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Notes from the second day of IFRIC's April 2003 meeting

  • IFRIC (International Financial Reporting Interpretations Committee) (blue) Image

04 Apr 2003

Here are our unofficial notes from the IFRIC meeting on 2 April 2003.Notes from the IFRIC Meeting2 April 2003 Emission Rights A pre-ballot draft Interpretation was sent to the IASB Board for review.

The staff reported that six IASB members have raised serious reservations about the current draft for the following reasons:
  • Four Board members believe that emission rights should be required to be recorded at fair value (although this is inconsistent with IAS 38),
  • One Board member believes the liability should be raised as measured at market value, and
  • One Board member believes a separate asset should not be recognised.

The staff noted that some Board members believe that IFRIC should address the accounting for the issues on its agenda on a conceptual basis and should not be restricted by existing guidance. The IFRIC members expressed concern at this point as their mandate is to interpret existing guidance.

The IFRIC noted that emission rights granted meet the definition of a government grant under IAS 20 and until such guidance is replaced, that should be the basis for the interpretation. Given the fact several Board members do not like IAS 20, the decision to rescind IAS 20 must go through due process. Therefore, the final interpretation (assuming it is released prior to the rescission or amendment to IAS 20) will be based on IAS 20. A footnote pointing out the Board's intentions to rescind IAS 20 will be added to the Draft Interpretation.

The staff noted that the current requirement would most likely result in an asset and deferred income being recorded at the date the emission right was granted. However, the Board does not believe this deferred credit meets the definition of a liability. The IFRIC reiterated its conclusion that the current guidance will generally not allow immediate recognition of income and that the only other option is to record a deferred credit in the balance sheet. One observer noted that the fact that a deferred tax liability does not meet the definition of a liability (no current obligating event) has not stopped the Board before.

The IFRIC concluded that the deferred credit should be amortised to income on a systematic and rational basis. That is, the IFRIC will not prescribe an amortisation method, but will provide an example based on the units of emission. The IFRIC members agreed that impairment should not be addressed in detail in the final Interpretation.

A ballot draft will be sent to IFRIC members shortly for a final vote. No IFRIC member stated an intention to vote against the proposed ballot draft.

IAS 19, Employee Benefits - Money purchase plan with minimum guarantee

The staff came to the IFRIC with a first Draft Interpretation. The following issues were discussed:

1. Possible lack of convergence with US GAAP 2. The allocation of benefits to accounting periods when the benefit formula is stated in terms of current salary 3. The fact that the proposed methodology ignores expectations about future returns on the plan assets 4. How to allocate the change in the additional liability that arises from excess returns on plan assets between the expected return and actuarial gains and losses

The staff stated that the lack of convergence with US GAAP is based on the differences between the definitions of defined benefit plans and defined contribution plans themselves. Indeed, US GAAP is more focused on the nature of the benefit given to the employees rather than the employer's side. The IFRIC noted that the lack of convergence in this regard should not affect the progress of the project.

The staff noted that the allocation of benefits to accounting periods is a broader issue. The IFRIC decided that this issue should not be addressed in this project. For example, the EITF has discussed five different variations of the projected unit credit method.

The IFRIC confirmed that a projection of salary increases should not be considered in projecting the future benefit obligation-based on the facts of the plan considered. An IFRIC member proposed that actuaries be involved in the project to ensure the IFRIC is properly capturing the effect on the calculation.

Some IFRIC members expressed concerns about the drafting relating to points 3 and 4 above and asked the staff to redraft to make sure that the facts are directly linked to IAS 19. The IFRIC discussed the possibility of measuring the defined benefit piece and the defined contribution piece separately-recording the higher of the two calculations. No decisions were made. The IFRIC will continue discussion of this issue at a future meeting.

Non-monetary exchanges of assets

The IFRIC discussed an example of a non-monetary exchange of assets. The transaction was an exchange of A's 13% ownership in B for 13% ownership in C. The only asset of C is 100% ownership of B. In essence, A is in exactly the same economic position after the exchange (indirectly holding 13% interest in B through C) than before the exchange (directly holding 13% interest in B). The IFRIC concluded that they would be uncomfortable recording the investment in C at an amount other than the carrying amount of A's investment in B. However, they did not address what they would do if C had other operations.

The IFRIC decided not to take this item on its agenda as these issues are being addressed in the improvements to IAS 16.

Exchange rate for remeasuring foreign currency transactions and translation of foreign operations under IAS 21

The IFRIC discussed the selection of the appropriate exchange rate for translation and remeasurement when more than one exchange rate exists. There was general consensus that the exchange rate to be used must reflect economic reality. In addition, the IFRIC noted that they could not mandate illegal acts. Most IFRIC members were comfortable that the rate to be used must be a legal or de-facto legal rate.

The IFRIC decided not to take this on its agenda as the situations where a de facto legal rate does not exist are rare. In addition, the differences from a de facto legal rate and an illegal rate are generally immaterial.

Items not taken on the agenda

In addition to the two preceding items, the IFRIC considered to not take the following items onto its Agenda:

  • Equity method application (presumption of significant influence over operations of an investee if it holds directly or indirectly through subsidiaries, 20% or more of the voting power). Three examples were discussed. Nevertheless, these issues will be passed to the IASB staff on the Improvement project, to see if the wording of IAS 28 can be clarified.
  • Classification of treasury shares in the consolidated cash flow statement.
  • Reciprocal interests (treatment of shares of the parent held by a subsidiary or associate). This issue should wait until the Board has completed the amendments to IAS 27.

Hyperinflation and deferred tax

Neither IAS 29 nor IAS 12 specifically addresses the calculation of the comparative amount of deferred taxes when an entity in a hyperinflationary economy restates its financial statements.

The staff came to IFRIC with four different views on a specific example (asset, deferred asset and equity):

1. restatement approach (based on the restatement approach of IAS 29.34). 2. remeasurement approach (based on IAS 29.32) 3. combined approach (deferred tax is calculated after each components has been restated) 4. comparatives remain unchanged

Under the restatement approach, the answer will depend on whether the deferred taxes are considered as a monetary or non-monetary item.

The IFRIC did not reach a decision on this issue and will discuss whether it should be taken onto its agenda or not at a future meeting. In the meantime, the staff will work to clarify the examples in the agenda paper.

This summary is based on notes taken by observers at the IFRIC meeting and should not be regarded as an official or final summary.

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