Report from the IFRIC meeting 1 April 2005

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

02 Apr 2005

The International Financial Reporting Interpretations Committee (IFRIC) met at the IASB's offices in London on Thursday 31 March and Friday 1 April 2005. Presented below are the preliminary and unofficial notes taken by Deloitte observers at the second day of the meeting.Notes from the IFRIC Meeting1 April 2005 IAS 39: Impairment of an Equity Instrument One of the impairment triggers in paragraph 61 of IAS 39 is 'a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost'. The submission before the IFRIC is for guidance regarding whether 'significant' in paragraph 61 should be measured against the original cost or the original cost less any prior impairment losses, and whether 'prolonged' in paragraph 61 should be evaluated against the entire period for which the investment has been held, or against the time period since the last recognised impairment loss.

In addition, guidance is being sought as to whether IAS 39 allows an entity to, in some way, segregate different loss events impacting an investment in a single equity instrument and evaluate the significance and duration of each event separately.

The IFRIC debated this issue at length, with some noting that by its nature, the requirements of paragraph 61 as regards the words 'significant' and 'prolonged' would result in different application in practice. There was general agreement that a loss event leading to an impairment loss on an available-for-sale financial asset should not have the effect of setting a new 'cost', instead any further losses should also be recognised as impairment losses ('keep the meter running'). This results in the need to maintain a record of impairment losses recognised throughout the period for which such instrument is held.

It was noted that practise in the USA would result in a new cost being set up after the first loss event. Members indicated that this issue does not require the development of an Interpretation and that any suggestion to the IASB to amend IAS 39 would significantly change the accounting for available-for-sale instruments (that is, potentially requiring all gains and losses to be recognised in the income statement). A rejection note will be drafted and presented at the next meeting setting out why the IFRIC believe the issue is clear together with an expanded note clarifying that the word 'prolonged' refers to the period that the instrument has a value below cost.

IFRIC D12, D13, D14 Service Concessions Arrangements

The staff indicated to IFRIC members that there was general concern that the 61-day comment period ending 3 May 2005 was too brief. IFRIC agreed to extend the comment period to 31 May 2005 but would encourage those respondents able to meet the original deadline to submit their comments on that earlier date in order to allow IFRIC to start processing responses. It was also noted that those constituents that had advocated for this issue to be dealt with swiftly, should be notified of the possible delay on the overall timetable resulting from this extension.

Convertible Instruments Denominated in a Foreign Currency (Cross-Currency Bonds)

The issue before the IFRIC concerns the classification of a convertible bond denominated in a foreign currency (ie a currency other than the functional currency of the entity issuing the bond). Such a bond allows the holder to convert the bond into a fixed number of the entity's equity instruments in exchange for a fixed amount of foreign currency. For example an entity whose functional currency is the Euro issues a US dollar-denominated convertible bond that can be converted into a fixed number of the entity's equity instruments (ie it contains an option to exchange a fixed number of the entity's shares for a fixed amount of US dollars).

IAS 32 states that a contract that will be settled by the entity by delivering a fixed number of its own equity instruments in exchange for a fixed amount of cash or another financial asset is an equity instrument. Consequently, the question determining classification of the written option in the convertible bond is whether a fixed amount of a foreign currency represents a fixed amount of cash or other financial asset. Ie, in the example above, is a fixed amount of US dollars 'a fixed amount of cash or another financial asset' for an entity whose functional currency is Euro?

If a fixed amount of a foreign currency represents a fixed amount of cash or another financial asset the convertible is separated into a liability and an equity component in the usual way. If however a fixed amount of a foreign currency represents a variable amount of cash then some have asserted that the written option component in the convertible

  • is a liability;
  • is equity; or
  • is a hybrid instrument with equity and foreign exchange components that require separate accounting under IAS 39 Financial Instruments: Recognition and Measurement.

After some debate, there was general consensus within IFRIC that contracts that will be settled by an entity by delivering a fixed number of its own equity instruments in exchange for a fixed amount of foreign currency should be classified as liabilities. IFRIC agreed to undertake a research project on possible amendments to the literature that could be passed on to the IASB for consideration. This course of action was taken as the IASB is currently considering a project dealing with liability / equity issues.

IFRS 2: Treasury Share Transactions and Group Transactions

The IFRIC continued its discussions of various issues relating to accounting for share-based payment arrangements in which:

  • An entity grants options to its employees and chooses to or is required to purchase its own shares upon exercise of the options by its employees
  • A subsidiary's employees are granted rights to shares of the parent.

