Notes from the IFRIC meeting on 4 February

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06 Feb 2003

The International Financial Reporting Interpretations Committee (IFRIC) met on 4 February 2003. Our unofficial notes of the meeting are as follows.

IFRIC will continue its meeting on 5 February:

Notes from the IFRIC Meeting4 February 2003


Ken Wild and Jeannot Blanchet were welcomed to their first IFRIC meeting. Norman Lyle attended as alternate to Clement Kwok.

Rights of Use

The IFRIC continued its discussion of determining when a contract that gives an entity the right to use an asset should be accounted for as a lease. The staff proposed that in assessing whether a lease had arisen all of the following criteria should be present:

  • the agreement is dependent upon a specific item or items ('the asset');
  • the entity obtains control over that asset for a specific period of time; and
  • the entity is contractually, or in substance, required to make payments under the agreement for its right to use the asset rather than for its actual use. Previously it had been proposed that a lease would have been considered to exist when an entity that had rights to acquire substantially all of the output produced by an asset was deemed to have control over the asset (as specified by the above criteria), but only if the supplier obtained a return that was commensurate with that which would be obtained by an asset manager or operator. The requirement to consider the supplier's return was therefore eliminated as it was not considered to be important in assessing whether a lease existed but whether the lease would be an operating or finance lease. Some IFRIC members were concerned that this could result in an inappropriate definition of control arising and were more comfortable with the inclusion of conditions indicating that the payments were in respect of the right to use the asset and not for the actual use of the asset or its output. These members referred the staff to the current EITF proposals in this regard and requested the staff to liaise with the EITF to arrive at similar wording. The IFRIC supported that any agreement that fell within the ambit of the interpretation should be assessed at the inception of the contract and should only be reassessed if there was an amendment or significant modifications to the agreement. Thus the agreement would not be reassessed if there was only a change in circumstances. It was agreed that the interpretation on issue should have retrospective application. One member of the IFRIC strongly disagreed and it was agreed that this would be referred to in the Basis for Conclusions with a specific request to comment. It was agreed that the staff would draft a proposed interpretation to be circulated to the IFRIC prior to the next meeting with a view to finalising the interpretation for exposure at the next meeting. Emission Rights IFRIC previously had agreed that the proposed interpretation should make reference to IAS 20. As a result of the Board's decision to withdraw the current IAS 20 and replace it with something that has not yet been decided it was questioned whether this approach should continue. There was considerable concern amongst various IFRIC members that there should not be an immediate gain recognised on recording the emission certificates as an asset. It was noted that it could be difficult to include alternatives to IAS 20 in the absence of any clear guidelines from the Board as to what they believed the accounting for government grants should be and in the absence of any due process in this area. It was agreed that the interpretation should continue to refer to IAS 20 but that a section would be included in the preamble to the proposed interpretation regarding accounting for these grants in the absence of IAS 20 and requesting comment in this area. It was agreed that the government grant should be taken to income on a systematic basis over the period to which it relates. It was agreed that the staff would include guidance that the liability to be recognised in respect of the environmental damage would be based on the best estimate of whether it would be settled by the delivery of emission certificates at their current market value or the penalty provisions of the scheme as a result of sufficient certificates not being available. It was agreed that the interpretation would not address accounting by traders in emission certificates. An IFRIC member noted that the proposed effective date of three months after issue seemed to be fairly short. It was agreed that the staff would address the issues raised and that a draft interpretation would be prepared with a view to approving it for issue at the next meeting. Employee Benefits - Multi-Employer Plan Exemption The staff proposed guidance that would be issued on when the exemption regarding accounting for multi-employer defined benefit plans as defined contribution plans would apply. The IFRIC noted that it would be extremely rare for the situation to exist that there was no consistent and reliable basis for allocating the obligation, plan assets and cost to individual entities participating in the plan. They agreed that the interpretation would contain wording indicating this. They further agreed that the interpretation contain guidance that indicated that significant effort needed to be made before concluding that the information needed would not be available. An IFRIC member stated that the proposed interpretation should address the measurement implications of cross subsidisation inherent in these plans. It was agreed that the staff would address the issues raised and that a draft interpretation would be prepared. Employee Benefits - Money Purchase Plans with Minimum Guarantee The IFRIC considered how to apply IAS 19 to a plan that would be a defined contribution plan but for the existence of a minimum return guarantee. The terms of the plan are that a contribution is made each year based on the employee's current salary and the employee receives a benefit (a lump sum or an annuity) equal to the contributions paid into the plan plus the return generated on the assets acquired. The employer guarantees a minimum return on the assets over the period to when the benefit is paid. The IFRIC agreed that such plans should be accounted for as defined benefit plans. It was proposed that this would be done by accounting for the minimum return as the defined benefit plan with an additional liability recognised in respect of the excess return on assets over the minimum guarantee. Some concern was raised as how this relates to the position that the minimum guarantee is determined over the employee's service and consequently excess returns in a particular period could be used to offset lower returns in other periods. Further concern was raised that the corridor approach would apply to accounting for returns on assets in excess of that expected whereas the increase in liability would be immediate. It was agreed that the staff would consider these points and bring the issue back to the IFRIC with further proposals.

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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