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Notes from the 3-4 February 2004 IFRIC meeting

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

06 Feb 2004

The International Financial Reporting Interpretations Committee (IFRIC) met at the IASB offices in London on 3 and 4 February 2004. Presented below are our observers' preliminary and unofficial notes from the meeting.Notes from the IFRIC Meeting3-4 February 2004 Tuesday, 3 February 2004 D2 Changes in Decommissioning, Restoration and Similar Liabilities The IFRIC discussed several issues related to the scope of the draft interpretation for changes in decommissioning, restoration, and similar liabilities.

The IFRIC agreed to expand the scope to include liabilities recognised as part of the cost of mineral rights and mineral reserves such as oil, natural gas, and similar non-regenerative resources. However, the IFRIC decided not to expand the scope to address whether new liabilities that arise after the asset is recognised (for instance, as a result of a new law) should be expensed or capitalised.

The IFRIC discussed whether the zero-asset floor should consider the entire cost of the asset (including the decommissioning layer) or the cost of the asset excluding the layer. The IFRIC agreed that the entire cost of the asset should be considered when determining the amount to write off against the asset and the amount to expense. The IFRIC did not address how to account for costs previously expensed as a result of the zero-asset floor when the asset is subsequently written up.

The IFRIC discussed whether the transition should be retrospective under IAS 8. The members noted that IFRS provides an impracticability exception that should make the transition easier for older assets. Some members noted that the retrospective approach in the exposure draft would be preferable for first-time adopters. The majority of IFRIC members felt that an exception to IFRS 1 was not desirable. The IFRIC decided to recommend a 3-month effective date if the final Interpretation is issued by March 2004. A longer effective date will need to be reconsidered if the publication date is much later than March 2004.

The staff will proceed with a ballot draft to be issued (preferably) before the next IFRIC meeting. One member indicated an intent to dissent to the interpretation on grounds that all changes in the liability should be recognised in the P&L immediately; two other members said they may dissent for the same reason. One IASB Board member noted that he objects to issuing this interpretation for the same reason as the dissenting IFRIC member and would try to convince the other IASB members to also dissent. The staff noted that they did not believe the IASB would reject this document.

First-time Adoption of IAS 29 Financial Reporting in Hyperinflationary Economies

The IFRIC continued its discussion of the appropriate financial reporting when an entity begins to apply IAS 29. The IFRIC noted that this is not a change in accounting policy, but rather a change in circumstance (an economy becoming hyperinflationary). However, the IFRIC agreed that the commencement of accounting under IAS 29 should be treated similarly to a change in accounting policy, and consistent with IAS 8 an entity should apply IAS 29 as if it had always applied the standard where practicable.

The IFRIC approved issuance of a draft interpretation subject to any minor editorial amendments.

Emission Rights

The staff updated the IFRIC on the progress and plans for this project. Consistent with the decision made by the IFRIC in December, the IASB decided to amend IAS 38 with the result that the emission rights and liabilities should be measured at fair value, with changes in value recognised in profit and loss. The IASB has decided that the IFRIC should re-expose its interpretation on emission rights at the same time as the Board exposes its intention to withdraw IAS 20 and to amend IAS 38. An exposure draft is expected in June 2004 with a final interpretation issued in November 2004. The staff was unclear whether it would recommend a required effective date for those adopting IFRS in 2005.

IAS 19 Employee Benefits - Plans with a Guaranteed Minimum Return

The IFRIC continued its discussion of applying IAS 19 to a plan that would be a defined contribution plan but for the existence of a minimum return guarantee. Previously the IFRIC had concluded that such plans must be treated as defined benefit plans. The IFRIC determined that until such time as the corridor approach is removed from IAS 19 it must be included in the IFRIC interpretation. However, the IFRIC asked that its conceptual disagreement with the application of the corridor approach to this situation should be specifically included in the basis for conclusions.

The IFRIC determined that where assets are not plan assets as defined in IAS 19, they should be treated as notional assets. A definition of notional assets that includes those relevant assets that are not held by a plan will be drafted and included in the interpretation.

