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Notes from day 2 of the IFRIC meeting

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

04 Mar 2006

The International Financial Reporting Interpretations Committee (IFRIC) met at the IASB's offices in London on Thursday 2 March and Friday 3 March 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 Meeting2 March 2006 Relationship with National Standard-setters and National Interpretive Groups The IFRIC discussed staff proposals on how the IFRIC should interact with national standard-setters and national interpretive groups.

The proposals were based on the principles enunciated in the draft Statement of Best Practice: Working Relationships between the IASB and other Accounting Standard-Setters. [This document was formerly known as the Draft Memorandum of Understanding and was exposed for comment in 2005.]

Generally, the IFRIC supported the staff positions; however there was a concern that the requirement 'not to monitor actively the work of NSSs and NIGs' was unrealistic. The proposal was thought to be too restrictive and might preclude the monitoring and exchange of information between 'market leaders' and the IASB staff that occurs currently.

The staff will incorporate the IFRIC's comments in the draft of the IFRIC Due Process Handbook due to be placed before the IASC Foundation Trustees prior to exposure for public comment.

IAS 18 - Customer Loyalty Programmes

The IFRIC discussed whether customer loyalty programmes should be regarded as:

  • (a) goods and services supplied as part of a sales transaction;
  • (b) costs of securing sales of other goods and services; or
  • (c) possibly either, depending on the nature of the programme?

Views around IFRIC were evenly divided among the three alternatives. However, several IFRIC members agreed that the analysis provided by the staff tended to support (a), but considered that in many situations (b) was the more appropriate answer. It was noted that some loyalty programmes could be analogised to lease incentives, which are treated as part of the cost of the lease to the lessor, rather than as a reduction of revenue.

The staff next addressed whether loyalty programmes represented separately identifiable components of a transaction for the purposes of IAS 18. The meeting accepted that the staff's analysis was appropriate and that if you accepted approach (a) to revenue recognition. Some members noted that the time value of money would have an effect on the amount recognised for the subsequent service component. The Chairman noted that the IASB's project to revise IAS 37, which is developing a 'cost to settle' model, which could be significant to this issue.

The staff redefined their position such that, provided that an entity could allocate revenue to the elements and could estimate the cost of the first element, the entity should recognise revenue for the first element and defer the revenue related to the subsequent element(s). Some members noted that in certain situations (for example, air fares) there could be 80-100 different prices represented on a given revenue event (for example, flight). The cost of applying the staff recommendation to the transaction would be very onerous, and, by inference, the information provided of little utility to users.

The IFRIC agreed that when the rights granted under a loyalty programme have the economic nature of sale incentives, the sale is to be considered as a whole, because IAS 18 paragraph 14(a) and (e) have been satisfied. This conclusion was appropriate when the entity had concluded that IAS 18 paragraph 19 was appropriate. However, some did not agree with the analysis that IAS 18 paragraph 19 applied in all situations.

After a protracted debate, the Chairman directed the staff to prepare a draft Interpretation on the basis of no alternative treatments, based on view (a) above (because there was little opposition to the components approach). While this did not guarantee that view (a) would be accepted by a sufficient number of IFRIC members, it provided a means to carry the debate forward.

Review of Tentative Agenda Decisions

The IFRIC reviewed and confirmed the following agenda decisions for which draft 'rejection notices' were published in IFRIC Update as noted:

IFRIC Update (December 2005)

  • IFRS 3 Business Combinations - Whether a new entity that pays cash can be identified as the Acquirer
  • IFRS 3 Business Combinations - 'Transitory' common control
  • IAS 17 Leases - Leases of land that do not transfer title to the lessee
  • IAS 12 Income Taxes - Scope
  • IAS 18 Revenue - Subscriber acquisition costs in the telecommunications industry

IFRIC Update (January 2006)

  • IAS 27 Consolidated and Separate Financial Statements - Separate financial statements issued before consolidated financial statements

IFRIC Agenda: Consideration of IFRIC Agenda Committee Recommendations

IFRS 2 Share-based Payment: Scope of IFRS 2 – Share plans with cash alternatives at the discretion of the entity

The IFRIC was asked whether the following should be treated as a share-based payment transaction in accordance with IFRS 2:

There are a number of bonus plans that may be settled in shares or in cash at the discretion of the sponsoring entity. In addition, the amounts of the cash alternative under those bonus plans may not be determined in a manner that is related to the price of the entity's shares. For example, a company (the issuer) agrees to pay employees a bonus based on performance criteria which are not directly linked to its share price and the arrangement provides the issuer with a choice of settlement, either in cash or in shares with value equivalent to the value of the cash payment.

