Notes from day 1 of the July 2006 IFRIC meeting

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07 Jul 2006

The International Financial Reporting Interpretations Committee (IFRIC) is meeting 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 first day of the meeting.Notes from the IFRIC Meeting6 July 2006 New Members The Chairman noted that the IASC Foundation Trustees had appointed three new IFRIC members on 5 July 2006: Takatsugu Ochi (present at the meeting), Sara York Kenny and Ruth Picker (neither of whom was able to be present because of prior commitments).

He also welcomed Reinhard Biebel as the new representative of the European Commission.

Customer Loyalty Programmes

Review of text of a Draft Interpretation

Rationale for applying paragraph 13 rather than paragraph 19 of IAS 18

The IFRIC concurred with proposed changes to the Draft Interpretation to stress that the basis of the Interpretation was IAS 18 paragraph 13 and its concept of applying the 'revenue recognition criteria to the separately identifiable components of a single transaction.' In addition, the guidance in IAS 18.13 is normative and IAS 18.19 is the exception and applies in those circumstances in which the entity will incur costs in the future as a result of an event outside the control of both it and the customer (e.g., a claim under a warranty).

Estimates of fair values of award credits

The IFRIC agreed that the Draft Interpretation should not provide detailed guidance on measurement and estimation techniques. Rather, it should establish a principle that an entity should determine the fair value of the consideration received and the fair value of the goods or services delivered and recognise revenue based on the relative fair values of the two. The methods used to determine this allocation should be consistent and should also result in some revenue being allocated to the reward credits. Recognising revenue on one basis and deferring revenue on another would be precluded.

Programmes that offer a choice of awards

Decision. The IFRIC agreed that the Draft Interpretation should address programmes that offer a choice of awards. There was little discussion and the proposed wording was not available to Observers.

Awards supplied by a third-party provider

Decision. The IFRIC agreed that revenue should be recognised when either the customer redeems award credits or when a third party assumes the obligation to supply the awards. IFRIC members asked that the Draft Interpretation should give an example of this type of award (for example, a hotel grants airline miles/points).


The IFRIC discussed how entities that operate customer loyalty programmes should account for award credits that are forfeited by customers, that is, never redeemed for awards.

The IFRIC agreed that the Draft Interpretation should be explicit that an entity should make an estimate of the expected forfeitures of awards as part of the initial allocation of the consideration received (between revenue and the future deliverable). That estimate can be revised (as any other estimate) but that revision does not affect the initial allocation. As agreed earlier in the session, the Draft Interpretation will not provide detailed guidance on how this estimation should be done, but the method chosen should be applied consistently.


Decision. The Chairman polled IFRIC members as to who would object to the issue of a Draft Interpretation based on the Draft Interpretation as presented, amended and supplemented by the decisions reflected above. No IFRIC members intimated an intention to object to the Draft Interpretation.

Drafting comments will be taken out of session and the normal 'negative clearance' will be sought from the Board in die course. It is hoped to issue the Draft Interpretation for comment presently.

IFRIC D17 – IFRS 2: Group and Treasury Share Transactions

The IFRIC discussed the following situations, previously raised in paragraph 6(c)(i) and 6(c)(ii) of D17 Group and Treasury Share Transactions:

  • The parent (or another entity of the same group) directly grants its equity instruments to the employees of a subsidiary; and
  • A subsidiary grants equity instruments of its parent (or another entity of the same group) to its employees.

Situations in which the Parent grants options on its shares directly to a Subsidiary's employees or to the Subsidiary, which then delivers them to its employees

The IFRIC quickly coalesced around a method (Method 3 in the Observer note) that would result in a 'reasonable allocation of the group charge' being made by the Parent to the Subsidiary. This method ensures that, regardless of the intragroup payment structures that exist, the effects of the transactions are reasonably reflected in profit or loss of the subsidiary that receives services from the employees. Several IFIRC members, while expressing support for the method, also expressed concerns about the possible consequences of this approach on separate financial statements generally. Others noted the concern, but thought that because these schemes were always 'group schemes' and the parent company was actively involved in the scheme, the reasonable allocation approach reflected the substance of the transaction.

