Notes from IFRIC Meeting of February 2005

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05 Feb 2005

The International Financial Reporting Interpretations Committee met at the IASB's offices in London on Thursday and Friday, 3 and 4 February 2005. Presented below are the Deloitte observers' preliminary and unofficial notes from the second and final day of that meeting:Notes from the IFRIC Meeting4 February 2005 D5 - Applying IAS 29 Financial Reporting in Hyperinflationary Economies for the First Time The staff recommended that IFRIC not undertake a project to amend IAS 29 as proposed at the last meeting that this draft interpretation was discussed.

This recommendation was based on cost-benefit considerations that the IASB noted whilst developing IFRS 1, compounded by the fact that the changes that some IFRIC members had in mind were of a broad nature and may result in convergence issues that would best be dealt with by the Board. IFRIC agreed with the staff.

It was noted that following a recent visit by the Chairman of the IASB, the Mexican standard setters had embarked on a project exploring IAS 29, Some broad issues related to hyperinflationary accounting as well as seeking to extract guidance from other literature currently in existence. A draft paper would be presented to the IASB in April or May for the Board's consideration. This would be in addition to a research project currently being conducted by the Canadian standard setters.

The IFRIC agreed to proceed with D5 despite the above as well as to clarify that D5 would apply where an economy had ceased to be hyperinflationary at some point but had deteriorated into a hyperinflationary status again. As a result of this, IFRIC agreed to amend the title of the pronouncement in order that it should not be perceived to apply to first-time application of IAS 29 only, but rather, to the application of the restatement provisions of that standard in general.

The IFRIC discussed whether deferred tax assets and liabilities are monetary or non-monetary assets. Some IFRIC members believed that regardless of how the amount is computed, these balances are monetary items when the definitions of deferred taxes and monetary items in IAS 12 and IAS 21 respectively are read together. Others, however, believed these balances are non-monetary. Consequently, the IFRIC decided to amend the draft interpretation to remove the statement that suggests that deferred tax balances are neither monetary nor non-monetary, as these items are mutually exclusive. The treatment of deferred tax balances in the draft interpretation was not amended as a result of this decision.

The IFRIC discussed whether 'value' as used in IAS 29.16 refers to 'fair value', a point that had been clarified by a paragraph in the initial draft interpretation, which had subsequently been deleted. There was general support for the notion that value in this context would be any value that reasonably represented a 'current value', not necessarily fair value.

The IFRIC discussed the effective date of the draft interpretation and agreed that it should be set for 'periods beginning on or after' a particular date. It was unclear what the actual effective date set would be.

IAS 11 Construction Contracts - Combining and Segmenting Contracts

The IFRIC, after some discussion, decided to proceed with this project, noting that the interaction between IAS 18 and IAS 11 would be challenging given the on-going IASB project on Revenue Recognition. The IFRIC agreed to incorporate some of the US GAAP guidance in SOP 81-1.

It was pointed out that, as a convergence project, the issues to be dealt with were broader than just the interaction between SOP 81-1 and IAS 11 but would also include EITF 00-21.

The IFRIC agreed to report to the IASB on these issues at its March meeting before going ahead with the substantive work on this project.

Reassessment of Embedded Derivatives

The draft conclusion reached so far is that reassessment of host contracts for the existence of embedded derivatives (after initial recognition) is not required under IAS 39. The staff pointed out that FASB staff has confirmed that this conclusion would result in a difference between IFRS and US GAAP as the latter requires reassessment throughout the contract term.

The IFRIC agreed with the staff's proposal to proceed with the draft interpretation.

Arising from the discussions was a similar issue of principle – whether an investor in a subsidiary is required to reassess the classification of a lease at the time of acquiring the subsidiary as opposed to leaving the classification in the subsidiary which would have been determined at the time of entering into the lease arrangement by that subsidiary. The IFRIC agreed that this issue, although similar in principle to the embedded derivative issue, should be dealt with separately as an interpretation of IFRS 3. The staff was requested to proceed with the work on this project.

Agenda Issue

The IFRIC was asked to consider, at the recommendation of the Agenda Committee, whether they believed that a project would be worthwhile at this time, to deal with the piece-meal sale of shares by a parent entity in a subsidiary but still retaining control, as this issue is not dealt with under IFRS (the converse of step share purchases in an entity that is already controlled).

Some of the points considered by IFRIC include the following:

  • Diverse accounting treatments in various jurisdictions at present.
  • This issue will be dealt with in the Business Combinations Phase II project.
  • An expected significant time lag until finalisation of the Business Combinations Phase II project, which would result in divergent accounting that would most probably be 'grandfathered' under that project and hence resulting in a lack of comparability.
  • Relatively short life of the interpretation given the fact that Business Combinations Phase II would supersede that IFRIC pronouncement.
  • The IFRICs work would be pre-emptive of the Business Combinations Phase II conclusions.

The IFRIC agreed to wait and assess the progress made on the Business Combinations Phase II project as regards meeting the timeframes set out in the Board agenda. Reassessment of that progress may lead IFRIC to consider issuing an interpretation.

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 3 February 2005.

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