• (a) the assumptions underlying the MFR measurement are not current best estimates and it is expected that those assumptions will change to eliminate the deficit or increase the MFR surplus; or
• (b) it is a reasonable assumption that, in the jurisdiction of the plan in question, any surplus existing on the wind up of the plan will revert to the entity, taking into account all costs associated with a wind-up. To the extent that an asset is recognised on this assumption, that fact shall be disclosed in the financial statements; or
• (c) it is a reasonable assumption that in the jurisdiction of the plan in question, in a gradual settlement of the plan at the end of its life, any surplus in the plan will revert to the entity. To the extent that an asset is recognised on this assumption, that fact shall be disclosed in the financial statements.

It was noted that the key questions in the mind of constituents are 'what is the interaction between the minimum funding requirements and the plan asset recognition rules' and 'what is meant by reduction in future contributions'. It was further noted that there are questions both of recognition (whether a plan asset could be recognised) and measurement (how it is measured when an MFR exists.)

Members expressed some concerns that the proposal in (a) above would result in recognition of the effect of changes in rates (for example a regulatory change in the minimum funding requirement) that are neither enacted nor substantively enacted at balance sheet date. The staff clarified that the intention of this paragraph would be too allow the recognition of changes where the MFR will change as a result of past events (for example rate changes) that have already occurred at the balance sheet date.

The IFRIC noted that where there is no scope for the entity to ever receive the excess created by the MFR back, this is an additional cost to the entity of providing the scheme. Where there is some scope to receive the excess back (for example on a gradual basis as the scheme winds down and the regulators are satisfied as to the adequacy of plan assets absent the MFR) then the MFR should not be incorporated into the IAS 19 calculations. In any case it was acknowledged that the existence of the MFR does result in an economic restriction as the entity may not be able to get the returns that they would if the assets were not tied up in the plan. It was agreed that the impact of MFRs would vary significantly from one jurisdiction to the next. The IFRIC agreed that the staff should further develop the principles they recommend, amplifying and clarifying the wording. The IFRIC also agreed that to the extent possible the language should be consistent with IAS 19, and particularly that the phrase 'reasonable assumption' is inappropriate.

The IFRIC briefly considered whether an additional liability should be recognised when an MFR liability exists over and above the IAS 19 deficit. The IFRIC agreed that the resolution of this issue would flow from the model to be developed in respect of plan assets. The IFRIC briefly considered the impact of MFRs in a business combination (because, arguably, the amount an entity would pay for another entity with a scheme subject to an MFR, is different to what the entity would pay for another identical entity without an MFR) and agreed that this would most appropriately be dealt with in the IASB's project on Business Combinations Phase 2.

At its next meeting the IFRIC will consider worked examples of the impact of MFRs on plan assets, together with a paper that further develops the principles discussed above.

IFRIC 3 Emission Rights

The IFRIC discussed two papers:

• A proposed amendment to IAS 38 Intangible Assets that would create an additional category of intangibles measured at fair value through profit and loss, and
• A proposal from EFRAG as to how hedge accounting could be used to resolve the mis-match issues created by IFRIC 3.

At its February meeting the IFRIC had agreed to prepare a limited amendment to IAS 38, despite the preference of some members for the revaluation model contained in that standard to be completely revisited. It was noted that the effect of the proposed amendment was to move the gains and losses into the same place (profit and loss); however the timing might still have a mismatch because of the at the beginning of the period an asset exists, for which fair value gains and losses must be recognised, however the corresponding liability builds up over the period.

EFRAG presented a paper proposing to include emission rights within a hedge accounting model, that would use the principles of cash flow hedging to deal with this issue. There was support from a number of IFRIC members; however, many expressed reluctance to take the project further until the IASB had been explicitly consulted as whether they considered this an appropriate project to pursue.

