Most IFRIC members supported the staff's proposed amendment.

IFRIC members then discussed how contractual rights arising from a guarantee would affect recognition of a financial asset. Members generally agreed that a contractual guarantee by the grantor, ensuring a certain cash amount on the service concession, should be recognised as a financial asset.

Some members also said that there should be a dividing line between contractual rights to cash and other contractual rights to non-cash items. This would imply that contractual rights/guarantees given to a service provider do not necessarily exclude the recognition of an intangible arising under the same contract (that is, recognition of both financial assets and intangibles).

While acknowledging that bifurcation may be appropriate in certain circumstances, some IFRIC members expressed their concern that this would create measurement problems.

The following general views were given at the end of this part of the discussion:

• Members were generally supportive of the proposed amendment to clarify that the economics of the transaction should determine classification. Some minor amendments were proposed and will be considered by the staff.
• IFRIC accepted that the economics in some service concession arrangements would lead to a bifurcation model in which the service provider would have to account for both financial assets and intangibles.

Staff will provide the IFRIC with a revised Draft interpretation.

The interaction of D12 with IFRIC 4

The paper set out two issues for the IFRIC to decide:

• Whether the 'significant residual interest' criterion for service concessions was a necessary part of the scope requirements in D12.
• Whether the scope issue between D12 and IFRIC 4 should be resolved by amending IFRIC 4 to specifically exclude service concession arrangements.

Staff recommended no changes to the scope paragraph (that is, leaving the 'significant residual interest' criterion in service concessions as proposed in the Exposure Draft), as they thought the criterion was essential to clarify the scope of D12.

The IFRIC discussed how this would affect classification of 'whole of life assets' (that is, an asset used in a service concession arrangement for the whole of its useful life). IFRIC members generally concluded that the 'significant residual interest' criterion should be kept, which would mean that such assets would be out of the scope of service concessions. Members generally felt that a contract would not be outside the scope of IFRIC 4 just because there is a significant residual. However, because comment letters expressed concerns about the scope issue, it would be more helpful to amend IFRIC 4.

The IFRIC agreed that the residual interest criterion in paragraph 5(b) of IFRIC D12 should be amended to clarify that the interpretation applies if a significant residual interest exists and that interest passes to the grantor. If a significant residual interest does not exist (that is, whole of life arrangements) but the other scope criteria are met, the arrangement will be also within the scope.

The IFRIC therefore decided to amend IFRIC 4 stating a specific scope exclusion for service concession arrangements.

Analysis of remaining comments

Staff had analysed the responses received on the remaining questions in exposure drafts D12, D13, and D14 that had not been discussed at the prior IFRIC meeting. Staff made various proposals based on responses received.

Timing of recognition of an intangible asset

The ED had proposed not to mandate the timing of recognition of an intangible asset. The staff suggested that the IFRIC postpone its discussion of this issue until final agreement on the dividing line between recognising a financial asset and recognising an intangible asset.

The IFRIC agreed to the postponement.

Amortisation of an intangible asset

The staff proposed to clarify in the Basis for Conclusions that amortisation methods acceptable under IAS 38 would be acceptable for amortisation of intangibles in service concession arrangements.

The IFRIC discussed the 'unit of production' (UOP) method in relation to this proposal. Some members thought that the UOP method would better reflect the economic circumstances if the underlying value of the intangible changed during the service arrangement.

The IFRIC did not decide whether to accept the staff proposal. Instead, IFRIC asked the staff to explore the interaction with the requirements in IAS 38 on amortisation of intangibles and bring this issue back at a future meeting.

Repairs and maintenance obligations

Staff proposed that the IFRIC should reconsider the treatment of repair and maintenance obligations when they had concluded on how to proceed regarding the dividing line between financial assets and intangibles.

IFRIC decided to postpone this discussion.

Allocation of contract revenue

Staff had proposed to strengthen the analysis on which revenue should be allocated between different activities of a service concession arrangement by reference to the fair values.

