the request, the submitter also asks how an entity should interpret and apply paragraph B6 of Guidance on Implementing IAS 39 Financial Instruments: Recognition and Measurement (‘IG B6’). Paragraph IG B6 of IAS 39 provides guidance on whether non-derivative transactions should be aggregated and treated as a derivative.

Staff summarised the feedback they received from the outreach they performed and presented this to the Committee. Their conclusion was the Committee cannot address the specific issue as it requires judgement to be made, which would depended on the specific facts and circumstances related to this issue. In addition, the current Standard provides sufficient guidance to enable the entity to identify the analysis required to determine the accounting treatment. Also, they suggested due to the complexity of the issue, the entity should consider disclosing the relevant information about these transactions, subject to a materiality assessment that considers both qualitative and quantitative characteristics of the transactions.

Staff suggested the Committee do not take this issue onto its agenda and presented their proposed wording for a tentative agenda decision.

The Chairman began by highlighting that the issue raised deals with a specific issue and usually the Committee would not discuss specific scenarios. Therefore, he requested the Committee to focus on indicators of whether the transaction would be treated in aggregate or each transaction dealt with as a single transaction rather than addressing any specific issues with each transaction.

A member began the discussion by saying this is a complicated topic and an element of judgement is required. In addition, the example given in IG B6 is where the counterparty is the same and therefore having the same counterparty is an indicator rather than a rule. The member added that the last paragraph of IG B6 alludes that the objective of entering into several contracts should be considered i.e. if it was to reflect the same effect as though it would have been one transaction.

Another member agreed with Staff’s recommendation and added that the Committee should not and could not analyse this issue. In this member’s opinion the three transactions reflect a derivative.

A member said that IG B6 is implementation guidance and therefore not a principle that must be followed. The difficulty is if this was the only guidance provided.

Another member reiterated that IG B6 suggests the substance of transactions should be considered and the three transactions presented must have been intended with one goal rather than it being coincidence they all occurred in this manner. Therefore, when dealing with such transactions it is important to consider the ultimate goal.

Another member wanted the agenda decision to be scaled back and also include a discussion on the complication of the issue and that judgement would be required to determine the accounting treatment.

A member added that such transactions are relatively common structured transactions and there is divergence in practice on the treatment. The accounting treatment of such transactions is usually driven by the facts and circumstances related to the transactions and also how an entity interprets IG B6. A member questioned why such transactions were common. The first member discussed there are various economic and accounting reasons for entering into such transaction, as well as the entity’s ability or inability to enter into different types of transactions.

Another member was concerned that the staff paper was focused on implementation guidance, which does not form part of the actual Standard and suggested the agenda decision should be carefully written.

The Chairman concluded that the Committee agreed not to take this issue onto its agenda and that the agenda decision will be re-written with the help of two members.

The Committee received a request to clarify whether an obligating event for a levy that is subject to a minimum annual threshold can occur before that threshold is reached. There are two different circumstances as examples in which the legislation requires an entity to pay levies that are subject to minimum annual thresholds as well as ‘pro-rata’ thresholds, where the entity starts or stops the relevant activities that give rise to the levies in the middle of the annual assessment period. There is a concern as to how ‘the activity that triggers the payment of the levy’ in paragraph 8 of IFRIC 21 should be interpreted in identifying the obligating event. The three different views on an activity that triggers the payment of the levies in such circumstances are;

• the activity is passing the annual threshold,
• the activity is passing the ‘pro-rata’ threshold, and
• the activity is provision of relevant services (i.e. prior to passing the annual and ‘pro-rata’ threshold’).

Staff presented the summary of their results concluded as follows:

• the activity that triggers the payment of the levy that is described in paragraph 25 is the reaching of the ‘pro-rata’ activity threshold. This is because the entity’s future actions should not be taken into consideration when identifying an obligating event under IAS 37;
• the results of the outreach do not indicate that there is significant diversity in practice on the accounting for such a levy under IAS 37. IFRIC 21 does not change the requirements of IAS 37, but instead aims to ensure consistency of interpretation. Therefore, it is unlikely that significant diversity in practice will develop; and
• consequently, the Committee should not add this issue to its agenda.

Staff presented their proposed wording for a tentative agenda decision.

A member said the analysis presented by Staff was confusing and the paper needs to address the issue of what to do when an entity ceases operation and the interaction with levies being pro-rata thresholds.

