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Notes from the IFRIC meeting on 23 March

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

24 Mar 2004

The International Financial Reporting Interpretations Committee (IFRIC) met at the IASB offices in London on 23 March 2004, the first day of a two-day meeting.

Presented below are our observers' preliminary and unofficial notes from the meeting.

Notes from the IFRIC Meeting23 March 2004

Activities of Other Interpretation Bodies

The IFRIC considered a paper outlining the activities of other interpretation bodies. The IFRIC agreed that the issue addressed by the Australian Urgent Issues Group on accounting for the purchase of delinquent debt portfolios should be referred to the agenda committee. The IFRIC agreed that staff should continue to monitor the progress of the other projects currently under consideration by other interpretation bodies.

Report of the Agenda Committee

The IFRIC discussed the report of its agenda committee. In reviewing the items that the agenda committee had considered and determined did not require an IFRIC interpretation, the IFRIC discussed the means of communicating this to the public. It was noted that the staff are currently considering due process issues to ensure there are no impediments to the IFRIC announcing that an issue has been considered but not accepted on to the agenda. It was noted that it is important that the IFRIC is not seen to be issuing interpretations by stealth, which could be the perception if the IFRIC includes notes on the reasons for rejecting items from the agenda in a publication such as the IASB Update. Those notes might themselves be viewed as interpretations.

IAS 11 - Combining and Segmenting Construction Contracts

The IFRIC continued its discussion of the appropriate criteria for combining and segmenting construction contracts. It was noted that IAS 18 Revenue refers preparers to IAS 11 for guidance in determining the appropriate method of accounting for service contract revenue. Accordingly the IFRIC agreed that once the text of an interpretation relating to combining and segmenting construction contracts has been decided, the text should be tested against other service contracts to ensure that the results are considered appropriate. The IFRIC considered a draft interpretation and agreed to discuss the principles therein, but with a view to refraining from issuing a draft Interpretation until the service concessions project is further progressed, to ensure consistency between the projects.

The IFRIC agreed that the wording from SOP 81-1 (as had been included in the draft interpretation under consideration) should be amended so as to present the principles for separation of contracts, followed by indicators that suggest separation is appropriate. The broad principle agreed was that the contract in question should be separated when the negotiations for the parts of the contract were separate and it is common market practice for the negotiations for parts of such contracts to be considered separately.

The IFRIC considered a number of examples as to when multiple contracts should be combined and agreed that multiple contracts should be combined where they are sufficiently interdependent, such that the contractor has the obligation to complete all phases of the contracts, and the counter-party the right to demand completion of all contracts.

The IFRIC agreed a broad principle that where a single contract for a project exists, the contract should be presumed to be a single unit of accounting but should be tested to determine whether separation is appropriate. Conversely, where multiple contracts for a project exist, those contracts should each be presumed to be single units of accounting but should be tested to determine whether combination is appropriate.

The IFRIC considered when options to extend contracts should be separated from or combined with the original contract for accounting purposes. The IFRIC requested additional guidance from staff on the method of amending the original contract where separation/combination are not considered necessary.

The IFRIC will discuss the issues further at a later meeting.

D6: Employee Benefits - Plans with a Guaranteed Minimum Return on Contributions and Notional Contributions

The Exposure Draft was given negative clearance by the IASB at its March meeting. However, at that meeting a number of non-fatal concerns were aired by Board members. The IFRIC considered the comments of the Board presented to them by staff and agreed to amend the Basis for Conclusions to better explain the methodology required by the draft interpretation and to reduce the content of the example. Staff will make the amendments and circulate the draft interpretation for out-of-session approval.

Members Shares in a Co-operative Entities

Three representatives of the European Association of Co-operative Banks attended the IFRIC meeting to assist in the discussions.

The IFRIC agreed to amend the scope to clarify that the interpretation applies to all entities applying the December 2003 version of IAS 32. Amending the scope in this manner will enable the IFRIC to include a paragraph clarifying that members' current accounts held in a relationship with them as customers or suppliers should be treated as liabilities.

The IFRIC agreed that members' shares should be treated as equity in two broad situations:

  • where the entity has an unconditional right to refuse redemption; and
  • where the entity has an obligation (such as a statutory obligation) to refuse redemption.

The IFRIC discussed the inclusion of a paragraph specifying that, when the members' shares are considered equity, periodic payments are treated as dividends, and where they are classified as liabilities such payments are treated as expenses. The IFRIC agreed this inclusion was conceptually correct, albeit potentially redundant. The IFRIC also agreed that where the treatment results in the reclassification of items between liabilities and equity, gain or loss should not be recognised on such reclassification.

The IFRIC discussed transition issues, particularly in relation to European Co-operative Banks. The bank representatives noted that their current constitutions would result in a classification as liability, but that they would be unwilling to attempt to amend their constitutions until the IFRIC Interpretation is finalised. As the only general meeting in which such changes for a co-operative bank could be approved is held in May or June each year, they noted that on transition their members' shares will be treated as a liability, until such time as the constitution can be amended. The IFRIC agreed that this issue is best addressed by disclosure by the co-operative banks, as this best reflects the fact that for a time, for accounting purposes, these items should be treated as liabilities, and there is not any guarantee that members will agree to the changes in their constitutions.

The IFRIC agreed to include an example showing the accounting in a situation where an entity is prohibited from ever redeeming a members share unless there is a new shareholder coming in.

Emission Rights (D1)

The staff provided the IFRIC with an update of the IASB's ongoing project of amending IAS 20 Accounting for Government Grants and Disclosure of Government Assistance. No decisions were made as the IASB will continue its discussions in this area.

Transitional Requirements of IAS 39 on Impairment of AFS Equity Instruments

IAS 39 (revised 2003) amends the guidance in the previous version of IAS 39 for when objective evidence of an impairment of available-for-sale equity instruments is present. Specifically, the requirement to have either a significant or prolonged decline in the instrument's fair value was added. The IFRIC agenda committee could not decide whether the amendment should be viewed as a change in policy or a clarification of what was required in 39 all along.

The IFRIC discussed the issue and noted a preference for impairments recognised as a result of the change in 39 to be classified as a change in accounting policy (not a correction of an error). However, there was not a consensus view. The IFRIC decided not to take this item on the agenda as the staff believes the answer to be clear and since there was only a minority view for treatment in current income or as an error in prior periods.

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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