Some members expressed a fundamental disagreement with the staff proposal. They commented that this was an issue that could not be answered under service concessions because it is being addressed by the Board as part of its measurement project.

The IFRIC decided not to address this issue.

Effective date

Staff proposed that IFRIC should consider an effective date for the interpretations when their post-exposure deliberations are complete.

The IFRIC agreed.

IAS 18 Revenue Recognition - Sales of Real Estate

The IFRIC agreed to add to its agenda a project to clarify how the requirements of IAS 18 Revenue should be applied to real estate sales in which contracts are agreed before construction is complete.

The IFRIC then discussed matters to be addressed in the project. With regard to the scope of the interpretation, the point was made that the interpretation should assume the relevant agreements through which the construction work is to be undertaken to have been agreed prior to construction. The IFRIC agreed to revisit the scope after discussing the other matters.

Two possible fact patterns could be developed as the potential issues to be addressed:

• 1. Whether it is permissible to switch from the sale of goods guidance (IAS 18.14) to the rendering of services guidance (IAS 18.20) at some point during construction?
• 2. If legal title to the land transfers to the buyer before construction is completed, can IAS 18 be interpreted in a way that allows, from that point onwards, the contractor's activities to be viewed as delivering items onto the buyer's property.

The second issue was noted as posing further questions about separating identifiable components, possibly the land and building under construction as separate deliverables. IFRIC members noted that it is quite possible to deliver a partially complete building.

The IFRIC agreed that the interpretation should address the circumstances in which a contract for sale should be regarded as a construction contract within the scope of IAS 11.

In addressing when revenue should be recognised (provided it is appropriate to apply IAS 18), the IFRIC agreed to explore how transfers of legal title take place in such construction arrangements (title to land may transfer to the buyer but the construction activity continues under the control of the contractor) and how that differs from the notion of 'equitable title' referred to in paragraph 9 of the Appendix to IAS 18. Some IFRIC members noted that the term 'equitable title' is not defined in IFRSs and is used loosely in various jurisdictions. It was agreed that the Interpretation should be drafted using the 'significant risks and rewards' notion with a reference to equitable title as appropriate.

IFRIC noted the possibility of recommending an amendment or deletion of paragraph 9 of the Appendix to IAS 18 if an Interpretation is finalised. This was re-enforced by some IFRIC members who noted that any Interpretation prepared would interpret the Standard, not the Appendix that accompanies but is not part of IAS 18.

IFRIC noted the IAS 18.14(e) requirements about costs but noted that the interpretation should not deal with the allocation questions that arise (for example, costs attributable to the penthouse situated at the top of an apartment block are likely to differ from the costs of the ordinary apartment on the ground floor) as this is an area of judgement based on facts and circumstances.

IAS 19 Post-employment Benefits - The Effect of a Minimum Funding Requirement (MFR) on the Asset Ceiling

The key decisions made at the September 2005 meeting were as follows:

• 1. If an MFR obligates the entity to pay additional contributions to a plan, an additional liability should be recognised under IAS 19 to the extent that the assets derived from those contributions would not be available to the entity as a refund or reduction in future contributions.
• 2. It is not necessary for the refund or contribution reduction to be immediately available at the balance sheet date, provided that it would be available at some point during the life of the plan or when the plan liability is finally settled.
• 3. The amount available as a refund shall be recognised to the extent that any surplus existing on the final settlement of the plan liabilities will revert to the entity, after taking into account all the costs associated with the settlement.
• 4. The amount available as a reduction in future contributions is the present value, using IAS 19 assumptions, of:
  • i. The service cost (if there were no surplus) excluding future employee contributions; less
  • ii. the entity's minimum funding contribution requirement.

The IFRIC considered a draft interpretation based on the above decisions.

The IFRIC debated whether an obligation exists merely because of a requirement to place a certain amount into the bank account of the pension fund. The discussion included whether it is of significance if the entity is able to recover that amount through reduced future contributions or otherwise. IFRIC agreed that an obligation exists provided that the MFR is with respect to past service and that if the resultant asset (which may arise if the contribution is made) were recoverable, the liability to make an extra contribution (the MFR) may have a value of nil as a result of applying the IAS 19 methodology which offsets liabilities and assets.