Another member agreed with Staff that the Committee should not take this onto its agenda but similarly to the previous member was not convinced by Staff’s analysis, in particular because the distinction between a pro-rata threshold and a progressive threshold was not made.

A member added that IFRIC 21 may have significant implication to current practice. This member was also confused with Staff analysis in particular view 2A presented where Staff said “an entity that has passed the ‘pro-rata’ threshold and assesses that it is probable that the annual threshold will be reached should begin accruing a liability once the entity exceeds the ‘pro-rata’ threshold.”

Another member added that the only exception to the rule for booking an expense (or a liability) is when it is written into Legislation. In addition payroll taxes are not intended to be captured by IFRIC 21.

A member said where there are multiple triggering events, an entity should recognise the expense (or a liability) when it has satisfied all of these.

Another member added that Staff’s paper was confusing cashflows with the booking of expenses and gave the example of withholding taxes.

Another member added that further guidance, in particular to discuss changes in threshold on disposal of an asset or ceasing to trading. The triggering event on disposal of an asset is when it’s sold rather than the intention of selling it.

The Chairman concluded that Staff are to re-write the agenda decision. In agreement with the majority of the members additional examples are not to be included however Staff are to assess the impact of a variety of issues (Staff said they are collecting an inventory of issues that they can look at).

The Committee received a request from the European Securities and Markets Authority (ESMA) to clarify the distinction between changes in accounting policies and changes in accounting estimates. There are divergent practices regarding the assessment of whether a change qualifies as a change in an accounting policy or as a change in an accounting estimate in accordance with IAS 8. The distinction between a change in accounting estimate and a change in accounting policy is important because IFRS requires a different accounting treatment resulting in application of the changes prospectively for a change in accounting estimate and retrospectively for a change in accounting policy. Moreover, IAS 8 sets out stricter criteria for changes in accounting polices than for changes in accounting estimates. According to paragraph 14(b) of IAS 8, in order to change an accounting policy the issuer should be able to justify that the change provides more relevant information, whereas there is no such explicit requirement for a change in accounting estimate.

Staff analysed the issue and noted that existing Standards provide a certain level of guidance to distinguish a change in an accounting policy from a change in an accounting estimate. However, Staff acknowledge that the Standard could benefit from greater clarity and guidance. This should be addressed as part of Conceptual Framework project. Paragraph 35 of IAS 8 recognises that there may be circumstances where it is difficult to distinguish a change in policy from a change in estimate; hence an amendment or an interpretation is needed in the short-term.

Staff recommended the Committee do not take this issue onto its agenda and presented their proposed wording for a tentative agenda decision.

A member agreed with Staff’s recommendation but wanted an amendment to be issued sooner rather than as part of the Conceptual Framework. Another member agreed that this is a difficult issue to be dealt with and explained that there is no clear solution. For example the Committee cannot say that issues x, y and z are clearly changes in accounting policies and assume anything else is a change in estimates.

Another member said that usually a change in one method to another is to bring better value to the methodology/figures presented in financial statements.

Another member disagreed and said that there is not diversity in practice.

A member said the current definition of a change in accounting policy is fairly broad and therefore this issue should not be addressed by IFRIC. The issue has arisen due to the consequences of something being a change in estimate or a change in policy. In particular, it is driven by an entity’s willingness to make retrospective or prospective adjustments and disclose the issue. Generally, a change in estimate is preferred to allow for prospective adjustments.

Another member said that IAS 8 provides adequate guidance in determining whether an issue is a change in estimate or accounting policy. Paragraph 35 of IAS 8 makes it clear that when an issue is hard to determine then the change is to be treated as a change in accounting estimate. In addition, paragraph 122 of IAS 1 requires entities to disclose a summary of significant accounting polices and the judgement around it.

Staff explained to the Committee that paragraph 122 of IAS 1 has also caused problems as firms have found it difficult determine which polices are significant. Clarification of what a significant accounting policy is should be looked in a short term project, this should focus on the concept of materiality. And in a long term project, clarification on the concept of “judgement” should be addressed. 

Another member added that it is clear in the Standard that a change in accounting estimate arises from new information or gaining more experience. He suggested that Staff should focus in their agenda decision on this distinction. Paragraph 39 of IAS 8 requires entities to provide the effect of the change in estimate on future periods, although in practice this is not often provided.

