Notes from IFRIC Meeting of December 2004

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

05 Dec 2004

The International Financial Reporting Interpretations Committee met at the IASB's offices in London on Thursday, 2 December 2004. Presented below are the Deloitte observers' preliminary and unofficial notes from that meeting:Notes from the IFRIC Meeting2 December 2004 Administrative matters The Chairman welcomed Mike Bradbury, Professor of Accounting at Unitec in New Zealand, to his first meeting as an IFRIC member.

A second new IFRIC member, Jean-Louis Lebrun, Partner and Chairman of the Supervisory Board of Mazars, France, has been appointed but was unable to attend the December meeting.

IAS 1 Presentation of Financial Statements

The IASB considered at its November meeting whether it would be beyond the IFRIC's remit to develop a Draft Interpretation that would prohibit particular opportunistic practices regarding the presentation of expenses in income statements. The IASB agreed that the development of an interpretation prohibiting the exclusion of certain 'unusual' expenses from the classifications to which they relate would not be appropriate. The IASB believed that this matter should not be considered outside of its own project on reporting comprehensive income. However, the IASB did support the development of an interpretation prohibiting the inappropriate presentation of particular expenses below the results of operating activities (when an entity elects to disclose such a sub-total). The IASB specifically supported the IFRIC developing an interpretation which would draw out the principles contained in BC 13 of IAS 1.

The IFRIC discussed whether the latter item should be taken on to its agenda. The difficulties of providing an interpretation about 'operating activities' (a term deliberately removed from IAS 1), which is not a defined term, were discussed. The IFRIC concluded that a meaningful interpretation could not be developed within the framework of the existing IAS 1. The IFRIC noted that it was not that BC 13 is 'only' part of the Basis for Conclusions that was causing the problem, it was that there is really an open forum for entities to define 'operating activities' as they see fit if they wish to disclose such a total. The staff will revert to the Board with the IFRIC's conclusion.

IFRIC Interpretation 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental Funds

In November the IASB voted to issue IFRIC Interpretation 5 and the consequential amendments to IAS 39 arising. However, concern was expressed about the intended effective date (three months after the date of issue). Board members requested that the effective date be amended to 1 January 2006 in order to avoid the issuance of any amendments to IAS 39 that would be effective for the year beginning 1 January 2005. The IFRIC agreed to this amendment. The expected publication date of IFRS 5 is 16 December 2005.

Service Concessions

The IFRIC considered a number of amendments to the draft interpretations on service concessions.

D11 Determining the Accounting Model

The IFRIC considered the drafting of the Basis for Conclusions which details the alternative methods by which the line between the financial asset model and the intangible asset model could be drawn. The IFRIC agreed, subject to some minor amendments, that the drafting captured adequately the debates held and the range of views expressed by IFRIC members on this topic.

The IFRIC considered the drafting of the Basis for Conclusions in relation to sale of infrastructure by the grantor to the operator. The IFRIC had noted in the May 2004 meeting that there were some difficulties in reconciling the revenue recognition criteria for a sale in IAS 18 with those for a sale and lease back in IAS 17. The IFRIC agreed that the Basis for Conclusions should simply note that the IAS 18 criteria are used because the interpretations deal with the right of the access rather than the right of use, and that new derecognition criteria are not being developed in the interpretation. The IFRIC agreed that the issues of reconciling the requirements of IAS 17 and IAS 18 have broader application than to service concessions alone, and therefore this issue should be considered by IFRIC as a separate project.

The IFRIC considered the comments in the Basis for Conclusions regarding situations where infrastructure is used for both regulated and unregulated purposes. It was agreed that the Basis for Conclusions should not go into this in great detail as, per previous IFRIC discussions; it is not possible for the interpretation to address every possible scenario, a fact which has been stated in the draft interpretation.

The IFRIC agreed to the inclusion of drafting which would be interpreted that an arrangement could be accounted for using a different model simply by undertaking some 'cheque-passing' activities.

The IFRIC agreed that subject to the edits requested, the draft interpretation should be issued.

D12: The Financial Asset Model

The IFRIC agreed with the staff's analysis that the interpretation effectively prevented financial assets arising from concession arrangements from being classified as held to maturity investments, and agreed to include an explanation of the reasons for this in the basis for conclusions.

The IFRIC noted that the transitional provisions contained in the draft interpretation would not be available to first-time adopters, and accordingly an amendment to IFRS 1 would be required. The IFRIC agreed that, similar to the proposals for existing IFRS users, the IFRS 1 requirement ought to be that existing service concession assets should be reclassified as they would be under the interpretations but need not be remeasured in accordance with the interpretations. Therefore, depending on previous accounting treatment, it is possible that assets and liabilities may be entirely derecognised on transition because they do not meet the recognition criteria. However, the first step would be to reclassify those amounts which do meet the recognition criteria.

