Report from the IFRIC meeting 3 June 2005

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04 Jun 2005

The International Financial Reporting Interpretations Committee (IFRIC) met at the IASB's offices in London on Thursday and Friday 2-3 June 2005. Presented below are the preliminary and unofficial notes taken by Deloitte observers at the second day of the meeting.Notes from the IFRIC Meeting3 June 2005 Convertible Instruments Denominated in a Foreign Currency At its April meeting, the IFRIC addressed the classification of the written option in a convertible bond denominated in a foreign currency.

Such bonds allow the holders to convert the bond into a fixed number of the entity's equity instruments in exchange for a fixed amount of foreign currency. The IFRIC had agreed in April that the result of applying IAS 32 to this fact pattern would be to classify the entire instrument as a liability.

At the June meeting of IFRIC, the IFRIC considered draft amendments to IAS 32 that it could recommend to the Board to enable the appropriate classification of the equity element of the instrument. Some IFRIC members believed this classification is possible under existing IAS 32. However, a clear majority believed this was not possible and that the standard should be amended to require such classification.

The IFRIC members debated the draft wording and requested some amendments. The proposed amendment will be put to the IASB at its June meeting. The IFRIC were advised that IASB members are cognisant of the need for timely resolution of this issue. The IFRIC members also agreed that it was not appropriate for wording to be published in the IFRIC Update explaining the IFRIC's reasons for not taking this onto the agenda – this topic is clearly on the agenda, albeit that the expected outcome is an amendment to a standard rather than an IFRIC interpretation.

The IFRIC noted that as a result of its publication in the April 2005 IFRIC Update of their view that IAS 32 currently requires classification as a liability, companies in certain jurisdictions applying IFRS had, for their March quarterly reporting, reclassified these instruments as liabilities in compliance with that view. The chairman reminded the public that non-authoritative publications such as the IFRIC Update and the IASB Update should not be read in the same way as final standards and interpretations. The Update publications reflect the progress of an issue through the due process and should not be read or interpreted as being the final views of either the IASB or the IFRIC.

Reasons for Rejection

IAS 39: Accounting for Securities Sold but not yet Purchased ('Short trading')

The IFRIC had previously published draft reasons for not accepting this item onto the agenda in the April 2005 IFRIC Update. The IFRIC had previously agreed that as part of the process for enabling the public to comment on reasons for not taking items onto the agenda, if letters were received as a result of the IFRIC Update these would be given due consideration. A letter from a constituent on this topic was tabled at the meeting, and the IFRIC agreed to defer consideration of this item until the next meeting to allow IFRIC members to explore fully the implications of the content of that letter.

The public were reminded that if comments do arise as a result of draft reasons for not taking an item onto the agenda published in the IFRIC Update, those comments should be received by the staff as soon as possible, to enable them to be taken into account when the wording is finalised at the following IFRIC meeting. A dedicated email address will be set up for this purpose. Constituents should not address their concerns to particular individuals within the IASCF organisation; rather they should use the dedicated email address.

Inclusion of Value Added Tax (VAT) in Cash Flow Statements

The IFRIC reconsidered revised wording on this topic, which had been prepared overnight. After a short discussion it emerged that not all IFRIC members were in agreement as to whether a separate line item for VAT-related cash flows should be permitted under the existing standard. Accordingly, while the IFRIC are in agreement that cash flows from customers and to suppliers cannot be shown net of the VAT, they are unable to finalise wording for not taking this issue onto the agenda, until the second issue has been resolved, and acknowledged in the course of the meeting that the topic may indeed be added to the agenda. This will be discussed at the next IFRIC meeting.

IAS 19 - Distinction Between Defined Benefit and Defined Contribution Plans

In the course of analysing the comments received on IFRIC D9 Employee Benefits with a Promised Return on Contribution or Notional Contributions, staff noted that some confusion existed amongst constituents as to the appropriate distinction between defined benefit and defined contribution plans. This confusion was brought to the attention of the IFRIC at its April meeting, where the IFRIC agreed that staff should consider the development of appropriate guidance on distinguishing between the two types of plan, for possible inclusion in the finalised version of D9.

Staff prepared the following proposed guidance:

The distinction between a defined contribution and defined benefit arrangement lies in whether or not the employer has an obligation in respect of future risks attached to the benefits earned as at the balance sheet date.

In order to determine whether such an obligation exists, one should make reference to the following three conditions:

  • Condition 1: the employee stays in employment;
  • Condition 2: retains plan membership
  • Condition 3: stops accruing future benefits in the plan

If the employer has no obligation in respect of future risks in respect of the earned benefit when the three conditions apply, then the plan is a defined contribution plan. Otherwise, it is defined benefit.

(Extract from paragraph 3.46 of Observer Paper, Agenda Item 10)

The IFRIC noted that the third criteria should refer to accruing service related benefits. That is, in some circumstances, an employee might reach the maximum pensionable service period (such as 25 years) but might still accrue additional benefits in the form of adjustment of the pension related to adjustments to that employee's salary. In such a case the plan would be a defined benefit scheme. The IFRIC discussed briefly various types of plans such as career average salary plans and current salary plans, and whether plans which are economically the same should be accounted for differently. Staff briefly explained the economic differences in the various types of plan.

The IFRIC discussed whether the existence of a compulsory benefit resulted in automatic classification as a defined benefit scheme. The IFRIC agreed that such classification would not be automatic. The IFRIC discussed some proposed wording on the impact of materiality. They agreed that it is inappropriate to describe a defined contribution scheme as having an immaterial defined benefit element, rather the analysis should be that there are two separate schemes, and the defined benefit scheme is not material. In addition the IFRIC considered whether an unfunded scheme should automatically be classified as defined benefit, and noted this would have possible implications for year-end accruals.

The IFRIC agreed that guidance on the difference between defined benefit and defined contribution plans should not be included in the final interpretation resulting from D9. The IFRIC agreed to address this as a separate project and to consider a project plan for this project out of session. The IFRIC agreed that the three conditions proposed by staff were a step in the right direction, and further debate is necessary. Furthermore, consideration of the following issues would be required:

  • Whether the existence of a compulsory benefit automatically results in classification as a defined benefit scheme;
  • Worked examples explaining average salary plans;
  • Appropriate discussion of the impact of materiality on classification;
  • Whether an unfunded plan is automatically considered defined benefit; and
  • The interaction of the defined benefit/defined contribution distinction with insured benefits.

IFRIC D9 Employee Benefits with a Promised Return on Contributions or Notional Contributions

At its April meeting the IFRIC had considered responses to IFRIC D9. In analysing those responses, it had been noted that the proposed measurement model in D9 was not entirely consistent with IAS 19. The fixed/variable approach contained in that document was not only inconsistent with IAS 19, but not easily applied in practice. A deconstruction approach was recommended to the April IFRIC meeting but rejected by that meeting.

At this meeting the staff noted that an ideal solution to this problem would come in the form of an amendment to IAS 19 that would enable the pension expense to be recognised appropriately for such schemes. However, a compromise proposal would be to use a deconstruction approach in accounting for the defined benefit analysis, and ensure recognition of the pension expense which would be recognised under IAS 19. The IFRIC agreed to consider this approach and the approach involving a change to the standard, in detail, at its next meeting. They agreed that as well as examining the effect of the different methods, they would need to analyse the nature of the changes to IAS 19 that would be required to operationalise the use of the methodologies.

The IFRIC noted that its original conclusion, that these items are defined benefit schemes, was still correct, albeit they have been unable to finalise an appropriate measurement model.

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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