The Chairman concluded that the Committee agreed not to take this issue on to its agenda. In addition, the agenda decision should explain that all estimates are not equal, moving to a worse estimate is not permitted and that disclosure is always preferred. Staff are to take this issue to the IASB to be addressed and also discuss with the IASB the concept of materiality and the disclosure requirements when an issue is a change in estimate. Also the IASB should consider a third category which is the change in a method of application of an accounting policy.

In January 2013, the Committee received several requests to clarify the application of the requirements of IFRS 11, in particular the classification of a joint arrangement as a joint venture or a joint operation and the accounting for joint operations. Staff conducted an outreach on the various issues and asked for additional significant issues that have been raised regarding the application of IFRS 11. There were five initial principal issues identified under different categories and 21 additional issues were identified from the outreach.
A summary of these issues is provided in the Staff paper on pages 23-26. Staff asked the Committee for next steps on these issues.

A member started by commenting that some issues in the paper probably require judgement to be exercised. Some of them need to consider the criteria of other facts and circumstances in IFRS 11, which would determine the measurement and recognition of joint operations and this is difficult to do. The member also highlighted to the Committee that approaching issues raised in a piecemeal manner is not the best approach. Staff should adopt a more holistic approach and therefore suggested to let practice prevail before addressing these issues.

Another member in agreement said that out of the 26 issues raised there are some that could be addressed within the framework of the Standards and a few may be addressed by looking at IFRS 3. The five original issues should take priority but that member suggested that the Committee let practice prevail and revisit the issues in the post implementation phase.

A member commented that Staff should have the following two priorities:

• the application of other facts and circumstances – whether this should look at the legal and enforceable terms or if it should include an analysis of the substance, so there is a clear answer on how to use the other facts and circumstances criteria; and
•  what is accounted for – the direct rights and obligations when in fact these are owned by a separate entity (this is looked at in agenda paper 11).

The members from the regulators said that there is major diversity in practice and currently there is little guidance on the accounting for joint operations.

Another member said that reading both agenda papers 10 and 11 highlighted that there is significant diversity in practice and there are different views on the application of IFRS 11. Therefore, it is essential that these issues should be addressed. The three main issues to be addressed are as follows:

1. clarification of  joint operation and a joint arrangement;
2. initial recognition of rights and obligations; and
3. the treatment of a change from joint operation to a joint venture or a joint operation to a subsidiary.

The member also suggested that IFRS 11 should be deferred further.

Another member added that there may be some entities that may apply the other facts and circumstances criteria but some may not. The challenge is to address the correct consolidation method.

A member was concerned about trying to address issues on a relatively new standard and agreed to let practice coalesce.

In agreement another member suggested that the five original issues should be the main focus but the Committee should provide clarity on the application of other facts and circumstances as leaving it may lead to further divergence in practice. Another member added that the application of facts and circumstances could be applied in a different way to the way it was intended to be applied.

Staff commented that deferral of the Standard has already caused problems in the first year that it has been issued. Most of the issues are around the equity method and by the time they address these issues it would have already been another year. Therefore the best approach is to issue clarification in the short term and then deal with the other issues in the post implementation phase.

Another member said that this issue is widespread throughout Europe especially in France, Germany and Italy and therefore postponement may not be ideal.

Another member added that paragraph B30 of IFRS 11 is clear that other facts and circumstances should be taken into consideration along with the direct rights to assets and obligations, therefore proportional accounting may not always be the ideal solution. These measurement issues arise as the Standard does not provide guidance when there are rights to assets and obligations for liabilities but the substance of the operation is different. Therefore the Committee should address this issue through a narrow scope amendment.

The Chairman concluded that Staff need to prioritise the issues presented and focus on those specifically around other facts and circumstances and how it affects the classification of a joint operation and the issues related to measurement.

With the 21 issues identified Staff are to assess how many issues can be resolved by amending the standards, or by providing additional guidance and those that can be addressed through the current Standard. All of these are to be resolved before presenting the issues to the IASB.

In September 2013, The IASB discussed the accounting for joint operators in their separate IFRS financial statements for an interest in a joint operation that is housed in a separate entity. This was in response to a request from a national standard-setter (the ‘NSS’) to review how such investments are reported in the separate IFRS-financial statements of the joint operator. The IASB asked the staff to undertake additional consultations to identify real life examples of difficulties in practice to help the IASB to assess the magnitude of accounting issues in the separate IFRS-financial statements of the joint operator. This should include a consultation with the Committee.

