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

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09 Feb 2003

The International Financial Reporting Interpretations Committee (IFRIC) met on 5 February 2003 – the second day of a two-day meeting.

Our unofficial notes are presented below:

Notes from the IFRIC Meeting5 February 2003

Changes in Decommissioning and Similar Liabilities

The IFRIC discussed several issues related to decommissioning and similar liabilities. The members noted that changes in the liability could be caused by changes in the discount rate, useful life of the asset and/or estimates of future cash flows. The IFRIC concluded on practical grounds that the portion of the asset related to prior years should be expensed and the portion related to future years should be capitalised to the asset for all changes in the liability. Two methods of allocation were discussed, however, the IFRIC decided that any means of reasonable allocation would be appropriate under the draft interpretation. Therefore, the draft interpretation will state a general principle or pro-rating and provide an example of one method that may be used to calculate the amount related to prior periods.

The IFRIC concluded that if a new law is enacted which creates a decommissioning obligation on an existing asset, then the debit should be to the asset-with a pro rata portion assigned to prior years. Changes in existing laws would be accounted for similarly. The IFRIC clarified that the portion allocated to the asset should be based on the assets expected remaining economic life (including reference to the potential annual evaluation of residual values and useful lives under the improvements to IAS 16). The IFRIC also clarified that a negative asset should never occur under this interpretation.

One member expressed a position that the change in the liability should be expensed entirely, however, the IFRIC decided that the change is a change in the original cost of the asset and a pro-rata portion should be assigned to it.

The IFRIC concluded that transition should be prospective. One observer noted that prospective application may be in conflict (depending upon the effective date of the final interpretation) with the first time application which will require retrospective application. The staff will consider the effect of this draft interpretation in drafting and in consideration of an appropriate effective date.

The IFRIC concluded to retain a cumulative catch-up method for changes in estimates (as noted above). The IFRIC concluded that the draft interpretation should not contain guidance on the income statement presentation of changes in decommissioning liabilities. The IFRIC also decided that the draft interpretation should include disclosure guidance.

The staff will prepare a pre-ballot draft for the members and depending on comments received, a ballot draft will be distributed shortly thereafter with the intention for an exposure draft either in late quarter 2 of 2003 or in quarter 3 of 2003.

Decommissioning Funds

The IFRIC concluded that the draft interpretation should be structured so that it states that the accounting for the liability (from which the fund is required or voluntarily entered into) should not impact the accounting for the contributions made to the fund. The first step will be to determine whether the fund should be consolidated by the contributor by reference to IAS 27 and SIC 12. If control does not exist, the entity will need to determine whether significant influence exists and therefore whether the fund is an associate. The entity will then need to determine the extent of its guarantee on the liabilities of others in the fund.

The IFRIC members agree to address the issue of silos separately from this interpretation. The IASB staff clarified that the virtually certain test in IAS 37 should be applied to whether the liability will be incurred, not whether the reimbursement will occur. The test for the reimbursement would be based on the definition of an asset, or probable.

The IFRIC concluded that the right to receive reimbursement from the fund meets the definition of a financial instrument and should be accounted for as an originated loan under IAS 39. However, the IFRIC expressed doubt that the information will be available to compute amortised cost (duration, interest rate, etc.) and therefore believe that in the absence of such information, the asset should be recorded at fair value as a held for trading security. Since the expense related to the liability would be running through expense, the IFRIC believes the income from the asset should also be to earnings.

The IFRIC concluded that decommissioning funds are not similar to insurance contracts and that the requirements in IAS 19 should not be applied by analogy.

Presentation - Operating and Ordinary Activities

After much debate, the IFRIC decided not to address this issue, as any conclusions would pre-empt an ongoing IASB project on performance reporting. The IFRIC, however, made clear that this issues is important in practice and must be addressed immediately.


The IFRIC concluded that the draft interpretation should not address situation where one contract should be divided into two or more components and agreed on certain disclosure requirements. IFRIC also agreed to expand the name of the project to "Reporting of Linked Transactions".

The IFRIC concluded that the guidance for when to link transactions should be characterised as indicators. The Staff asked the IFRIC members whether the final conclusions should be documented as an interpretation or given to the Board to be issued as a standard. The IFRIC concluded that preparation of a pre-ballot draft for an interpretation should continue unless instructed by the Board that this should be issued as a standard.

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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