If at the balance sheet date the contribution had not been made to the pension fund, IFRIC discussed the possible accounting to recognise the obligation arising from the MFR. Some IFRIC members suggested that the debit entry should recognise a plan asset that would then be subject to an impairment test that takes into account whether or not it would be recoverable through reductions in future contributions. Any impairment would be recognised in profit or loss. Others believe this accounting cannot be achieved because IAS 19.103 precludes unpaid contributions from plan assets.

IFRIC members commented that the draft interpretation should clearly separate the issue of the MFR liability from the asset ceiling issue that may arise once the MFR liability has been settled.

IFRIC discussed the applicability of the draft interpretation to funding requirements in general, as some IFRIC members believe there to be no distinction in substance between MFR set out by governments and those set out by contract or otherwise between entities and employees (or their representatives, such as trade unions). It was not clear how IFRIC decided to proceed with that issue.

Various questions that may arise on transition were discussed briefly, and staff suggested that a paper be prepared for consideration at a future meeting.

The staff asked the IFRIC to consider the following outstanding issues:

Future changes in the workforce

At the previous meeting, the IFRIC rejected the view that the entity should make allowances for any future changes in the size and demographics of the workforce consistent with the management's most recent budgets/forecasts in determining the future contribution reduction available. The IFRIC decided that actuarial assumptions, including demographic assumptions, used in computing the net plan asset available should be consistent with the assumptions made to compute the benefit obligation at the balance sheet date.

Some IFRIC members pointed out that, in practice, actuarial valuation techniques often consider normal attrition of the workforce and compensate for that by assuming new employees join to replace those that leave the employ of the entity. Following on from this, any significant future changes in the workforce would be accounted for as curtailments.

Associated costs

The staff recommend that the IFRIC should not issue guidance on how the present value of the associated cost should be determined (includes costs associated with gradual settlement or wind-up of the plan). The IFRIC appeared to agree with this recommendation.

IAS 32 - Classification of a Financial Instrument as Liability or Equity

The staff presented a paper in which the analysis provided the rationale that economic compulsion is an issue that may affect the manner of settlement but does not affect classification of a financial instrument as a liability or equity.

IFRIC members generally agreed that the staff's analysis was accurate and reflected the contents of IAS 32. However, some IFRIC members said that although that is what IAS 32 requires (particularly, paragraph AG26), they did not like the answer. Some IFRIC members pointed out the need for an interpretation given the misunderstanding in practice of whether economic compulsion can create an indirect obligation that would affect classification on initial recognition. After agreeing that AG26 is clear, and therefore negated the need for an interpretation, IFRIC decided to remove this issue from its agenda, with public explanation of why, and possibly to release the staff paper as useful analysis for constituents via the IASB website.

IFRS 1 - Cost of a subsidiary in the separate financial statements of a parent

The IFRIC was asked to consider two issues regarding the accounting for investments in subsidiaries on adoption of IFRS 1 First-time Adoption of International Financial Reporting Standards in the separate financial statements of a parent. These issues are applicable only to the separate financial statements of the parent.

• 1. How to determine the cost of an investment in a subsidiary in the separate financial statements of the parent entity upon its transition to IFRS?
• 2. What is the dividing line for pre- and post-acquisition reserves of a subsidiary for the purposes of determining the carrying amount of the investment in a subsidiary in the parent entity's first IFRS separate financial statements?

The point was made that the treatment of investments in subsidiaries in the separate financial statements of the parent was not addressed satisfactorily in IFRS 1. The intention of the exemption available for restating business combinations was to discourage the recreation of data that was not collected at the time of the transaction and that compelling entities to revisit every pre-transition cost of investment and pre-acquisition reserves calculation is inconsistent with the principles in IFRS 1.

The Agenda Committee recommended that this issue could not be resolved by an Interpretation and that the Board should be requested to amend IFRS 1. The IFRIC agreed with this proposal.

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