The staff presented a revised draft Interpretation setting out the changes suggested at the previous meeting and there was general agreement with the revised document. Subject to minor editorial amendments, no objections were noted to the issuance of the draft Interpretation.

Scope of IFRS 2

The staff indicated that they had prepared the latest draft Interpretation to deal mainly with the issue of whether there is a requirement to demonstrate that goods or services would be received in order to IFRS 2 to apply. There was general support for the document. Subject to minor editorial amendments, no objections were noted to the issuance of the draft Interpretation.

IFRIC D11 Changes in Contributions to Employee Share Purchase Plans (ESPPs)

To date, 34 comment letters on D11 have been received. The staff presented a summary of comments on:

  • the proposed treatment of a cessation of contributions
  • the proposed treatment of a change from one ESPP to another
  • other issues.

Cessation of contributions

Most respondents focused on this issue. Many disagreed with the proposed treatment in D11. Of those who disagreed, many argued that a requirement to contribute to the plan is a vesting condition; therefore, a cessation of contributions should be accounted for as a forfeiture (ie reversal of the expense recognised to date and no further charges).

Of the remainder of respondents who disagreed with the proposal in D11, some supported the alternative treatment outlined in paragraph BC10 of the Basis for Conclusions to D11, ie the cessation of contributions has no accounting effect; instead, the entity should continue to recognise an expense for services received from that employee over the remainder of the vesting period. In addition to the above, a few respondents who disagreed with the proposal in D11 argued that instead of treating the cessation of contributions as a cancellation, the entity should cease recognising an expense for that employee, with no reversal of the previous expense. One respondent suggested that IFRS 2 be amended to permit this treatment.

Changes from one ESPP to another

Some respondents did not comment on the proposed treatment of a change from one ESPP to another. Of those respondents who did express a view, most agreed with the proposal in D11. IFRIC discussed the comments and some members made the point that it was not clear whether US GAAP is consistent with IFRS on the issue of cancellation. The point was made that US GAAP deals explicitly with 'reductions' in contributions but not cancellations.

Other Issues

IFRIC discussed other conceptual issues including when a 'shared understanding' of the arrangement is reached, for example, where a letter of employment states that employees are free to join the ESPP scheme as part of their employment contract. Does the signing of the contract by all employees represent grant date? Or is grant date when the employees that decide to join the scheme, indicate their willingness to join (possibly by making the contributions)? Following this thinking, some IFRIC members questioned the reason (at a conceptual level) why no charge for share-based payments had been proposed for employees that remained in employ but did not join the scheme. This thinking would have wide ramifications on various types of employee benefit schemes in existence.

After much debate, IFRIC seemed to agree that 'forfeiture' is not a possible solution, and neither is accounting for the SAYE schemes as those presenting the employees with a choice of settlement in cash or equity. Some suggested that D11 as currently drafted is the only correct interpretation of IFRS 2 as drafted, but 5 IFRIC members indicated that they would vote against D11 as currently drafted.

Others indicated they would prefer to reach a consensus that would allow entities to cease expensing or even continue with the expensing they had been doing, but would not accept accelerated expensing (as per D11) as it is counter intuitive. The opportunities to abuse such provisions were noted with indications that the Board would probably not sanction such amendments.

IFRIC concluded that the issue should be elevated to the Board with a proposal that the cancellation provisions in IFRS 2 be revisited.

IFRIC D10 Liabilities Arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment

The most striking fact with regard to descriptive statistics is that no individual preparer and only one preparer representative body has commented on IFRIC D10. 7 responses came from accountancy bodies and standard setters and 5 from accounting firms. Finally, EFRAG and FEE have sent a comment letter to IFRIC.

21 respondents (95%) fully agreed with the draft Consensus. While 8 respondents (36%) had no or just a few formal comments, 13 (59%) raised some concerns about the scope of IFRIC D10 and a certain lack of clarity in several paragraphs of the body of the draft Interpretation and the Basis for Conclusions.

Some scope issues were discussed, mainly that the interpretation should be drafted in a broader context and only making reference to the WE&EE directive. IFRIC indicated that they had already debated this issue and had arrived at the draft as currently drafted but would include a reference to the hierarchy in IAS 8 to deal with some of the scope issues.

Some respondents had requested that the requirements of the draft Interpretation be expanded by addressing disclosure requirements. IFRIC agreed to encourage this disclosure through the Basis for Conclusions but believe they could not require such disclosure without re-exposure and consulting the Board.

IFRIC decided to clarify that the recognition of the liability arising from applying D10 would take place 'during' the measurement period in order to avoid full recognition on the first day of participating in the market.

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

Scroll down for Notes from 31 March 2005.

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.