Notes from second day of the July 2006 IFRIC meeting

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08 Jul 2006

The International Financial Reporting Interpretations Committee (IFRIC) met at the IASB's offices in London on Thursday 6 July and Friday 7 July 2006. 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 Meeting7 July 2006 Employee Benefit Trusts in the Individual or Separate Financial Statements of the Sponsor At the May 2006 meeting, the IFRIC was asked to interpret an issue on accounting for employee benefit trusts that is established by a sponsoring entity to facilitate the transfer of equity instruments to the sponsoring entity's employees under share-based payment arrangements.

At that meeting the IFRIC decided to add the issue to its agenda.

The IFRIC was concerned whether boundaries between the sponsor and the employee benefit trust could be identified. The IFRIC discussed the notion of an 'entity' in IFRS, and agreed that there is no clear guidance in current IFRSs on whether an employee benefit trust is an entity or not. However the IFRIC seemed to agree on that if the trust is a legal entity and has ownership of the shares, each transaction should be treated separately in the individual financial statements of the sponsor and the employee benefit trust.

Decision. The IFRIC agreed that without a clear definition of what an entity is, the IFRIC could not issue an interpretation. Therefore the IFRIC decided that the issue should be rejected from the agenda, and that the IFRIC would inform the Board on this decision.

IAS 39 Financial Instruments: Recognition and Measurement – Identification of a portion of an exposure eligible for hedge accounting

The IFRIC continued to deliberate whether a financial asset or financial liability can be designated as a hedged item with respect to only a portion of the risks of changes in its fair value or its cash flows.

The IFRIC had previously asked the staff to explore whether the wording in IAS 39.AG100 could be used to establish a principle for identifying a portion that could be eligible to be used in hedge accounting.

The IFRIC discussed the scope of the word 'portion' in IAS 39. The discussion focussed on different components of financial assets/liabilities and whether those components would be identifiable and reliably measurable.

Some members said that a key issue would be whether the effect of an identified portion is predictable, since this would be required to perform prospective assessment of the hedge effectiveness.

Decision. The IFRIC decided that the staff should prepare a paper exploring the scope of portions in relation to hedging under IAS 39. The staff should try to develop criteria for what could qualify as a portion.

Recommendations from the IFRIC Agenda Committee and the staff

Classification of puts and forwards held by minority interests and puts or forwards received by a minority interest in a business combination contingent consideration

The IFRIC discussed two related questions:

  • 1. How to classify puts and forwards held by minority interests.
  • 2. Are puts or forwards received by minority interests in a business combination contingent consideration?

Two issues related to the first question were:

  • Whether a parent should recognise a liability for the amount payable to the minority interest due to the holding of the puts or when the parent have a forward contract to buy the shares.
  • Should a minority interest continue to be recognised?

The issue in the second question is whether variability in the amount potentially payable to a minority interest under a forward contract or a put held by the minority is contingent/deferred consideration according to IFRS 3.

The issues were initially presented as separate items, but IFRIC members found them related, and discussed both papers during the same session.

On the first issue, IFRIC members were divided as to whether an IFRS 3 approach should be applied for the contracts. Some IFRIC members did not like the approach of applying IFRS 3 to the initial transaction (where, for instance, a company issues puts to the minority interest, and where there are uncertainty whether the business transaction would happen). Hence, business combination accounting would only occur when the minority interest decides to exercise the option.

Decision. The IFRIC decided not to add this topic to its agenda. The rejection statement will address the accounting for the obligation represented by the put or forward. The rejection wording will have no reference to whether a minority interest should continue to be recognised.

Regarding the second topic, the IFRIC agreed that they would not be able to finish an interpretation before the standard on business combinations would be issued. It is expected that the new standard would address this issue.

Decision. It was decided that the second topic should not be added to the agenda, as the IFRIC agreed that they could not issue an Interpretation before the new standard on business combinations is expected to be issued.

SIC 12 Consolidation: Special Purpose Entities - Relinquishment of control

Paragraph 10 in SIC-12 has four indicators for assessing whether an entity controls an SPE. IFRIC has been asked whether any of the indicators carries greater weight than others in determining who has control over an SPE.

Decision. The IFRIC agreed to reject this issue, stating that it is not possible to reach a general conclusion as to whether any of the indicators carries greater weight than others, but rather it depends on facts and circumstances.

Definition of a derivative – Indexation on own EBITDA or own revenue

The IFRIC considered a request to interpret whether a contract that is indexed on an entity's own revenue or own EBITDA meets the definition of a derivative under IAS 39.

The IFRIC first considered whether the exemption in paragraph 9(a) applies to non-financial variables only in insurance contracts. The IFRIC agreed that the exemption is not restricted to insurance contracts.

The IFRIC then considered whether EBITDA or revenue would represent a financial or non-financial variable.

Decision. IFRIC members noted that there is current diversity in practice. Given this diversity, IFRIC members agreed not to add the topic to the agenda, on the basis that it would be unable to reach a consensus on a timely basis.

Foreign currency instruments exchangeable into equity instruments of the parent entity of the issuer

The IFRIC considered a submission in connection with exchangeable instruments issued by a subsidiary of a group that provide holders with rights to convert the instruments into a fixed number of equity instruments of the parent entity of the issuer. Two situations were outlined in the submission:

  • in one the exchangeable instruments are denominated in a currency other than the functional currency of the issuer;
  • in the other the exchangeable instruments are denominated in a currency other than the functional currency of the parent entity of the issuer.

The issue is whether the conversion options embedded in the exchangeable instruments should be classified as equity in the consolidated financial statements of the parent.

Decision. The IFRIC decided not to take this topic to the agenda.

IAS 32 Financial instruments: Presentation – Changes in the contractual terms of an existing equity instrument resulting in it being reclassified to financial liability

The IFRIC considered a situation in which an entity makes some substantive amendments to the terms of an existing equity instrument, for example, by inserting a contingent settlement provision. Consequently, the instrument is reclassified from equity to financial liability in accordance with IAS 32. On the date of reclassification, the fair value of the instrument is different from the carrying amount of the previously recognised equity instrument. The submission asked how the liability that arises from the change in the terms of the instrument should be measured at the date of reclassification. Should the liability be measured at:

  • the carrying amount in equity immediately before the reclassification; or
  • at its fair value at the date of reclassification?

Decision. The IFRIC decided not to add the topic to the agenda. The rejection note will explain that the liability should be measured at fair value when reclassified, and that the difference between the carrying amount and the fair value should be recognised in equity.

IAS 1 Presentation of financial statements - Whether the liability component of a convertible instrument should be classified as current or non-current

The IFRIC considered a situation in connection with the presentation of the liability component of a convertible instrument. The submission asked the IFRIC to provide guidance on how the liability component should be presented on the face of the balance sheet.

Decision. IFRIC decided not to endorse any view at the current stage, but rather to refer this issue to the Board for clarification.

Oral Update on Other Agenda Committee Business

IFRIC staff gave a brief update on agenda items that the IFRIC Agenda Committee are reviewing.

An issue on classification of SIM cards as inventory or assets is expected to be presented to the IFRIC in September. The Agenda Committee is also reviewing an issue on accounting for catalogues and TV spots. This issue is also expected to be presented to the IFRIC in September. A issue related to hedge effectiveness and assessment on a cumulative basis was noted, but without an indication as to when the issue would be presented to the IFRIC.

Scroll down for notes from day 1 of the meeting.

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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