The NSS thinks that joint operators should account, in their separate IFRS-financial statements, for their interests in joint operations that are housed in separate vehicles (whose legal form confers separation between the parties and the vehicle) in the same way as for their interests in subsidiaries.

The NSS noted that IFRS 11 and IAS 27 are inconsistent. IFRS 11 requires a party to a joint arrangement to account for its interest in a joint operation based on its share of assets, liabilities, revenue and expenses that are held or incurred jointly.

IAS 27 requires that a parent accounts for its interests in subsidiaries at cost or at fair value in accordance with IFRS 9.

View 1 is that a joint operator accounts for any interest in the equity of an entity that houses a joint operation measuring that investment at cost, fair value or using the equity method i.e. the interest is accounted for as an investment in an entity.

View 2 is that the joint operator accounts for its share in the assets held by the separate vehicle that houses the joint operation or in the liabilities incurred by it i.e. the consolidated financial statements are the same as those with the individual financial statements. This forms View 2.

Staff asked the Committee the following three questions:

1. Is the accounting for interests in joint operations that are structured through separate vehicles in separate IFRS-financial statements (expected to be) a prevalent issue in practice?
2. What are your views on the two different readings of IFRS 11 (View 1, and View 2) what observations did you make with respect to these two different readings?
3. What are the examples from practice in which preparers face difficulties in applying IFRS 11 to the accounting for interest in joint arrangements that are structured through a separate vehicle?

A member started by saying that the issue is around measurement of revenue, expenses, assets and liabilities. There is no conflict between IAS 27 in the separate and consolidated financial statements.

Another member added that this is a real issue in practice which is especially prevalent in the UK. There is a conflict between the two standards and clarification is required to determine which standard to apply. IFRS 11 looks at the direct assets an entity has rights to and the obligations it is responsible for. Whereas IAS 27 focuses on the shares an entity holds. If IFRS 11 is followed then the treatment in the consolidated and separate financial statements should be the same.

A member said the correct treatment is to show the share of assets and liabilities for a joint operation only when the entity has enforceable rights and liabilities. There should not be a different accounting treatment in the separate financial statements and the consolidated financial statements.

With view 2 another issue arises in the financial statements of a joint operation, because it could be argued that there is nothing to recognise because all of the assets and liabilities have been accounted for by the parties to the joint operation.

Another member added that the challenge arises when you use the other facts and circumstances criteria to determine the accounting for the rights and obligations of each party to the joint operation.

A member said the Standard is clear that the same accounting treatment would be applied in the separate financial statements as the consolidated financial statements.

Another member spoke about control in the context of a subsidiary. In a subsidiary the parent owns shares, which are accounted for in the separate financial statements.  In a joint operation the investor should account for the assets and liabilities it controls, as the investor has rights to these. In the case of a subsidiary the parent may control it but only has rights to the dividends the subsidiary distributes and not the actual assets and liabilities. In addition, the purpose of separate financial statements is to reflect what assets and liabilities the parent has. Another member in agreement said that if the parent controlled a subsidiary through different rights other than the shareholding in that subsidiary, then in the separate financial statements, the parent would reflect these, hence it seems appropriate to apply the same principle in respect of a joint operation. 

Another member added that the legal form should be reflected in the financial statements.

The Chairman asked Staff to summarise the views and they were as follows:

• the issue discussed above is a common issue in the separate financial statements of a joint operator;
• there issue is widespread in practice;
• majority of the Committee members agreed that the accounting for a joint operation should be the same in the consolidated as well as the separate financial statements;
• if a party to a joint operation has no rights and obligations then in the separate financial statements there are no assets or liabilities to account for; and
• View 1 does not reflect the distinction between a joint operation and joint venture in IFRS 11. View 2 does reflect the requirement of IFRS 11 but it needs clarity of rights and obligations (making clearer when you have a joint operation versus joint venture and how the rights and obligations affect the legal structure).

The Committee was requested to provide guidance on whether fixed staff costs (employees on payroll who spend all (or substantially all) of their time on the negotiation, arranging and creation of new transactions (leases and loans)) can qualify as "incremental costs" in terms of initial direct costs as specified in IAS 17. It is unclear how the requirements in IAS 17 are applied and therefore there are two alternative views being applied in practice.

View A: internal fixed costs (such as the staff costs set out above) do not qualify as ‘incremental costs’ and therefore should not be included as initial direct costs in the lessor’s lease receivable.