The IFRIC noted that the effect of caps and floors on service concession arrangements was discussed in D13 but not D12. Previously the IFRIC had decided that while D11 would direct you to the treatment required either by D12 and D13, the two would not be stand alone documents, that is, irrespective of which model you were using, there would be relevant information in both interpretations. The IFRIC reversed this decision and agreed to amend interpretations D12 and D13 should be stand alone documents and should be made to be as consistent as possible with one another.

The IFRIC noted that the discussion explaining that financial assets are not qualifying assets (and therefore borrowing costs cannot be capitalised on those assets) had wider application than to service concessions. The IFRIC agreed that the media release accompanying the release of the draft interpretations should highlight to interested parties the range of issues covered and that many of them have broader application to companies not involved in service concessions.

The IFRIC agreed, subject to the amendments, that the draft interpretation should be issued.

D13: Intangible Asset Model

The IFRIC agreed to some wording in the basis for conclusion explaining why interest rate methods of depreciation are considered inappropriate. The IFRIC also agreed to some wording explaining the measurement of revenue on the exchange of assets. They discussed the interaction of IAS 18 and IAS 38, and possible inconsistencies between the two, but agreed to remain silent on this matter. Some wording from IAS 38 will be included in the basis to explain the measurement, and it will be clarified that when the intangible asset is ready for use borrowing costs should cease being capitalised.

The IFRIC noted that accounting for hand-over obligations had a broader application than simply to service concessions, and agreed that rather than being addressed in this project it should be addressed as part of a separate project in the future.

The IFRIC agreed, subject to the amendments, that the draft interpretation should be issued.

The IFRIC agreed that worked examples should be developed and made publicly available during the exposure period. They agreed to consider the worked examples at the February 2005 meeting, but that the publication of the text of the draft interpretations should not be delayed by the development of the worked examples. Accordingly, amendments to the draft interpretations will be made and they will be circulated for out of session approval (unless the resolution of any issues raised by IFRIC members proves to need in session discussion) and made available. The 90-day comment period will be counted as starting from the date the worked examples are made available.

IAS 39 Financial Instruments: Recognition and Measurement - Reassessment of Embedded Derivatives

The IFRIC discussed whether the requirement in IAS 39 to assess whether there is an embedded derivative which must be separated is required to be reassessed, and if so how often. The IFRIC agreed that an interpretation should be developed prohibiting the reassessment. In coming to this conclusion the IFRIC noted that the intention of the Board in requiring the separation of embedded derivatives was to prevent entities from deliberately including in a single instrument items which should rightly be accounted for separately. The IFRIC agreed that matters which would result in such a reassessment requiring an existing instrument to be separated are things such as fluctuations in currency which are outside the control of the entity, and therefore a requirement to reassess would be inconsistent with the Board's objective. In addition it was noted the practical difficulties of reassessing all of the entities instruments on a regular basis are significant.

The IFRIC then discussed whether first-time adopters should be required to reassess whether embedded derivatives that ought to be separated exist as at the date of transition, or at the inception of the instrument. The IFRIC agreed that, despite the difficulties of hindsight, the assessment must be made as at the date of inception of the instrument.

Staff will bring a draft interpretation to a future meeting based on these decisions.

Activities of Other Interpretation Bodies/ Report of Agenda Committee

It was noted that as the IFRIC Agenda Committee did not meet in November there were no matters to be brought to the attention of the full IFRIC.

IFRS 2 - Changes in Contributions to Employee Share Purchase Plans

The IFRIC considered a draft interpretation based on the decisions made at the November meeting that when an employee ceases to contribute to an Employee Share Purchase Plan and is therefore not able to buy shares under the plan, this is accounted for as a cancellation, and immediate recognition of the expense that otherwise would have been recognised during the vesting period is required. Where an employee changes from one plan to another the entity should determine whether the new plan is considered to be a replacement for the old plan. If it is, this is considered a modification. If it is not, the cessation of contributions to the old plan must be treated as a cancellation and the admission to the new plan as a new grant.

The IFRIC agreed that this interpretation should apply retrospectively, subject to the requirements of IFRS 2, and where relevant IFRS 1. The staff agreed to consider whether an amendment to IFRS 1 is required to reflect this.

The IFRIC agreed to include in the basis for conclusions some of their discussions around the importance (or lack thereof) of who is considered to be cancelling the employee's involvement in the plan. They also agreed to clarify that there is no accounting impact on the IFRS 2 expense if the employee goes the whole way through the savings plan but then elects not to buy the shares. In addition the interpretation would note that where an employee leaves this is considered to be forfeiture - the interpretations will only apply when the employee continues to be employed.