It was noted that the amendment to IAS 38 in itself is insufficient to alleviate the concerns raised by EFRAG, but is not incompatible with the EFRAG proposals. Accordingly, the amendment to IAS 38 would solve part of the problem for entities that do not pursue hedge accounting. It was noted that if the hedging proposal was used, it would be difficult to mandate hedging (as entities could fail eligibility for hedging on a number of criteria, particularly forecast usage), and therefore this might open up more options. It was agreed that in principle hedge accounting should be required where certain facts and circumstances exist, with a default treatment being required if an entity fails to meet the hedge accounting requirements. The IFRIC agreed that the staff should continue with the proposal to amend IAS 38, subject to satisfying themselves that the amendment is necessary irrespective of whether the hedging methodology is introduced, and that the result of such an amendment is not to back IFRIC into a corner such that their options for introducing the hedging rules are limited. Staff agreed to check with the financial instrument team whether it was appropriate to use cash flow hedging during the period when the entity has only the allowances, and fair value hedging after the emissions have been made.

The IFRIC noted that there are other issues, such as the appropriate initial recognition date, however did not seek to resolve these issues at this time.

IAS 12 and Finance Leases – Draft reasons for rejection

In the April IFRIC Update, the IFRIC published a proposed wording for the rejection of this issue from the IFRIC agenda, which included a comment as to the appropriate technical outcome. A number of constituents had expressed discomfort at this. The IFRIC agreed that the final wording for the reasons for rejection should merely say that whilst the IFRIC has noted there is diversity in practice, this will not be taken onto the agenda as it will be resolved by the Board's short term convergence project on income taxes. As the IFRIC themselves are not in agreement as to the appropriate technical conclusion under existing IAS 12, no mention should be made as to the appropriate answer.

Impairment of an Equity Security – Draft reasons for rejection

The IFRIC discussed a draft reason for rejection of this issue. It was noted that the matter was discussed at the April 2005 meeting and the intention to reject it from the agenda was published in the IFRIC Update, and no adverse comments from constituents had been received. The IFRIC agreed, subject to certain amendments, that the draft reasons for rejection (which was not made available to observers) should be published in the IFRIC Update.

IAS 19: Prioritisation of Outstanding Issues

The staff noted that there were 8 outstanding issues on the IFRIC agenda in relation to IAS 19 Employee Benefits, and suggested an order of priority in which they should be addressed. The staff had classified the issues as follows:

Group 1: Issues with widespread divergence for which IFRIC has begun or is about to begin its deliberations

• D9 - plans with a promised return on contributions
• Distinction between defined benefit and defined contribution arrangements
• Impact of minimum funding requirement on the asset ceiling

Group 2: Items with widespread relevance, but less expected impact than Group 1

• Pension promises based on performance hurdles
• Issues related to the non-consolidation model and the definition of plan assets

Group 3: Issues considered to be important which have been added to the agenda, but are less widespread and significant than groups 1 and 2

• Changes to a plan caused by government
• Treatment of employee contributions
• Treatment of death-in-service and other risk benefits

It was noted that the non-consolidation aspect of the issue in Group 2 does need to be worked up, but may not actually require an IAS 19 expert to staff this project. Some IFRIC members expressed surprise that the changes to a plan caused by the government was not considered a high priority, given the recent high profile examples in which local regulators had given different views in different countries.

The IFRIC noted that some of these issues were added to the agenda at a time when the IFRIC agenda committee did not have a formal process for publication of the rejection of issues. The issues in groups 2 and 3 would be brought back to the agenda committee to determine whether they still meet the criteria for addition onto the agenda, and if not, whether constituent concerns could be resolved via the new process for formalising the rejection of issues.

Rejection of Issues

No observer papers were provided for this session, and accordingly the impact of some aspects of the discussion was difficult to record. However, the IFRIC's policy of publishing their draft and final reasons for rejection of issues in the IFRIC Update will result in this information being released into the public domain shortly after the meeting. It was noted that editorial amendments might be made to wording between the publication of the draft reasons for rejection, and the finalisation of those reasons, and that such amendments need not be explicitly drawn to the attention of readers of the IFRIC Update.

Inclusion of Value Added Tax (VAT) in Cash flow statements

The IFRIC agreed that the proposed wording for rejection, as published in the April 2005 IFRIC Update, did not directly answer the question posed, and accordingly should be redrafted to more clearly state that cash flows should not be reported net of VAT.