View B: internal fixed costs (such as the staff costs set out above) do qualify as ‘incremental costs’ and therefore should be included as initial direct costs in the lessor’s lease receivable.

Staff presented their analysis to the Committee where they concluded that internal fixed costs do not qualify as incremental costs. Only those costs that would not have been incurred if the entity had not negotiated and arranged a lease should be included in the initial measurement of the finance lease receivable. In addition, Staff noted there appears to be no diversity in practice in relation to this issue.

Staff recommended the Committee do not take this issue onto its agenda and presented their proposed wording for a tentative agenda decision.

A member agreed with Staff’s recommendation but wanted to understand how this would fit with the revenue recognition exposure draft (ED) on incremental cost. Other members raised the question in relation to the developments of the insurances and leases Standards. 

Staff said that the treatment is very similar in relation to revenue, costs are incurred when certain events take place. With regards to insurance there is no notion of incremental costs, they look at cash flows. On leasing, the IASB was undecided if incremental costs would be included or excluded.

Another member added that incremental costs directly related should be deferred.

A member commented that fixed costs are not permanently fixed and therefore they can be incremental. He gave an example of staff costs, as staff could leave at any point in time or could be made redundant.

The Chairman added that the insurance Standard is based on a portfolio basis and therefore it may not be relevant for the purpose of this discussion. The issue that the Committee should focus on here is if one extra lease contract would make a difference in staff costs and therefore such a cost be incremental.

A member raised the following four points to the Committee:

1. the definition of incremental is different in each standard and therefore the Committee should work towards a common definition, for example in IAS 39 the notion of incremental is not the same as that of IAS 17;
2. the direct cost definition in the lease ED is not different to IAS 17;
3. the member is surprised to see limited diversity in practice; and
4. it was worrying to see that insourced costs were not capitalised where as if the cost was outsourced it would be capitalised. This could lead to a potential anomaly.

Another member agreed with Staff’s recommendation but commented that even costs that are fixed in the short term, over time can be variable.

Another member agreed with Staff and said that costs that were outsourced cannot necessarily be incremental where the cost of say 1 contract was the same as that of 100. However if staff were paid bonuses on completion of a contract then it could be argued that this is an incremental cost.

A member said that under US GAAP, direct internal costs relating to a lease can be capitalised. In addition outsourced incremental costs would also be capitalised.

Another member added that in Germany there is no diversity in practice, a company can structure it such a way that certain costs could be capitalised for example by having low salaries and bonuses on completion.

The Chairman concluded the meeting by saying that although the majority of the Committee agreed with Staff’s recommendation Staff need to explore the definition of what incremental means in IAS 17.

The amendments to IFRS 10 require an investment entity to measure its investments in subsidiaries at fair value apart from where a subsidiary provides investment-related services or activities, in which case the investment entity shall consolidate the subsidiary. The issue relates to the accounting treatment where a subsidiary is itself an investment entity but also provides investment related services or activities; should the parent measure that subsidiary at fair value or consolidate it. Specifically, should the parent consolidate the investment portfolio on a line-by-line basis, or should the parent measure the entire portfolio and the related third party debt held at fair value.

Staff performed outreach and summarised the findings in their paper. From their analysis into the Standard, Staff think it is not clear how to account for a subsidiary that is both an investment entity subsidiary and provides investment-related services. Therefore Staff recommended the Committee add this issue onto its agenda.

A member agreed with Staff’s analysis that there is a lack of clarity regarding hybrid entities. The member confirmed this is an issue in the industry. In the Staff paper the approach adopted by Staff is to have the same accounting treatment for all of these sorts of structures however this may not be possible as they may be other elements which would need to be considered such as non-controlling interests.

Another member also agreed with staff analysis but was confused with paragraph 15 where the entities in structure one and two are not the same as those in structure three. He agreed with staff that adding clarity would be helpful.

Another member said it would be helpful to clarify the extent to which investment services would have to be provided, for them to be consolidated.

Another member added that the Committee should be careful going forward. She is worried about the different sorts of consolidation method that would arise from any amendments staff would give and therefore she would encourage staff to be as simple and as principle-based as possible.

Overall there was general support for Staff’s recommendation.

