Report from the IFRIC meeting 31 March 2005

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01 Apr 2005

The International Financial Reporting Interpretations Committee (IFRIC) is meeting 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 first day of the meeting.Notes from the IFRIC Meeting31 March 2005 Administrative Matters Gilbert Gelard, IASB member chaired the meeting.

The Chairman welcomed Shunichi Toyoda (Japan), who has replaced Junichi Akiyama on the IFRIC. Mr Toyoda is employed by the NEC Corporation. He is currently on secondment to the Accounting Standards Board of Japan, where he is a technical manager.

The IFRIC expressed its thanks and good wishes for the future to outgoing member Junichi Akiyama.

Mr Gelard also noted that this meeting would be the last for Robert Comerford (IOSCO-SEC) and for Kevin Stevenson (IASB). Mr Comerford will be leaving the SEC at the end of May. Mr Stevenson is returning to his native Australia at the end of April.

An IFRIC member expressed concern that the short comment letter period on the concessions exposure drafts (Draft Interpretations D12, D13 and D14) would lead to a 'lack of depth' in the comments. One of the international accounting firms had identified at least twelve points of principle in the exposure drafts and is concerned that there were several 'embedded interpretations' – especially of IAS 11 Construction Contracts – that might catch people unawares. The staff noted the concern and stated that the staff would investigate whether an extension of the comment period was possible given the desired completion date for the final interpretations.

IFRIC 3 Emission Rights

Intangible assets

The IFRIC considered a staff proposal to amend IAS 38 Intangible Assets to facilitate 'currency-like' intangible assets (eg emission allowances that can be used to settle emission obligations) to be measured at fair value through profit or loss. That amendment would be a further accounting policy choice in IAS 38.

The IFRIC had received strong representations from the European Financial Reporting Advisory Group (EFRAG) about IFRIC 3, especially with respect to a perceived accounting mismatch caused by the interaction of IAS 20 Government Grants, IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and IAS 38.

The staff proposal would create a special category of intangible asset, which could be used if:

a. the intangible asset's value derives from the fact that it can be used to settle obligations; and b. the intangible asset has a fair value that can be determined by reference to an active market.

The IFRIC discussed the issue at length and explored the staff recommendations as well as other possible alternatives. There was enough support among IFRIC to direct the staff to develop its general proposal further. There was mixed support for a proposal that the accounting model should mandate a 'fair value through profit and loss' approach. One vote taken had enough support for a consensus view however, after further discussion, there was enough opposition to the mandatory requirement to block a consensus. Notwithstanding this vote, the IFRIC agreed that the staff should redraft the proposals assuming a mandatory requirement for fair value through profit or loss.

The staff was asked to refine the accounting model such that the class of intangible asset such that criterion (a) above would be something like 'the intangible asset ultimately derives its value from the fact that it can only be used to settle obligations'.

Hedge accounting

The IFRIC had also received a suggestion from the EFRAG that entities should be allowed to apply, by analogy, the hedge accounting provisions in IAS 39 Financial Instruments: Recognition and Measurement for a cash flow hedge of a foreign currency exposure.

IFRIC members stated that they wished to develop their views on the accounting for intangible assets before giving detailed consideration to this proposal. To that end, they directed the staff to ask EFRAG to prepare a more detailed proposal on hedge accounting and to submit this in good time before the next IFRIC meeting (2-3 June 2005).

IFRIC D9 Employee Benefit Plans with a Promised Return on Contributions or Notional Contributions

The IFIRC discussed a preliminary analysis of comments received on exposure, in particular the measurement of the defined benefit obligation in respect of a D9-type plan. The discussion was wide-ranging, and no conclusions were reached. Several concerns were expressed, especially that, if the tentative staff conclusions were pursued, the IFRIC would be undertaking a far more fundamental amendment of IAS 19 Employee Benefits. Such a move would necessitate re-exposure.

The IFRIC will resume its redeliberations in June.

IFRIC D6 Multi-employer Plans

IFRIC redeliberated IFRIC D6 Multi-employer Plans with respect to State Plans. IFRIC D6 contained a proposed amendment to IAS 19 that stated that entities should account for state plans as defined contribution plans. The results from exposure were inconclusive, and some commentators disagreed with the automatic exemption from defined benefit accounting for any type of plan.

After a brief discussion, the IFRIC agreed with a staff recommendation that the IFRIC should not proceed with the proposed amendments to IAS 19 in relation to state plans.

IFRIC D5 Applying IAS 29 Financial Reporting in Hyperinflationary Economies for the First Time

Disposition of comments received on the 'near-final draft' of proposed IFRIC 6 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies.

The IFRIC did not provide Observer Notes for this session.

The IFRIC agreed a number of editorial amendments to the near-final draft of IFRIC 6 suggested by the staff. In addition, they agreed that the section on Transition (paragraph 7) was redundant and should be deleted.

The IFRIC agreed to redraft BC16, which contained a discussion of US generally accepted accounting principles and the reporting requirements of the US Securities and Exchange Commission, such that it is factual rather than discursive.

An IFRIC member raised a concern with the material in IE6, which addresses deferred tax accounting. The member was concerned that, while the example reflected appropriately the IFRIC's conclusions, the accounting result could be seen as being not meaningful. The concern was that the operation of the restatement approach magnifies the deferred tax effect by a greater amount than might be expected. The staff is to review the example. If it could be amended without major work and causing no changes in principle, the consensus would be issued under existing authorities granted by the IFRIC and IASB. However, if there were changes in principle as a result of the staff's review of the example, IFRIC 6 would have to be referred to the IFRIC (and the IASB) in June.

IAS 11 Combining and Segmenting Contracts

The IFRIC discussed a report to the IASB prepared by the staff, which summarised the IFRIC's work and conclusions on this topic. The staff's primary conclusions were (i) that there was no significant difference between IFRS and US GAAP with respect to combining and segmenting construction contracts and (ii) that the Board should assume responsibility for two revenue recognition issues identified during the course of IFRIC's discussions.

IFRIC members expressed concern that, while there might be no difference in net income between IFRS and US GAAP with respect to contract accounting, differences in the timing of revenue and expense recognition under the two regimes could lead to differences. These differences could lead to material differences in the measure of total revenue and total expense, even if net income was not affected.

The IFRIC also discussed two flowcharts comparing IFRS and US GAAP for the separation, allocation and recognition of multiple element arrangements. Some IFRIC members expressed some reservations about the staff analysis with respect to the accounting for multiple element arrangements under IFRS, but the discussion was not conclusive.

The IFRIC was asked to pass any comments to the staff off-line. In addition, they were asked to indicate which, if any, issues related to the topic they might want to pursue. Any such topics might be treated as supplemental topics for the service concessions team.

IFRIC D12, D13, D14 Service Concession Arrangements

The staff provided an oral report on the status of the comprehensive example designed to accompany D12, D13, and D14 on service concession arrangements. The example extends the example in the exposure draft to a 50-year arrangement and contains detailed computations, etc.

The staff had reviewed the example and had a number of comments and some major concerns, in particular with respect to potential conflicts with current requirements of IAS 38. The parties preparing the example (who are independent of the IASB) have yet to respond to the staff. However, from experience they have been very accommodating to staff concerns. The comprehensive example will be available on the IASB Website as soon as the staff is satisfied with its contents. The IFRIC will not review it.

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

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