The IFRIC considered a revised example that uses the straight-line allocation method to illustrate that the assessment of whether higher levels of benefit are attributed to later years of service would have to take into account expected future salaries. The IFRIC agreed that the example was appropriate.

The IFRIC agreed that subject to the amendments above, and any minor editorial amendments, the document should be issued as an draft interpretation.

Recognition and Measurement of Biological Assets and Agriculture Produce in Accordance with IAS 41 Agriculture

The purpose of this project is to provide the IASB with suggested wording to amend certain requirements and statements in IAS 41.

The IFRIC discussed the appropriate method for determining fair value in measuring biological assets and agriculture produce in accordance with IAS 41. Particularly, the IFRIC discussed whether material selling costs should be included as a deduction in determining the recognised fair value of the assets. The IFRIC noted that selling costs are not included as a deduction in determining the recognisable value of financial instruments in accordance with IAS 39. However, the IFRIC determined that often agricultural assets cannot be sold in an active market without necessarily incurring selling costs, such as harvesting and transportation, and therefore such costs ought to be factored into the measurement of fair value.

The IFRIC discussed the requirement of IAS 41.21 that the objective of a calculation of the present value of expected net cash flows is to determine the fair value of a biological asset in its present location and condition, and that the present condition excludes any increases in value from additional biological transformation. The IFRIC discussed whether this means that the expected future biological transformation should not be considered in determining the fair value of the assets in their current state. The IFRIC determined that ideally the fair value of the assets should be determined as the discounted value of the expected future cash flows, with the discount rate used including the risk factors associated with the successful biological transformation required before the asset is readily marketable.

The IFRIC also discussed the impact of future restoration obligations (such as replanting obligations) on the determination of fair value. The IFRIC concluded that where the restoration obligation will create an additional asset for the entity, it should be capitalised as part of the asset. Where the restoration provision does not result in an additional asset for the entity (for example, restoring leased land at the end of the operating lease), the cost should be expensed.

In accordance with the IFRIC's previous decision, and the subsequent agreement of the IASB to that decision, the staff will bring an amended copy of IAS 41 to the next meeting for IFRIC's consideration.

Wednesday, 4 February 2004

Service Concession Arrangements

The IFRIC discussed how existing IASB literature should be applied in accounting for service concession arrangements. The IFRIC agreed that there are a number of accounting methodologies that are, in some ways, analogous to accounting for service concession arrangements, particularly accounting for leases, with accounting for intangible assets and construction contracts also noted as relevant. The IFRIC discussed a number of examples of issues relating to the recognition of service concession arrangements on the balance sheet in relation to the leasing model in IAS 17 and agreed to continue its debate on these topics at a future meeting.

The IFRIC discussed a number of issues regarding the impact of service concession arrangements on recognised profit and loss. The IFRIC asked that staff give consideration to the appropriate definition of contract revenue and to costs that ought to be deferred as part of service concession arrangements, and present a position to the IFRIC at a future meeting.

Members' Shares in a Co-operative Bank

Three representatives of the European Association of Co-operative Banks made a presentation to IFRIC expressing the concern of that association that members' shares in co-operative banks may be considered liabilities in accordance with the revised IAS 32. They detailing their reasons for believing the members shares should be treated as equity.

The IFRIC agreed that absent the existence of a redemption provision, the members' shares as described should be classified as equity. In reaching this conclusion, the IFRIC considered the voting, dividend, and liquidation rights typically associated with these instruments.

The IFRIC considered the circumstances in which the redemption provision causes the members' shares to be classified as liabilities and agreed that where the redemption of shares is at the discretion of the issuer, the instruments should generally be classified as equity. However the IFRIC noted the importance of providing very clear guidance on this matter to ensure that when applied by analogy the guidance is not misinterpreted.

The IFRIC agreed that a considerable portion of the next meeting should be dedicated to resolving this issue.

IAS 27: Investments of Joint Venture Capital

The chairman briefly discussed a recent request from the EFRAG that IFRIC give consideration to the issues surrounding consolidation of investment funds by investment companies. The IFRIC agreed to debate this issue further. Staff will make a comprehensive presentation of the issues and proposed solutions at a future IFRIC meeting.

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

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