This issue relates to investment entities that establish wholly-owned intermediate subsidiaries in certain jurisdictions, which own the portfolio of investments in the group structure. The sole purpose of the intermediate subsidiaries is to minimise the tax paid by investors in the ‘parent’ investment entity. There is no other activity within the subsidiaries and the tax advantage comes about simply by virtue of returns being channelled through the jurisdiction of the subsidiaries. The issue is whether the ‘tax optimisation’ described above should be considered investment-related services or activities.

Staff said that tax optimisation should not be considered to be investment related services or activities; this is clear from paragraphs B85C, B85D and BC272 of IFRS 10. Consequently Staff recommend that the Committee should not take this issue onto its agenda and presented their proposed wording.

A member started the discussion by agreeing with Staff’s conclusion however he said that the broader issue is what is an investment and therefore Staff should look at the previous paper. Usually these sorts of entities are not just set up for tax optimisation purposes, if they will have other services and therefore these should be considered.

Another member said that there should be a clear distinction between tax optimisation and tax advisory services, and these should be considered when looking at these sorts of entities.

A member commented on the draft tentative agenda decision proposed by staff. In particular the wording used “pass through entities” seems incorrect and suggested that the wording should be revised. By using the word “pass through entities” it suggests that when looking at the financial statements this entity would be looked through and not considered.

Paragraph 4 of IFRS 10 provides relief whereby a parent need not present consolidated financial statements if it meets particular conditions, including the requirement that “its ultimate or any intermediate parent produces consolidated financial statements that are available for public use and comply with IFRSs.”

There are two issues to be addressed. The first issue is whether the exemption is applicable if its ultimate or any intermediate parent is an investment entity which prepares consolidated financial statements but measures investees at fair value. The second issue is whether the intermediate parent loses the exemption if the ultimate parent does not present consolidated financial statements. This would be the case if the parent entity prepares one set of financial statements in which it accounts for all of the investments at fair value, because it does not have a subsidiary which provides investment-related services.

Staff recommended the Committee should not take the first issue onto its agenda, because the existing Standards sufficiently address the issue as discussed in the Staff paper. Staff presented a tentative agenda decision in relation to this issue and asked the Committee for comments.

Staff also recommended the Committee should take the second issue onto its agenda in the Annual Improvements.

A member raised concern on Staff’s analysis which seemed to indicate that the presence of a sister company triggered the consolidation of an intermediary company with a parent. This is not how the exemption works in practice, it is the fact that a parent has a subsidiary triggers the consolidation requirement. Any amendment in the Standard should reflect a more linear structure and not the presence of sister companies.

Another member said that Staff have correctly read the words in the standard but it is not what the Board had intended when the standard was released. This members proposed an amendment but one that is the opposite to what Staff have proposed. Another member agreed with this member and said that the intermediaries should provide information i.e. if it's not consolidated by the ultimate parent then it should provide the relevant information.

Another member said that the two issues must be looked at jointly and not separately.

Another member supported Staff because the information of an intermediary may not be immediately obvious in the parent companies consolidated financial statements.

Overall the Committee agreed to adopt an approach opposite to what Staff had recommended and therefore Staff will have to bring this issue back at a future meeting after taking into consideration the discussion held by members.

Staff said that an exemption is provided in very exceptional circumstances and therefore they would need to assess the consequences of the right answer carefully to avoid unintended consequences.

A member suggested that when Staff bring this issue back to the Committee, Staff should consider the effect of an intermediary that is held for sale.

The Committee received a request for guidance on the recognition and measurement of deferred tax assets when an entity is loss-making. The Committee was asked to clarify:

1. whether IAS 12 Income Taxes requires that a deferred tax asset is recognised regardless of an entity’s expectations of future tax losses when there are suitable reversing taxable temporary differences (‘Issue 1’); and
2. how the guidance in IAS 12 is applied when tax laws limit the extent to which losses can be recovered against future profits (‘Issue 2’).

Staff performed outreach on this topic with national accounting standard-setters and regulators. The results of this outreach are included as part of the staff’s analysis of this issue.

Staff concluded that the Committee should recommend to the IASB that it should amend IAS 12 to clarify that the Standard requires that deferred tax assets are recognised only to the extent that an entity expects that the reversal of the deductible temporary differences will reduce tax payments. Consequently, deferred tax assets are not recognised independent of an entity’s expectations of future losses, when there are suitable reversing taxable temporary differences. In other words, the existence of taxable temporary differences is merely an indicator, not actual evidence, that future taxable profits are probable.

