Day 1 of the November 2005 IFRIC meeting

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05 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 first day of the meeting.Notes from the IFRIC Meeting3 November 2005 Service Concession Arrangements Draft Interim Statement At this meeting the IFRIC discussed the issuance of a public statement that would clarify how existing standards apply to service concession arrangements in light of the delayed finalisation of D12-14. There was some discussion about how helpful such a statement would be given its factual nature, and lack of interpretive guidance. IFRIC agreed to deal only with the question of whether an exemption from the requirements of IAS 8 was to be created for service concession arrangements for the 2005 year ends.

IFRIC's view was that such an exemption does not exist and the IASB will not be requested to consider creating an exemption. This view would be made clear in the IFRIC Update publication. In addition, a project summary of the tentative decisions already taken would be posted onto the IASB website in order to communicate to the public against bad practices currently being applied. Regarding the authoritativeness of such a statement, IFRIC members noted that this route would be taken only because the service concession arrangements project is unique given its far reaching implications across various IFRS Standards, and that this should not be seen as setting a precedent.


As many different types of arrangements exist, IFRIC staff presented a high level outline of where the focus areas should be, to help IFRIC determine the scope of this project. The slide presentation was well received. In particular, the 'Snapshot-Allocation of Key Responsibilities Under Main Options for Private Sector Participation in Public Services' (see Observer Notes - Agenda Paper 2B) was seen as a good starting point of determining the focus area.

IFRIC Process Review

There were no observer notes for this discussion hence it was difficult to follow the discussion.

Staff presented an analysis of comments received as well as staff recommendations. In addition, staff indicated that a sub-committee of the Standards Advisory Council (SAC) will be considering the issue of IFRIC's Process Review and would be informed of issues arising out of IFRIC's discussions.

When asked about the functioning of the Agenda Committee in relation to IFRIC itself, IFRIC members expressed comfort about the process and set-up of the Agenda Committee given that every IFRIC member is provided with the Agenda Committee papers and in addition, is able to attend the Agenda Committee meetings if they so wish. There was some agreement that clear communication of the Agenda Committee's role and responsibilities should be developed in order to mitigate the perception that its process is not transparent. It was also noted that these perceptions were subsiding following the introduction of the process of communicating its recommendations in public meeting to IFRIC itself. This led to the issue of whether Agenda Committee meetings should be held in public, to which most responded by stating that as it is not a decision making body, there was no need for the Agenda Committee to meet in public (similar to the EITF). The Staff were asked to liaise with EITF staff in order to compare their processes and work on adopting best practices on both sides.

Regarding the criteria for taking on projects, IFRIC members made the point that when the IASB is dealing with an issue as part of its own project, the policy governing IFRIC should not restrict it from taking immediate action that stops bad practice, regardless of how obvious the issue may seem. In addition, it should be stated that where constituents disagree with the decisions of IFRIC, they should be allowed to bring this to the IASB's attention.

The prominence of IFRIC decisions on the IASB website was discussed, with many appearing to be in favour of this proposal. It was stated that old or outdated decisions would not be revisited to take into account changes to IFRS. The reasons for this were that it provided constituents with an archive on which they could base the rationale for accounting treatments adopted in the past as well as the issue of staff resource constraints. A suggestion that IFRIC rejections should be included in the Bound Volume publication was rejected.

Some commentators suggested that IFRIC papers be made available publicly. This suggestion was rejected as it would make the IFRIC process unmanageable for both staff and IFRIC members. Access currently granted to liaison standard setters was viewed as discriminatory against other constituents and that this should be resolved. IFRIC members requested that they should be allowed to share their papers with experts on the same confidential basis as they are made available to them. It appeared that these suggestions would be taken forward to the SAC sub-committee.

Others noted that observer notes should be made available at the same time that the IFRIC papers are made available to IFRIC members in order for interested parties to prepare adequately and follow the meetings.

The point was made that a reference to 8-12 interpretations may be read as a 'budget' instead of a maximum threshold. IFRIC members asked that this should be clarified in order for constituents to correctly assess the work of IFRIC.

IFRIC noted for discussion at a subsequent meeting, the formalisation of its role where a National Standard Setter requests negative clearance on guidance issued at a local level.

IFRIC D15 - Reassessment of Embedded Derivatives

The staff provided IFRIC with a comment letter analysis on D15. Overall, commentators agreed with IFRIC on its conclusions in D15. However, three main issues were raised by commentators which IFRIC were asked to consider:

1. Accounting treatment in business combinations

The staff reported that a number of comment letters requested a clarification of the scope of IFRIC D 15 as to whether the phrase "an entity that first becomes party to a contract" also applies to instruments held by an entity which is acquired in a business combination, that is, whether a reassessment is required in conjunction with the business combination.

IFRIC concluded that it could not address this issue as part of D15 as it would require re-exposure. The IFRIC also noted that there were broader issues around the assessment of certain contracts, not just embedded derivatives, at the time of a business combination that would widen the scope of the D15 project. Consequently, this issue would be addressed separately by asking the Agenda Committee to consider the issue and its scope. The IFRIC also noted that asking the Board to consider this issue as part of the phase 2 project on Business Combinations would not lead to a quicker resolution of the issues.