A subsidiary grants equity instruments of its parent (or another entity of the same group) to its employees The IFRIC was more troubled with extending Method 3 to the second group of transactions, because some of them thought that the approach contravened IAS 39's definitions of a derivative and the accounting prescribed for them in that Standard.

Decision. After an extended discussion, it was decided to draft an Interpretation to address the first Issue only. The Interpretation would comment that, in some circumstances, share-based payment schemes would be more appropriately treated as cash-settled.

Next steps

The staff will bring a draft Interpretation to the next meeting of the IFRIC.

IFRIC D12-14: Service Concession Arrangements

The staff presented the findings of further research it had conducted to obtain an understanding of how the contractual commitments for operations and maintenance obligations of service concession arrangements work in practice. As a result of this improved understanding, the staff recommended certain changes to the application guidance of the financial asset model set out in D13.

Decision. Although the IFRIC disagreed with some of the staff suggestions, it was agreed that the it was necessary to explain when it would be appropriate to use the 'D13' model to repairs and maintenance obligations and that the final Interpretation should include examples of when IAS 37 would apply to such obligations and when the D 13 model would apply.

Next steps

The IFRIC will next consider proposed illustrations of the bifurcated model and revised examples based on the approaches proposed in D 13 and D 14.

At a subsequent meeting(s), the IFRIC will consider the timing of recognition of any intangible assets; the transition date; and whether re-exposure is necessary. It is hoped that, barring the necessity for re-exposure, a final Interpretation would be issued by December 2006.

IAS 19 Post-employment Benefits – The effect of a minimum funding requirement on the asset ceiling

Review of text of a Draft Interpretation

The IFRIC discussed a revised draft of a Draft Interpretation on this topic. The revised draft included changes approved at the May 2006 IFRIC meeting. The detailed drafting was not available to Observers, although the substance of the changes was included in the Observer note.


Decision. The Chairman polled IFRIC members as to who would object to the issue of a Draft Interpretation based on the Draft Interpretation as presented, amended and supplemented by the decisions reflected above. No IFRIC members intimated an intention to object to the Draft Interpretation.

Drafting comments will be taken out of session and the normal 'negative clearance' will be sought from the Board in die course. It is hoped to issue the Draft Interpretation for comment presently.

>Agenda Proposal: Guidance on Identifying Agency Arrangements

The IFRIC, although noting that it did not see evidence that there is currently widespread divergence in this area, agreed to add a project to develop guidance at the level of general principles in IAS 18 on identifying whether an entity is acting as an agent in an agency relationship. At the same time, it noted that, because it was unaware of diversity in practice, the project should not be considered a high priority project.

Review of Published Tentative Agenda Decisions

IFRS 2 Share-based Payment - Fair value measurement of a post-vesting transfer restriction

The IFRIC confirmed its Tentative Agenda Decision with respect to this topic.

There was a discussion as to whether this decision would result in the treatment of any restatements necessary as the correction of an error, noting that the topic was raised as the result of guidance issued by a national standard-setter. The IFRIC noted that it was up to entities to determine whether any changes necessary were changes in estimates or other types of restatements (including errors).

Decision. It was agreed that the Rejection statement would state that there was 'sufficient authoritative guidance' available in IFRS 2 rather than stating that 'the answer is clear'. It was thought that this would avoid any restatements being treated as errors.

IAS 17 Leases - Recognition of contingent rentals

Decision. The IFRIC had received three comment letters on its proposed Rejection statement on this topic. The IFRIC agreed that none of the letters fundamentally changed its view that the topic should not be taken to the Agenda.

However, the IFRIC did agree:

  • To send a recommendation to the IASB that at the next available opportunity IAS 17 should be clarified to state that contingent rentals should not be included in minimum lease payments for the purposes of income and expense recognition.
  • The Rejection statement should be explicit that the topic referred to the IFRIC addressed income and expense recognition ('straight-lining') only and did not address lease classification.