Staff also think that the Committee should recommend to the IASB that it should include this proposed amendment in the narrow-scope amendment to IAS 12 Recognition of deferred tax assets for unrealised losses.

If the Committee agree with the recommendations made by Staff, Staff will present a draft of the proposed amendment to IAS 12 in a future meeting.

A member started by disagreeing with Staff and said that with issue 1 there is limited diversity and with issue 2 there is diversity in practice. The principle of IAS 12 is that deferred taxes should reflect the consequences of recovering deferred tax assets and liabilities, whereas the approach Staff have taken is the opposite.

Another member also disagreed with Staff and said that IAS 12 is clear in that entities start by offsetting deferred tax assets and liabilities as with existing tax losses or profits. This is the predominant view in France, Germany and Italy.

Another member agreed with staff's view and said judgement is required to determine if the deferred taxes can be recovered.

A member said that one should look at all the temporary differences first and then focus on the future tax differences when determining the recoverability of deferred tax assets.

Another member said the recoverability of deferred tax assets is dependent on managerial judgement and the Standard may be unclear on this. However, the Standard does require the recoverability of taxes by reference to management’s expectation of future activities to be considered as per paragraph 39 of IAS 12. This can be problematic for entities that are going through liquidation. These are the ideas that staff should present to the board.

The meeting concluded that with issue one Staff are to prepare a draft agenda decision and with issue 2 Staff would look at two different fact patterns: the first where the legislation limits recoverability to 40% within a time frame and another where there is no time limit but recoverability is restricted to 40%.

Another member said that the first assessment should be that deferred tax assets should be limited to the percentage authorised by the law and then secondly to assess how much is left. The meeting concluded that staff would bring issue 2 back to a future meeting.

In June 2013, the Committee received a request to clarify how an entity should account for a price difference between the institutional offer price and the retail offer price for shares

issued in an initial public offering (IPO). The submitter refers to the fact that the final retail price could be different from the institutional price because of:

(a) an unintentional difference arising from the book-building process or derived from a change in the fair value of the shares between the time the indicative offer price is set and the time the institutional price is determined; or

(b) an intentional difference arising from a discount given to retail investors as indicated in the prospectus.

The submitter notes that there are divergent views on whether the difference between the retail offer price and the institutional offer price can be analysed within the scope of IFRS 2 or whether this difference could be analysed as an equity transaction (i.e. a transaction with owners in their capacity as owners) in accordance with IFRS 10.

Staff performed outreach on this issue and found that this issue is generally not common. Eight out of ten respondents had not observed differences in share prices between the retail offer price and the institutional offer price within the context of an IPO. Of the two that had seen differences, one accounted for the transactions as a share based payment transactions and recognised the discount granted as an expense. The other did not provide detail of the accounting treatment but found that this issue for them was relatively common.

Staff identified two approaches for dealing with the price difference between the final offer and price and institutional priced (where it was intentionally lower and therefore the difference is looked at as a discount) as follows:

(a) Approach 1: the price difference represents unidentifiable goods or services received, in which case an expense is recognised in profit or loss for the amount of the discount given to retail investors; and

(b) Approach 2: the price difference does not represent goods or services received and the difference would not be recognised as an expense.

The Committee discussed this issue in the September 2013 meeting where they decided the issue is not widespread. In addition, the Committee concluded that the issue is outside the scope of IFRS 2. The Committee tentatively observed that the price negotiated between the issuer and the retail investor and between the issuer and the institutional investor is accepted as the fair value of the transaction, regardless of the fact that the retail investor and the institutional investor are acquiring shares at the same time.

Staff presented their draft agenda decision in this meeting and asked the Committee for comments.

One member suggested the agenda decision should be more specific and it should provide detail of how the Committee came to the conclusion.

Another member said he disagreed with a specific part of the agenda decision as the issue is common and not limited to a few jurisdictions. Also paragraph 3 in the agenda decision should highlight the fair value of the consideration. Another member agreed and said the issue is common also in the US and therefore suggested that the last paragraph should be deleted.

A member said that the second paragraph should show there are no identifiable goods or services that were provided and refer to BC18 C and D.

Three members are to help Staff revise the draft agenda decision.

The staff provided the Committee with an update on the current status of issues that are in progress but not to be discussed during the Committee’s November 2013 meeting. The Committee deferred work on four new issues and five outstanding issues. All such issues will be discussed at future meetings.