In terms of US GAAP, it was noted that the guidance in the US requires assessment of the closely relatedness of the embedded derivative in as far as the actual counterparty to the contract is concerned, without any notion of an entity becoming a party via a business combination.

2. Specification and definition of 'a change in the contract'

Most commentators requested a clarification of this term and expressed concern that this condition might be misused as a de facto-choice at the discretion of the entity if even minor changes would require a reassessment (for example, postpone the settlement by one day in order to allow reassessment).

The staff suggested the following wording:

"A substantive change in the terms of the contract is a significant change in the cash flows associated with the embedded derivative or the host contract."

The IFRIC agreed with the Staff proposal but asked that the wording be checked against the guidance in IAS 16 regarding whether an exchanges of items of property plant and equipment has commercial substance as well as IAS 39 for consistency purposes.

In addition, IFRIC agreed with the Staff recommendation that the Interpretation should consider changes to both components (the non-derivative host contract and the embedded derivative). When evaluating whether two items A and B are still closely related, logic implies that either A or B or both may have changed. Therefore, both items should be considered. The same is true when evaluating whether both items have become closely related. Either item A or B or both might have changed and as a result, A and B become closely related.

3. Consequences of a reassessment

Some commentators requested further guidance as to the accounting consequences of a reassessment. Two possible treatments were noted:

  • a. restatement as if the embedded derivative had always been identified and separated (this gives rise to the problem that probably a profit or loss has to be accounted for as a result of a change in fair value since inception) (a kind of retrospective treatment),
  • b. the derivative is separated from the day of the reassessment onward. No profit or loss would be recognised and any difference would be attributed to the host contract (as the embedded derivative would be carried at fair value).

The same commentators pointed out that both treatments have drawbacks:

  • a. gives the opportunity to cherry-pick the hybrid contracts that would give rise to a profit or loss and change the terms of the contract to reassess them;
  • b. has the problem of the amount attributed to the host contract probably not meeting the definition of an asset or a liability.

IFRIC decided not to deal with this issue as part of the D15 project arguing that the scope of the Interpretation should be kept narrow, that is, to limit the scope to the question of whether or not to reassess. Questions about the accounting treatment after a reassessment would be outside the scope of the Interpretation.

Other issues

A commentator requested a clarification of D15's scope regarding whether the Interpretation only addresses the 'closely related' criterion of IAS 39. Otherwise, it is argued, D15 may lead to the situation when the entity is required to continuously reassess (being outside the scope of IFRIC D15) whether an 'own-use'-instrument despite initial expectations fulfils the net settlement characteristics and therefore is in IAS 39's and consequently D15's scope.

IFRIC concluded that D15 does not capture the own use criteria, instead it only deals with issues already in the scope of IAS 39.

On the issue of whether reassessment is required when market conditions change, the IFRIC agreed to include guidance that clarifies that reassessment is not required.

The staff were asked to bring to the next meeting, the final Interpretation for approval.

Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies


An IFRIC member asked about paragraph 3 of the Consensus in the draft Interpretation, which assumes that all the non-monetary items in the opening balance sheet have to be restated from historical cost. However, IAS 29 requires items that have been revalued to be remeasured from the date of revaluation. The proposed wording was approved provided that it is consistent with IAS 29.

The amendment required was viewed as more than editorial, since it changes some key wording in the Consensus paragraph. Accordingly, it was judged necessary to bring the text back to an IFRIC meeting and, if the proposed amendment is agreed, to report it to the Board.

It was noted that this will delay the publication date, with the result that the Interpretation could no longer have an effective date of periods commencing on or after 1 January 2006.

Update from Research Team

A member of IFRIC provided an overview of the work that had been performed to date in researching possible methods of accounting for high inflation that would replace IAS 29 in the long-term.

The basic premise of the new approach as it currently stands would be to account for high inflation (as opposed to hyperinflation). Based on research, 10% inflation was said to materially affect financial reporting if some sort of restatement was not undertaken. The research group is working on a lower threshold of 8% in order to be conservative.

Two approaches are believed to be potentially workable, namely:

  • the integral approach which would require comprehensive restatement, and
  • the simplified approach which would require restatement of major impact items such as property plant and equipment and inventory.

The research team hopes to present its work to date to the IASB at its next meeting as an education session.

IFRIC D16 Scope of IFRS 2

Thirty-nine comment letters were received. Most supported the principle of expensing the cost of equity instruments issued by an entity in return for goods or services received even if some or all of those goods or services are not identifiable.

The IFRIC discussed comments received and the staff recommendations.

IFRIC agreed to amend D16 to introduce the notion of 'assumed' goods or services received as the current guidance, noting 'identifiable' goods or services is problematic. In addition, IFRIC agreed to extend the scope of D16 and provide guidance for instances where charitable donations in shares are given (for example, the shareholder gives shares to a child or parent) by clarifying that these would not be in the scope of IFRS 2 provided the recipient does not provide goods or services to the entity.