Recommendations from the IFRIC Agenda Committee and the Staff

Valuation of electricity derivatives

Decision. The IFRIC reached a tentative decision not to add to its Agenda a topic to develop an Interpretation of IAS 39 with respect to the valuation of certain electricity derivatives, for example 'contracts for differences'. The IFRIC noted that the original submission was more in the nature of a request for application guidance rather than interpretive guidance.

The Rejection statement would note that IAS 39 already contains a valuation hierarchy (IAS 39.48-.49 and AG69-AG82) and that the guidance in the IASB's forthcoming proposals on fair value measurement would also assist in this area.

IAS 11 Construction Contracts/IAS 18 Revenue Allocation of profit in unsegmented contracts

This issue arose out of the IFRIC's project on service concession arrangements. In April 2005, the IFRIC noted that "The difference related to revenue recognition on construction contracts that involved different activities but did not meet the conditions in IAS 11 for segmentation. The IFRIC had observed that IAS 11 required gross recognition of revenue and costs (the 'gross approach'), while US GAAP required recognition of a percentage of expected contract profit (the 'net approach'). Arguably, the use of the gross approach (unlike the net approach) could result in the recognition of different profit margins on different activities within an unsegmented contract."

The staff was asked to consider whether it was necessary to develop stand-alone interpretive guidance or whether it would be sufficient to include guidance in the service concession Interpretation.

The IFRIC agreed that there was sufficient appropriate guidance already in IAS 18 and IAS 11 to determine the appropriate accounting in such circumstances.

Click to view Diagram of the Existing Guidance as discussed by IFRIC.

They thought the issue too fundamental to place in the service concession arrangement Interpretation. In addition, there were some cross-over issues with customer loyalty programmes.

Decision. The IFRIC tentatively agreed not to add the topic to its Agenda. It will consider proposed rejection wording at its next meeting.

IFRS 2 Share-based Payment-Incremental Fair Value to Employees as a result of unexpected Capital Restructurings

The IFRIC considered a submission addressing a situation in which a sponsoring entity had a capital restructuring (for example, a 1-for-2 share consolidation) subsequent to a grant of share options to its employees. At the time of the grant, the sponsoring entity did not expect to restructure its capital. As a result of the capital restructuring, the fair value of the share options increases significantly. However, the share option plan does not specify whether adjustments should be made to the plan in the event of a capital restructuring.

Decision. The IFRIC tentatively decided not to take this topic to its Agenda. In doing so, it noted:

  • The Rejection statement should state that the IFRIC would not expect to encounter situations such as that raised in the submission in normal commercial circumstances (that is, the submission fails the criterion in paragraph 27(a) of the IFRIC Preface).
  • It expected it to be rare for share-based payment plans not to make provision for capital restructurings and that, although the fact pattern in the submission probably represented an abuse, the abuse was not an accounting issue but a corporate governance issue.

Economic obligations

The IFRIC Chairman briefed the IFRIC on the results of the Board's discussion of economic obligations ('economic compulsion') at its June 2006 meeting and the statement that it issued subsequently in IASB Update.

Decision. It was agreed that the IFRIC would include the Board's statement in a proposed Rejection statement in the forthcoming issue of IFRIC Update, together with a statement from the IFRIC that it had decided not to take the topic to its Agenda. The usual comment period would apply.

IAS 39 Financial Instruments – Securitisations: Derecognition of Groups of Financial Assets

At the May IFRIC meeting the staff was asked to consider the implications of an Interpretation which would align the wording in IAS 39 paragraph 16 with the 'possible intention' of the Board. That request raised two intriguing questions:

  • What was the intention of the Board at the time of writing IAS 39, and
  • How could that intention be applied to the more recent questions that are on the IFRIC agenda (as well as future issues that may arise)?

The staff concluded that it would not be possible to ascertain what the intention of the Board actually was without asking the Board directly. Consequently, the IFRIC was asked to approve a reference from the IFRIC to the IASB for clarification. The result of this reference might be that the Board decides that it was best placed to assume responsibility for the topic or that it could give the IFRIC general advice on which it could address the topic and any future securitisation/derecognition issues.

The IFRIC agreed with the staff recommendation.

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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