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Notes from IFRIC Meeting of February 2005

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

04 Feb 2005

The International Financial Reporting Interpretations Committee is meeting 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 first day of that meeting:Notes from the IFRIC Meeting3 February 2005 Administrative matters Gilbert Gelard, IASB member chaired the meeting.

The Chairman welcomed Jean-Louis Lebrun, Partner and Chairman of the Supervisory Board, Mazars, France, to his first IFRIC meeting.

The new process for rejecting issues from the IFRIC's agenda was brought to the attention of members. This process is that where the agenda committee decides not to take an item onto the agenda, this item will be detailed in a standing agenda item to the full body of IFRIC, who will have one month to consider whether the exclusion of the item from the IFRIC agenda is appropriate. After this time has passed, the IFRIC will make a public communication explaining the issue and the reasons for not taking the item onto the agenda.

IFRS 2 Treasury Share Transactions and Group Transactions

The IFRIC considered a draft interpretation based on the examples that it had considered at previous meetings. The IFRIC had an extensive discussion on the appropriate accounting treatment in scenarios where a subsidiary provides parent company shares to the employees. The IFRIC concluded that while this transaction would be an equity-settled share-based payment in the group accounts, it may be a cash-settled share-based payment in the subsidiary's entity-only accounts. The IFRIC agreed that the wording in IFRS 2 stating that IFRS 2 applies to transactions where shares are received in other group entities is designed to scope in such arrangements, rather than to dictate that they must be accounted for consistently in individual entity accounts and consolidated accounts.

The IFRIC made the following decisions in respect of specific situations:

  • Where the transaction is between the parent company and an employee (that is, the parent company agrees with the employee to give the employee shares), this is an equity-settled arrangement; and
  • Where a subsidiary promises shares to an employee, this may be cash-settled, because the asset being promised is not own equity; however IFRIC members were not clear as to whether an agreement between parent and subsidiary as to the settlement of this arrangement would alter the accounting.

The IFRIC agreed to consider a further draft interpretation at its March meeting, and that the interpretation should be worded to cover both transactions within a group, and transactions where a major shareholder grants shares – i.e. to cover both types of transactions scoped into IFRS 2 by paragraph 3 of that standard.

Scope of IFRS 2

The IFRIC considered a revised draft interpretation on the scope of IFRS 2. The IFRIC agreed that this interpretation should be redrafted to focus on the basic point that you don't have to be able to identify the goods or services to be within IFRS 2, and to clarify the indicators that a share-based payment might exist.

Service Concession Arrangements

The IFRIC considered worked examples illustrating the effects of applying the proposed models for accounting for service concession arrangements. The IFRIC considered concerns raised by the Spanish working group on accounting for concessions that the example was too simplified due to the relatively short period of the arrangement (ten years) and the assumption of static toll charges. The Spanish working group had proposed that the arrangement cover 50 years, but only show amounts in five year increments – this proposal was deemed to be unworkable as discounting and other factors would make the source of numbers hard for constituents to use. The reason for the simplified example was to make it publishable in normal IASB format and to illustrate the point as simply as possible. The concern raised was that this short life example failed to show the heavy losses in early years and super profits in later years. The IFRIC agreed to proceed with the examples as currently drafted.

However, the IFRIC did agree that for constituents who would want to see the affects on a more realistic fact pattern, it would be more helpful if they all commented on a single fact pattern, rather than all constituents submitting their own fact pattern and commenting on the effects thereon. The latter would make comment letter analysis time consuming as staff and IFRIC members would need to analyse the validity of each fact pattern before considering the comments made. Therefore staff agreed to consider whether an existing example from any one of a number of groups could be analysed for consistency with the interpretations, and published on the IASB website so constituents that desired to do so could comment on that more intricate and realistic fact pattern.

The IFRIC agreed to pose a question in the invitation to comment as to whether the timing of recognition of an intangible asset in the intangible asset model can be mandated to be one of the available options (at inception, built up over construction, or exchanged of a receivable for an intangible at completion of construction) or whether all are supportable. The IFRIC also agreed to ask the question as to whether the difference in timing and amount of recognition of repairs and maintenance obligations between the two models is appropriate.

The IFRIC agreed to pose a question in the invitation to comment as to whether constituents think it appropriate under the financial asset model that different profit margins be applied to different parts of a non-segmented contract and to note to constituents that this assumption is inherent in the interpretation but is pending further consideration. In addition, the IFRIC agreed to note, in the basis for conclusions, that classification as an intangible asset or as a financial asset is dependent on the nature of the contractual relationship because this is how IAS 39 works.

The IFRIC noted that transitional provisions were insufficiently clear to tell people that existing assets on the operator's balance sheets that should not be there in accordance with the interpretation have to be derecognised from the earliest period presented.

The IFRIC agreed that the comment period should be as long as possible whilst still allowing an analysis of comments to be brought to the June meeting, thus enabling the IFRIC to give clear indications in public session as to the direction of the project prior to the time when entities would begin preparing their interim reports for the period ended 30 June 2005.

Emission Rights - Consideration of possible approaches for revision of IAS 38

The IFRIC noted that EFRAG are unlikely to recommend endorsement of IFRIC 3 in Europe. The IFRIC considered a proposal to amend IAS 38 to create a special category of intangible assets that are like currency units and should be recognised at fair value through profit and loss, thus eliminating the mismatch between the measurement of the liability and the measurement of the asset. The IFRIC agreed that such an amendment should not be held up by waiting for the Board to complete a project on IAS 20, which in any case, staff advised, would not be complete in the near future.

The IFRIC noted that staff had recently received proposals from EFRAG detailing a method of accounting for these items as hedging instruments that might resolve the issue. Staff had not had time to analyse these proposals.

The IFRIC agreed to consider a draft amendment to IAS 38 at its next meeting to determine whether this is a workable solution. Once the issue of the mismatch has been resolved, IFRIC will later consider issues around the timing of recognition of emission rights, and appropriate amortisation periods (for example what is the appropriate amortisation period if an entity receives an allowance in respect of one year but can carry over left over rights?)

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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