Some respondents noted that under paragraph 13 of IFRS 2, there is a rebuttable presumption that the fair value of goods or services received can be reliably estimated, but paragraph 9 of D16 implies that this presumption must always be rebutted. As a result entities would always be required to measure both the fair value of goods or services received and the fair value of the equity instruments transferred and take the higher of the two - an onerous requirement. Further, they argued, this would be inconsistent with paragraph 13 which states that the presumption is rebuttable in rare cases only.

The IFRIC agreed to change the wording of D16 to remove this inconsistency with IFRS 2 and to make clear that the onerous requirement to measure both sides of the transaction is not required in all cases.

Some respondents asked for further guidance on determining the measurement date and recognising the expense in respect of a D16 type transaction. IFRS 2 defines the measurement date for transactions with parties other than employees as the date at which the entity receives the goods or services. Further, IG6 states that if the goods or services are received on more than one date, the entity should measure the fair value of the equity instruments granted on each date when the goods or services are received.

The IFRIC agreed that the grant date should be used for measurement purposes.

IFRIC D17 IFRS 2 Group and Treasury Share Transactions

Some members pointed out that the comments received on IFRIC D17 highlighted the broader issues around push-down accounting from group financial statements to the separate financial statements, which could not be resolved in this project.

On the issue where a subsidiary entity grants, to its employees, rights to equity instruments of its parent, the IFRIC decided to proceed with D17 as drafted (cash-settled), as the alternative treatment is far more problematic (which entails assuming that it does not matter whose shares the subsidiary settles with - the parent's shares or any other unrelated entity). On the issue of whether the classification should be the same whether the parent entity or the subsidiary entity grants those rights because the economic substance of the transactions is the same, the IFRIC asked the staff to reconsider the issue and bring back another paper at the next meeting.

Customer Loyalty Programmes

Loyalty cards/programs have long been an integral part of many companies' incentives and customer relationship management programs. Loyalty programs currently operating serve businesses as diverse as supermarkets, telecommunication companies, airlines, hotels, automobile rental companies, banks, and music and book sellers. The question before IFRIC is what is the appropriate accounting under IAS 18 Revenue when an entity provides rewards, normally non-cash rewards, to loyal customers.


The IFRIC discussed in general terms, the various schemes in place in trying to determine the scope of this project. IFRIC members noted that discounts and other sales incentives, regardless of how they are structured, should not be included in the scope of this project.

Multiple element sales

Paragraph 13 of IAS 18 states that "in certain circumstances, it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction". This statement gives no guidance on:

  • a. when a component of a single transaction is separately identifiable and;
  • b. when applying the revenue recognition criteria in IAS 18 to a separately identifiable transaction is necessary to reflect the substance of the transaction.

The IFRIC agreed to develop indicators that could be used to establish when IAS 18.13 would be applicable.

After some debate, IFRIC agreed that IAS 18.13 is not helpful in addressing issues related to multiple element sales transactions nor is there any direction to other Standards that is useful. IAS 18.19 however leads to IAS 37.

IFRIC was asked to consider, if it considers that IAS 37 is applicable, whether the entity incurs a present obligation to its customers under a loyalty program:

  • a. when purchases are made by the customer;
  • b. when the customer reaches the minimum threshold at which it can redeem its accumulated points; or
  • c. at a later point (for instance, when the customer asks to redeem its points)?

IFRIC did not reach a conclusion on this issue as some entities do not announce their schemes to customers and there seems to be an issue with (a) above where repeated purchases are required before the customer is entitled to a reward (at what point does the entity incur the obligation; after the first purchase or after the last required purchase, or is it somewhere in between?).

On the issue of measurement, IFRIC agreed that this should be a separate project as there are broader issues outside the scope of customer loyalty programmes that require addressing. The alternatives identified by the Staff for IFRIC to consider include measurements based on:

  • a. the estimated cost to the entity to provide the promised items;
  • b. the excess, if any, of the estimated cost to provide the promised items over the amount the customer will pay for the items;
  • c. the excess of the value of the promised items over the amount the customer will pay for the items (opportunity cost) or;
  • d. some other amount.

Regarding the applicability of IAS 32 and IAS 39, IFRIC agreed that generally, contracts within the scope of this project would be considered to be normal use contracts. In addition, schemes that reward customers in cash are very rare, therefore in most cases, no financial liability arises. In those rare cases where a customer is rewarded in cash for loyalty, then clearly a financial liability arises.

Debrief on IAS 19 Hybrid Plans

The staff provided an oral report back of discussions with experts in the actuarial community. The feedback was that the deconstruction approach is considered useful and so is the embedded guarantee approach in accounting for hybrid plans. However the approach in IAS 19 through which actuarial gains and losses are deferred, hinders the full application of the embedded guarantee approach as fair value measures cannot be fully implemented.

In most cases, the intrinsic value approach is used at present.

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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