Recognition of Operating Lease Incentives

The IFRIC discussed the draft reasons for rejection, as published in the April 2005 IFRIC Update. After a short discussion it became apparent that a majority of IFRIC members were unconvinced as to the appropriateness of rejecting this item from the agenda, and accordingly the full IFRIC will consider the papers that were presented to the agenda committee in February at its next meeting.

A process issue was noted, that in putting the draft wording on the table, and into the IFRIC Update, results in this being put into the public domain before IFRIC has had a comprehensive discussion on the matter. As the IFRIC are currently settling into this new process it was agreed to consider alternative methodologies which will enable all IFRIC members to comprehensively consider an issue (should they wish to do so) prior to the draft wording for rejection being published.

Finance Leases of Finance Sub-Leases

The wording for rejection of this issue, published in the April 2005 IFRIC Update was agreed. In summary that is, the requirements of IAS 17, together with the derecognition requirements of IAS 39 provide a clear answer to this issue and therefore it should not be added to the agenda.

IAS 12: Carry forward of Unused Tax Losses and Tax Credits

The wording for rejection of this issue, published in the April 2005 IFRIC Update was agreed. In summary that is, that this issue should not be taken onto the agenda as there is little evidence of widespread diversity in practice.

IAS 12: Non-amortisable Intangible Assets

After a short discussion of the draft wording for rejection of this issue, it became apparent that a majority of IFRIC members were unconvinced as to its appropriateness. The papers considered by the agenda committee will be considered by the full IFRIC at its next meeting.

IAS 19: Determining the Appropriate Rate to Discount Employee Benefit Obligations

The wording for rejection of this issue, published in the April 2005 IFRIC Update was agreed. In summary that is, synthetically constructed equivalents to high quality bonds are not acceptable for the purposes of determining a discount rate for use in accordance with IAS 19. However, 'in a country' might refer to a regional market to which the entity has access, provided that currency and the currency of the country were the same. This should not be taken onto the agenda because IAS 19 provides a clear resolution to this issue.

IAS 39: Hedge Effectiveness Tests - Vacillations in Effectiveness/Timing of Tests

The wording for rejection of this issue, published in the April 2005 IFRIC Update was agreed. In summary that is, that IAS 39 does not preclude redesignation, and there is insufficient evidence of diversity in practice for the IFRIC to take this item onto the agenda.

IAS 1: Comparatives for Prospectuses

The IFRIC considered draft wording for rejecting this issue, published in the April 2005 IFRIC Update, to the effect that this was a regulatory issue rather than something for IFRIC to consider. After a short discussion it emerged that IFRIC wanted this item taken off the table for this meeting so that it could be considered in more detail at a future meeting.

IAS 1: Reference to Normal Operating Cycle

The wording for rejection of this issue, published in the April 2005 IFRIC Update was agreed. The question raised was whether the normal operating cycle (if using other than twelve months) applied across all the entities in a group, or product group by product group. The IFRIC agreed not to take this on, as it is clear from the standard that the wording should be read in the singular and the plural, and the appropriate accounting should be determined with reference to the nature of the inventories in relation to the operating cycle.

IFRIC D11 Changes in Contributions to Employee Stock Purchase Plans

As a result of the IFRIC's deliberations on D11, the IASB had been asked to consider whether IFRS 2 should be amended. The IASB agreed to amend the Standard to clarify that:

• The cancellation or settlement provisions do not apply only when the entity has cancelled the scheme (that is cancellations by the employee are also caught by these requirements); and
• Vesting conditions are service or performance conditions.

The IFRIC agreed that, in light of these amendments, a final interpretation arising from D11 was not considered necessary at this time; however, members would consider whether there are any related issues that will not be resolved that should be brought back to the IFRIC Agenda Committee. It was noted that the Board would consider whether re-exposure was necessary for these amendments – the IFRIC strongly recommended that the amendments should be exposed, together with a comprehensive basis for conclusions.

Activities of Other Interpretive Bodies

The IFRIC considered a paper in relation to the activities of other interpretive bodies, and confirmed the decision of the agenda committee not to add any of the items to the agenda.

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