IAS 16 — Property, Plant and Equipment, IAS 38 — Intangible Assets and IFRIC 12 — Service Concession Arrangements

Date recorded:

Agenda Paper 6: Variable payments for asset purchases and payments made by an operator to a grantor in a service concession arrangement

The Senior Technical Manager informed the Committee that the agenda paper addressed two issues, one concerned variable payments for asset purchases and the other variable concession fees payable by an operator under a service concession.

The Committee had discussed the issues previously and had reached a consensus on several issues including the subsequent accounting for variable payments for asset purchases and payments by an operator to a grantor. However, the Committee had been unable to reach a conclusion on the issue of variable payments dependent on future activities.

Based on the conclusions reached, the Committee had recommended to the Board to consider amendments to IAS 16, IAS 38 and IFRIC 12. The Board had decided that it would only consider the project after the deliberations on the leases project had completed. As the discussions on leases were substantially completed, the staff suggested starting to reconsider the issue. None of the Committee members objected.

Agenda Paper 6A: Variable payments for the purchases of property, plant and equipment and intangible assets

The Senior Technical Manager continued with variable payments for asset purchases. He said that the accounting for variable payments in the leases project could also be applied to asset purchases. This would implicate that variable payments dependent on an index or a rate would be included in the initial measurement of the liability, whilst other variable payments would be excluded. Subsequent adjustments of payments based on an index or a rate would be recorded against the cost of the asset. Subsequent adjustments of other variable payments would go through profit or loss under the leases proposals. However, the staff recommended to the Committee to retain their previous position that those payments were recognised as corresponding adjustments to the cost of an asset to the extent that those payments were associated with future economic benefits to be derived from the asset.

The Chairman asked whether the issue should be discussed for all asset purchases first and then for service concession agreements. The Committee agreed with that.

One observing IASB member agreed that the timing was right for the project; however she was concerned with the proposed leases analogy as the leases discussions were much broader. The main objective of the leases project was to bring leases on the balance sheet and she expressed strong concerns about using the rationales developed as a starting point for all assets. She also warned about potential knock-on effects on other topics like hedge accounting. In addition, it would be difficult to scope the project.

Another observing IASB member expressed support for the proposed inclusion of subsequent adjustment of variable payments in the cost of the asset as the cost definition was met in his view.

Several Committee members agreed with the proposal but expressed a desire for a conceptual basis. Many were unhappy with the leases analogy as leases were a special case. One Committee member mentioned that the accounting requirements for leases scoped out all other kinds of transactions. Others expressed concern about the message sent to constituents when postponing a project to wait for the outcome of the leases project and then stating afterwards that leases were unrelated to the project. One Committee member said that the project should be put on hold until the final leases document would be published. The Chairman replied that the leases document was in pre-ballot stage and that it was unlikely that there would be major changes during the ballot process. A Committee member suggested focusing on the submission which only concerned service concessions.

Some Committee members requested to link the accounting for the liability to the proposed Conceptual Framework where one feature of a liability was no practical ability to avoid the obligation. One Committee member said that the rationale applied in IFRIC 1 should also be applied here.

A fellow Committee member highlighted the fact that the accounting treatment would be different if the asset was part of a business acquired. A Committee member added that constituents had proposed analogising IFRS 3. However the IFRS 3 rationale for not including subsequent changes in the acquisition price was that pre-combination and post-combination parts of subsequent changes could usually not be distinguished. This would not be the case with a single asset.

Some Committee members suggested focusing on the question of what the variable payments were for. One Committee member said that they might be variable but that did not mean automatically that they were uncertain. An observing IASB member indicated that these payments could be a form of financing. A Committee member suggested differing between payments that were financing and payments that were dependent on external events. One Committee member said that it should be considered that the vendor could have an asset, depending on revenue recognition requirements.

The Chairman proposed that the staff should bring back a paper in which they present an analysis of why the Interpretations Committee should consider the implications of using the leases rationale for this issue.

Agenda Paper 6B: Payments made by an operator to a grantor

The Senior Technical Manager introduced the agenda paper and said that the Committee had previously decided to consider the substance of the payment when selecting the accounting. If the payment gave right to a good or service then this good or service should be accounted for under the applicable standard. If the payment was linked to a right of use of a tangible asset, that element of the concession arrangement would be an embedded lease if the operator controls the right of use asset. All other payments should be accounted for under the intangible asset model, the financial asset model or the hybrid model depending on the principles of IFRIC 12. The Senior Technical Manager asked the Committee to confirm this previous position.

Many Committee members still supported the conclusions reached in previous discussions. One Committee member warned, however, not to publish an opinion on this issue without having reached a consensus on variable payments for assets. He said if the payments were included in the liability, they should also be included in the asset. One Committee member was concerned that the proposals could lead to a different treatment of an intangible asset under IAS 38 and IFRIC 12. A fellow Committee member warned that concessions can be very long and that the inclusion in the cost might not provide useful information in that case.

The Chairman concluded that service concessions should be included as a special case in the paper to be drafted by the staff.

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