Work in progress that will be discussed at future meetings

• IFRS 5 Non-current assets held for sale and discontinued operations: write down of a disposal group to the lower of its carrying amount and fair value less costs to sell (‘FVLCTS’) in accordance with IFRS 5 when the write-down exceeds the carrying amount of non-current assets in a disposal group.
• IFRS 5 Non-current assets held for sale and discontinued operations: reversal of impairment losses relating to goodwill recognised for a disposal group classified as held for sale. The issue focuses specifically on whether an impairment loss relating to goodwill can be reversed.
• IAS 12 Income taxes: clarification of the accounting for deferred tax assets where an entity:
  • has deductible temporary differences relating to unrealised losses on debt instruments that are classified as available-for-sale financials assets and measured at fair value;
  • not allowed to deduct unrealised losses for tax purposes;
  • has the ability and intention to hold the debt instruments until the unrealised loss reverses; and
  • has insufficient taxable temporary differences and no other probable taxable profits against which the entity can utilise those deductible temporary differences.
• IAS 12 Income taxes: clarification of the calculation of deferred tax in circumstances in which the entity holds a subsidiary which has a single asset within it. Specifically, whether the tax base described in paragraph 11 of IAS 12 and used to calculate the deferred tax should be the tax base of the (single) asset within the entity which holds it, or the tax base of the shares of the entity holding the asset.
• IAS 28 Investment in Associates and Joint Ventures: further analysis and discussion is needed before the Committee can propose to the IASB whether to amend or delete paragraph 31 of IAS 28, which is perceived as conflicting with the proposed amendments to IFRS 10 and IAS 28 (2011). Paragraph 31 of IAS 28 specifies that an investor recognises in full in profit or loss the portion of gain or loss on contribution relating to monetary or non-monetary assets received, if they are received in addition to receiving an equity interest in an associate or joint venture.

Issues on hold:

• An IAS 39 Financial Instruments: Recognition and Measurement issue requesting clarification on how the income and expense that result from negative interest rates should be presented in the statement of comprehensive income. The issue arose from the fact that the demand of investors for ‘safe harbour’ assets has increased to a degree that the yield on some assets (on some of the remaining high quality government bonds) has turned negative. The staff have deferred finalisation of this issue pending the completion of the IASB’s financial instruments: classification and measurement project.
• An IAS 2 Inventories issue requesting clarification on the accounting for long-term supply contracts of raw materials when the purchaser of the raw materials agrees to make prepayments to the supplier. The question is whether the purchaser/supplier should accrete interest on long-term prepayments by recognising interest income/expense, resulting in an increase of the cost of inventories/revenue. The Staff are reviewing this issue in the context of developments on the IASB’s revenue recognition project.

New Issues:

• An IAS 12 Income taxes issue requesting clarification whether to apply IAS 12 and a “probable” threshold or the guidance in IAS 37 for contingent assets where an entity has paid cash to the tax authority but expects to recover some or all of that cash.
• An IAS 37 Provisions, Contingent liabilities and Contingent Assets issue to clarify the measurement of a liability related to an emission trading scheme under IAS 37. Specifically, the submitter asks whether the guidance for the measurement of emission trading liabilities in IFRIC 3 Emission Rights, which was withdrawn in June 2005, is still an appropriate interpretation of IAS 37.
• An IAS 32 Financial instruments: Presentation issue on classification of an instrument that is mandatorily converted, subject to a cap and floor. In the July 2013 meeting, the Committee asked staff to analyse the accounting for a financial instrument that is mandatorily convertible into a variable number of the issuer’s own equity instruments, subject to a cap and a floor on the number of equity instruments to be delivered. The Committee asked staff to analyse how the issuer of such an instrument should classify it in accordance with IAS 32. The Committee noted that this instrument is similar to the instrument described in Agenda Paper 17, but excludes the issuer’s option to settle early by delivering a fixed number of equity instruments.
• An IFRS 3 Business Combinations issue requesting the Committee to clarify the interaction of the requirements in IFRS 3 Business Combinations for identifying an acquirer with the requirements in IFRS 10 Consolidated Financial Statements for preparing consolidated financial statements.

A Committee member raised concern on the IAS 12 question as the Committee were unable to resolve a similar issue.

Another Committee member asked if the new issue on IFRS 3 will be addressed in the January meeting. Staff said they will bring it as they have done much of the work.

Other administrative matters

No other matters were discussed.