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

Date recorded:

At previous meetings, the Committee 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.

The Committee asked that the staff develop a principle associated with the accounting for variable concession fees; recognising that it is linked to the more broad issue of variable payments for the separate acquisition of property, plant and equipment and intangible assets outside of a business combination.

At its November 2012 meeting, the Committee was presented with a number of models historically considered by the Committee in accounting for variable payments, including:

  • Applying the requirements in current IFRSs regarding the accounting for variable payments for the separate purchase of an asset;
  • The ‘IFRS 3 model’, based on the accounting for contingent consideration in IFRS 3 Business Combinations; and
  • The ‘Leases model’, based on the tentative decisions taken so far by the International Accounting Standards Board (IASB or ‘the Board’) in the leases project.

In considering application of the above models, the Committee discussed both the initial and subsequent accounting for variable payments.

The Committee could not reach a consensus on the extent to which variable payments should be included in the initial measurement of the liability on the date of purchase of the asset.

In discussing the subsequent accounting for variable payments, the Committee tentatively agreed that adjustments to the liability other than finance costs should, in some specific circumstances, be recognised as a corresponding adjustment to the cost of the asset acquired. This followed from a more broad discussion of when application of paragraphs AG7 or AG8 of IAS 39 Financial Instruments: Recognition and Measurement is appropriate.

The Committee directed the staff to prepare a paper to be presented at a future meeting outlining some illustrative examples of cases in which the remeasurement of the liability should be included as an adjustment to the cost of the asset. The Committee also requested that the staff consider the correlation between the initial and subsequent accounting for variable payments for discussion at a future meeting.

At this meeting, the staff presented its analysis regarding the subsequent accounting for variable payments, including illustrative examples. The staff recognised that in certain cases, IFRSs specifically define the subsequent accounting for variable payments. Based on its analysis of other IFRSs in accounting for variable payments, the staff believed that the adjustment of the carrying amount of a financial liability resulting from the application of paragraph AG8 of IAS 39 (which generally requires recognition in profit or loss) should be recognised as a corresponding adjustment to the cost of the asset to the extent that another IFRS requires so. Therefore, the staff recommended that the Committee amend paragraph AG8 of IAS 39 to say that an entity should recognise any adjustment of the carrying amount of a liability resulting from the application of paragraph AG8 in profit or loss unless another Standard requires otherwise. This proposed amendment is an attempt to clarify that even though IAS 39 specifies that any adjustment arising from application of paragraph AG8 should be recognised in profit or loss, it does not prevent another IFRS from requiring its capitalisation (e.g., IAS 23 Borrowing Costs requires interest expenses that are otherwise recognised in profit or loss according to IAS 39 to be capitalised in accordance with IAS 23). While acknowledging the broader question over application of paragraphs AG6-AG8 of IAS 39, the staff suggested the inclusion of no further guidance on the application of these paragraphs given that these paragraphs relate to the application of the effective interest method which is currently being discussed by the IASB as part of its project to replace IAS 39.

Many Committee members expressed concern with the proposals. Those concerns ranged from the more broad (Would this amendment be helpful to constituents given that the Committee failed to provide guidance on the extent to which variable payments should be included in the initial measurement of the liability and indeed whether a liability should be booked at all, and instead, only provides guidance on where to book the debit once you determine a liability should be booked?), to the more specific (Should an amendment also be proposed to IAS 16 and IAS 38 – instead of just IAS 39 – given that the core issue is whether a corresponding adjustment should be made to the cost of the asset acquired?).

On the former point, multiple Committee members asked about next steps on the issues in which the Committee was unable to reach a consensus, including the accounting for variable consideration on service concession arrangements. The staff noted it would report these issue to the IASB in hopes that it would consider these issues.

On the latter point, many Committee members supported amending IAS 16 and IAS 38 to specify requirements to recognise paragraph AG8 adjustments as a corresponding adjustment to the cost of the asset purchased entirely when the adjustment is a change of estimate.

When put to a vote, the Committee tentatively supported also amending IAS 16 and IAS 38 related to the subsequent accounting in circumstances where the adjustment is not dependent on the purchaser’s future activity.

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