The IFRIC agreed, subject to the resolution of the issue as to whether IFRS 1 requires consequential amendment and editorial amendments that the draft interpretation should be issued with a 75-day comment period.

IFRS 2: Scope

The IFRIC discussed a draft interpretation which included a rebuttable presumption that where en entity issues equity instruments for less than their fair value, additional goods or services are received as well as the cash or other consideration.

It was noted that the interpretation as currently drafted would require an entity to determine the fair value of equity instruments issued as consideration for goods or services, in order to determine whether they were within the scope of IFRS 2. However having determined they were within the scope, the expense should be measured at the fair value of goods or services received and therefore the determination of the fair value of the equity instruments would not be needed to complete the accounting. Therefore the interpretation as drafted would require entities that would otherwise not be required to determine the fair value of the equity instruments issued to do so.

The IFRIC agreed to proceed with a draft interpretation which contained a presumption that when you are dealing with non-employees you are able to identify goods and services received. Where the fair value of those goods and services appears consistent with the fair value of the equity instruments issued, the share-based payment is measured at the fair value of the goods and services received. However, if goods or services are not readily identifiable, or their value does not seem consistent with the fair value of the equity instruments issued an entity must consider what other goods or services they received in exchange for the instruments. The use of the term 'consistent' is designed to ensure entities that appear to be making a simple transaction of goods for equity instruments worth more or less the same amount are not forced into an exercise of fair valuing the equity instruments issued.

The IFRIC discussed briefly whether there was any inconsistency between this conclusion and paragraph 31 of IAS 32 in respect of compound financial instruments. After a brief discussion it was determined that no inconsistency existed.

The IFRIC discussed whether there were any implications of its decisions for group transactions. It was agreed that IFRS 2 could only be relevant in a situation where there is a transaction in which the fair value of the investment acquired is less than the fair value of shares issued, and the company whose shares are being exchanged is not an associate, joint venture or subsidiary of the company receiving its shares. Even in this scenario this would be a transaction within equity amongst the group companies.

The IFRIC will consider a re-drafted interpretation at its February meeting.

IFRS 2: Treasury Shares and Group Transactions

The IFRIC considered a number of examples of cases where an entity provides its employees with share-based payments where the shares are those of its parent rather than itself, or acquires treasury shares in order to satisfy share-based payment obligations.

The first example is a single entity which voluntarily purchases its own shares on the market to satisfy share based payment obligations - it was agreed that such a transaction should be treated as an equity settled share based payment in accordance with IFRS 2.

The second example is where a single entity must mandatorily purchase its own shares to satisfy a share based payment obligation. It was agreed that this is an equity settled transaction, and the question of whether a liability should be raised for the obligation to purchase own shares is a question of interpretation of IAS 32 rather than IFRS 2 and should not be addressed in this project.

The third example is where a subsidiary grants share options over shares in the parent. A majority of IFRIC members agreed that this should be treated as equity settled, and that this was consistent with paragraphs BC19-BC22 of IFRS 2, and the reference to issuance of shares from other group entities in paragraph 11 of IFRS 2. It was agreed that IFRIC should expose only this view, although a minority of IFRIC members expressed the view that this conclusion results in very different accounting depending on how the intra-group expense allocation is handled, and particularly whether payments are required from the subsidiary to the parent (as noted in examples 5 and 6).

The fourth example is where the subsidiary grants share options over shares in the parent and the parent levies an inter-company charge. The IFRIC agreed this should be treated as an equity settled transaction.

In the fifth example the subsidiary grants share options over shares in the parent which it buys in the market. It was agreed this must be treated as cash settled because the subsidiary is giving up another asset (its shares in the parent rather than its own equity) to settle the share based payment obligation. Similarly in the sixth example where the subsidiary grants share options over shares in the parent which it buys from the parent this should be treated as a cash settled payment of the subsidiary.

In example seven, where there is a group transfer of employee from one member of a group to another. Any difference between the total of amounts recognised in subsidiary's accounts and the amount determined at the group level should be treated as a consolidation adjustment. The IFRIC noted that the accounting would vary depending on the form and structure of the group scheme, which are often structured in a manner designed to be tax effective. The IFRIC noted that there were future issues to be considered in terms of inter-company transactions including those related to transfer pricing and related parties, which are wider reaching than IFRS 2 issues alone and should be addressed separately.

The IFRIC considered briefly a situation where the subsidiary grants a cash-settled share appreciation right based on the parent's share price and agreed that this is outside of the scope of IFRS 2 and within the scope of IAS 19.

The IFRIC agreed that the key example was example three and that this should be converted into text for an interpretation, including the journal entries. The flow of logic used in getting to this conclusion (example 1, 2 and 4-6) should be explained in the basis for conclusions.

The IFRIC will consider a draft interpretation at a future meeting.

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

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.