The IFRIC declined to take this issue to its agenda. Members agreed that the transaction was a share-based payment transaction. The draft rejection notice would refer to IFRS 2 paragraphs 41-43 (the proposed draft rejection wording was not available to Observers)

IFRS 2 – Share plans with cash alternatives at the discretion of the employees: Grant date and vesting periods

The IFRIC considered the following transaction: bonus plans may provide employees with a choice of having cash at one date or shares at a later date.

For example, on 1 January 20X1, an entity enters into a bonus arrangement with its employees. The terms of the arrangement allow the employees to choose on 31 March 20X2 either (1) a cash payment based on between 25 and 50 per cent of the employees' salary on 31 March 20X2 (the exact percentage would depend on the entity's profitability) or (2) a certain number of shares with value equivalent to 150% of the cash payment.

If, on 31 March 20X2, the employees choose to have shares instead of a cash payment, they are required to work for the entity for a further three years and shares would be delivered to them on 30 March 20X5.

The issue considered by the IFRIC was how IFRS 2 should be applied to such a share plan. In particular, assuming that the transaction is a share-based payment transaction in accordance with IFRS 2, the questions that arise are (1) when the grant date is and (2) what the vesting period is.

The IFRIC declined to take this issue to its agenda. On (1), the IFRIC agreed that in the example discussed, the grant date would be 1 January 20X1, being the date on which both the entity and the employees understood the terms and conditions of the arrangement, including the formula that would be used to determine the amount of settlement. On (2), the IFRIC agreed that the vesting period for the equity component and the debt component should be considered separately. Members discussed proposed draft rejection wording that was not available to observers.

[Those interested in this topic might wish to note that there is a potential overlap of item (2) and the proposed Amendment to IFRS 2 regarding vesting conditions.]

IFRS 2 – Fair value measurement of a post-vesting transfer restriction

The IFRIC considered employee share purchase plans in which employees can buy shares of the employing entity at a discount to the market price but are not permitted to sell those shares for a certain period after the vesting date.

The IFRIC declined to take this issue to the agenda. Members discussed proposed draft rejection wording that was not available to observers.

IAS 39 Financial Instruments: Recognition and Measurement – Aspects of Derecognition in the Context of Securitisation

The staff conducted an extended educational session on issues before the IFRIC. These issues essentially address how best to make the requirements of IAS 39 and summarised in the flowchart in IAS 39 AG 36 operational.

It was noted that IFRIC members were aware of diverse accounting treatments around the world as well as divergent interpretations of how IAS 39 AG 36 should be applied in practice.

After working through the staff's initial analysis, the IFRIC asked that the staff treat the various issues identified as part of a single Interpretation and proceed with the project on that basis.

IAS 39 Financial Instruments: Recognition and Measurement – Hedging Inflation Risk: Whether inflation risk qualifies as a separable component for hedging purposes

The IFRIC discussed whether inflation qualifies as a risk associated with a portion of the fair value or cash flows of an interest-bearing financial asset or an interest bearing financial liability in terms of IAS 39 paragraph 81. The staff noted that if inflation risk qualifies as a risk associated with a portion of the fair value or cash flows of an interest bearing financial asset or an interest bearing financial liability then it would be possible to hedge interest bearing financial assets and financial liabilities with respect to inflation risk.

The staff position was that inflation risk was not a separable component, based on a reading of IAS 39 AG 100, which states, among other things:

Changes in the price of an ingredient or component of a non-financial asset or non-financial liability generally do not have a predictable, separately measurable effect on the price of the item that is comparable to the effect of, say, a change in market interest rates on the price of a bond. Thus, a non-financial asset or non-financial liability is a hedged item only in its entirety or for foreign exchange risk.

The IFRIC agreed that there was a need for more guidance on what a portion is under IAS 39, and whether the staff's view of AG 100 was appropriate when the instrument had only financial components. The IFRIC was divided: some members were convinced that inflation risk was a separable component: 'base inflation' is traded on some deep and liquid markets. Others disagreed, saying that just because something was traded did not make it a component for the purposes of IAS 39.

The IFRIC asked the staff to develop the model proposed further, based on accounting standards currently in force.

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

Scroll down for notes from Day 1 of this meeting.

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