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Day 2 of the November 2005 IFRIC meeting

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

06 Nov 2005

The International Financial Reporting Interpretations Committee (IFRIC) met at the IASB's offices in London on Thursday, and Friday 3-4 November 2005. Presented below are the preliminary and unofficial notes taken by Deloitte observers at the second and final day of the meeting.Notes from the IFRIC Meeting4 November 2005 IAS 34 interaction with IAS 36 and IAS 39 The IFRIC considered the interaction of the impairment provisions for equity instruments in IAS 39 and goodwill in IAS 36 with the requirement in IAS 34 that the frequency of reporting should not affect the measurement of an entity's annual results. The staff indicated that it believes there is evidence in IAS 34 to support both a discrete period approach and an integral period approach with regard to the reversal of impairment losses for investments in equity instruments and goodwill.

IFRIC members supported the staff's view with some referring to IAS 34 as a 'schizophrenic' Standard. It was noted that indeed different year ends created a lack of comparability between entities as impairment tests are potentially performed at different times for goodwill.

IFRIC debated ways of how best to proceed. Some suggested a proposal to the Board to delete paragraph 28 in IAS 34. Others argued that there were more fundamental issues to consider that could not be resolved with a quick fix (such as volume discounts as they affect revenue recognition, effectiveness testing when applying hedge accounting, requirements in IAS 19, and consideration of criteria for capitalising development costs under IAS 38). Some believe the particular issue under discussion arose as a result of the requirement that impairment losses cannot be reversed, therefore trying to resolve the issue through IAS 34 was not the correct approach.

Some observed that the requirements in US GAAP are not the same as in IAS 34. Therefore, SEC registrants have additional problems to consider.

IFRIC agreed to proceed with an Interpretation on the specific IAS 34/39 issue and tentatively decided to proceed on the basis that a more specific Standard would trump IAS 34. Some IFRIC members raised their concerns over this approach and IFRIC agreed to get the preliminary views of the IASB on the decision to take this direction before committing further resources to this project.

IAS 17 Leases of Land that Do Not Confer Title on the Lessee

The IFRIC received two requests for interpretation regarding the classification of leases on land that do not transfer title to the lessee. The first request is centred on what is meant by 'normally' in paragraph 14 of IAS 17. The second urges that a solution should be found that would be more reflective of the economic reality underlying such transactions in jurisdictions such as Singapore, where most transactions of land are leasehold.

The staff noted the following options as available to IFRIC on these issues:

  • 1. Interpret IAS 17 provisions related to long leases of land which do not transfer title to the lessee,
  • 2. Recommend to the Board an amendment to IAS 17, either;
    • removing the term 'normally', or
    • clarifying when leases of land that do not transfer title to the lessee may be classified as finance leases.
  • 3. Leave IAS 17 unchanged and publish reasons for not issuing an Interpretation (staff recommendation).

After some discussion about the inconsistencies in IAS 17, IFRIC concurred with the staff recommendation to leave IAS 17 unchanged, as any other alternative would be beyond the remit of an Interpretation, and publish reasons for not issuing an Interpretation by highlighting that the length of the period in such leases does not matter.

On a secondary issue, regarding whether a lease where the lessor is required to pay the market value of land on expiry of the lease to the lessee is normally classified as an operating lease, the staff did not consider that this issue should be the subject of a separate Interpretation as it does not appear to have widespread and practical relevance. The IFRIC concurred and requested that in the rejection wording, an example should be included to illustrate why this issue does not warrant a separate Interpretation.

IAS 39 - Hedging the Inflation Component of Nominal Interest Rates

The IFRIC received a submission asking whether it is possible under IAS 39 to apply fair value hedge accounting to a fixed interest rate liability when it is hedged with an inflation derivative.

The IFRIC noted that the Fisher equation (1 + nominal interest rates) = (1 + real interest rates) X (1 + inflation) holds true in the long-term but noted that the market did not react in that theoretical manner in the short-term. It was pointed out that despite this assertion, it was difficult to reconcile that view with reasons why companies were trading heavily in the inflation swap market in order to hedge revenue (mainly utility companies with inflation linked revenues) and in some cases, fixed interest rate debt.

Others indicated the existence of academic research that suggests that the relationship between inflation and interest rates is coincidental. This lead to a discussion about what constitutes a portion for hedge accounting purposes with IFRIC concluding that this was the real issue to be addressed (for instance, is the oil price considered to be a portion of the kerosene price, and if it is accepted that oil price rises cause inflation, then is the oil price a portion of inflation?). Some believe that trading of instruments based on a statistic such as inflation or LIBOR, does not mean it is a portion of some other statistic simply because they are quoted as such (such as LIBOR + y% to arrive at an interest rate to charge a borrower).

IFRIC did not agree on the issue about portions and requested that the submitter be asked to provide additional information to flesh out the issues around how effectiveness testing is being conducted. Despite this, IFRIC noted that it was leaning towards rejecting this issue as it is too narrow to warrant an Interpretation, unless something came through from the revised submission that would alter this view. If any more work is conducted, it should be on the broader issue of what constitutes a portion. The staff was asked to obtain the preliminary views of the IASB on the IFRIC's intended direction on this issue.

Review of Tentative Agenda Decisions and Recommendations by Agenda Committee

IFRIC considered wording of the tentative agenda decisions and recommendations by the Agenda Committee regarding requests for IFRIC agenda items.

Scroll down on this page to find notes from 3 November 2005.

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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