Rights of Use

The IFRIC considered a draft Interpretation, Determining whether an Arrangement Contains a Lease. The staff provided details of editorial changes made as a result of comments from IFRIC members. The IFRIC approved the draft proposal for exposure (9-2).

Emission Rights

The IFRIC considered the comments received on the exposure draft D1, Emission Rights. The main categories of comments were:

1. Should the IFRIC proceed with the Interpretation at this time

Some respondents questioned whether it was appropriate for the IFRIC to issue an Interpretation at this time given that projects on the Board's active agenda (amendments to IASs 20 and 38 and Performance Reporting) affect the proposals. Other respondents considered the scope of the Interpretation to be very narrow and thought that the IFRIC should cover a wider range of emission rights schemes.

It was noted that the projects named were unlikely to be completed in the short-term. Some IFRIC members supported the comments that the scope was narrow. The majority however believed that sufficient schemes exist to warrant the interpretation and that it contained sufficient principles to provide guidance in other circumstances. Other specific schemes could however be dealt with separately if necessary.

2. Principal concerns of respondents

Many respondents commented on the lack of symmetry in measuring and reporting the changes in the three elements in the scheme (the allowances, the liability for emissions to date, and the government grant). These respondents were concerned that the lack of symmetry resulted in an entity reporting artificial volatility in its income statement.

Many respondents commented that reporting under D1's proposals failed to reflect the substance of an emission rights scheme. Some respondents therefore proposed alternative accounting solutions. These included:

• A net model, under which an entity does not recognise allocated allowances, and accounts for actual emissions only when it holds insufficient allowances to cover those emissions.
• An amortising model, under which an entity recognises allocated allowances as an asset, but then amortise the allowances as it pollutes. The entity therefore recognises a liability for actual emissions only when it holds insufficient allowances to cover those emissions.

Other respondents suggested amendments to the IFRIC's proposals. These included:

• Measuring the liability that the entity incurs as it emits at the cost of the allowances held by the entity.
• Accounting for the allowances as financial assets and measuring them at fair value with gains and losses recognised in income.
• Classifying the allowances as a derivative and accounting for them as a cash flow hedge.
• Amending IAS 38 so that gains and losses on allowances are recognised in income rather than equity.
• Measuring the government grant by reference to the market value of the number of allowances it represents.

The IFRIC confirmed its belief in the gross approach and rejected the netting of the asset and liability. In addition the IFRIC did not support the amortisation approach. The wording will be clarified regarding the non-amortisation of the intangible asset.

The amendments to the proposals suggested by commentators were considered. The IFRIC agreed to continue with the proposals as exposed in these regards but that the Board should be informed that IFRIC believes a better approach would be to require revaluation of the intangible asset through the profit and loss statement and that this would require an amendment to IAS 38.

It was agreed to proceed with the interpretation, to draft a proposed amendment to IAS 38 to require fair value for these intangible assets and request the Board to either approve the interpretation as exposed, or expose the proposed amendment and delay the interpretation.

3. Other issues

The IFRIC discussed some of the other issues raised by respondents:

• Is it appropriate for the IFRIC to eliminate an option in a Standard? The IFRIC believed that the Board would only allow the interpretation to be issued if they are comfortable with the restriction and consequently did not need to address this issue further.
• Are allowances and/or Renewable Energy Certificates inventory? The IFRIC concluded that the emission rights are not inventory.
• Should the government grant be recognised in income immediately rather than recognised as a deferred credit? The IFRIC did not support the suggestion that the government grant should be treated as immediate income.
• Should the Interpretation specify disclosure requirements? The IFRIC did not believe disclosure requirements should be specified.
• Should the Interpretation include guidance for those cases where allowances are not traded in an active market?

The IFRIC did not support providing additional guidance in this area.

Decommissioning and Environmental Rehabilitation Funds

The IFRIC will consider a draft of an interpretation, which incorporates the Board's decision to amend the scope of IAS 39 to exclude rights to reimbursement. This decision would result in all rights to reimbursement falling under the scope of IAS 37 and enable the IFRIC to provide guidance on the measurement of such asset arising from these funds.

The IFRIC discussed the requirement to fair value the right to access the assets in the fund. It was noted that this fair value would include the risk of default of other participants in the fund. Additional contributions as a result of there being insufficient funds as a result of default of another party would still be treated as a contingent liability.

The IFRIC agreed with this approach. It was noted that this would give rise to an immediate loss on making a contribution to the fund.

The IFRIC approved the document for exposure subject to the changes detailed above and a review of those changes.

Accounting for Service Concession Arrangements

The IFRIC considered the recommendations from standard setters' research group into accounting for service concession arrangements.

They requested that IFRIC should clarify how the IASB's existing literature applies to service concessions. The IFRIC commenced discussing the issues identified in the research paper. The initial objective will be to consider the issues to be addressed, the order in which they might be addressed, and the form any output should take.

The IFRIC had a discussion on the scope of the project or projects and what approaches could be discussed. The IFRIC decided to include the following issues in the project scope:

• Is lease accounting the appropriate model to apply in accounting for service concession arrangements and similar arrangements?
• When considering whether an arrangement involves a lease and when classifying the lease, should:
• The arrangement be considered as a whole or should each potential transfer of property, and each major component transferred, be accounted for separately, and
• Is a components approach practical?
• Do any obligations arise under arrangements like service concession arrangements that are not lease obligations or other obligations that relate to equally unperformed executory contracts?
• Is guidance needed on how to apply IAS 17's "substantially all the risks and rewards incident to ownership" test to arrangements, such as service concession arrangements, that involve several potential linked transfers.
• When in practice would it be appropriate to apply percentage of completion accounting for service concession arrangements and which model should be applied?

Onerous Contracts

This issue was not discussed.

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