Notes from day 2 of the IFRIC meeting

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14 May 2006

The International Financial Reporting Interpretations Committee (IFRIC) met at the IASB's offices in London on Thursday 11 May and Friday 12 May 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 Meeting12 May 2006 IAS 39 – Securitisations: Derecognition of groups of financial assets The staff presented the IFRIC with three different views of how 'groups of similar financial assets' should be interpreted in relationship with the derecognition provisions of IAS 39. The debate focussed on whether 'similar' in paragraph 16 was only relevant when grouping assets that have either a pro rata share of cash flows or a portion of specifically identified cash flows, as opposed to a wider interpretation of 'similar' that focuses on whether cash instruments, like receivables, are similar to derivatives.

Many considered that the inclusion of the word similar had relevance when determining which assets can be grouped together when applying the derecognition decision tree under IAS 39. If the Board had intended something different when developing IAS 39, many considered this view was not clear from the current words in the standard. If the IFRIC were to pursue this alternative interpretation, IAS 39 would potentially need to be amended through the deletion of the word 'similar'.

The IFRIC decided that the staff should consider the various options available to IFRIC and propose alternatives at a future meeting.

IFRIC D17 - IFRS 2: Group and Treasury Share Transactions

The IFRIC continued its discussion of D17 - Group and Treasury Share Transactions. At IFRIC's November 2005 meeting, the staff had presented an analysis of comments on the draft interpretation. The IFRIC was not able to get to a consensus at that meeting. Some members thought the IFRIC should discontinue the project as the issues in D17 did not address a principle for how group transactions should be accounted for in the separate financial statements of the subsidiary. However, the IFRIC asked the staff to develop a paper exploring accounting under the following issues:

  • a. when an entity grants rights to its equity instruments to its employees, and either chooses or is required to buy those instruments from another party;
  • b. when and entity's employees are granted rights to equity instruments of the entity, either by the entity itself or by its shareholder, and the shareholder provides the equity instrument;
  • c. when a parent entity grants rights to its equity instruments directly to a subsidiary entity's employees; and
  • d. when a subsidiary grants rights to equity instruments in its parent to its employees

The issue before the IFRIC at the current meeting is how to continue on D17. (Note that the staff had outlined a rejection note that the IFRIC used in their discussion, which was not available for observers).

The staff had analysed issue (a) and (b) and concluded that the principles set out in IFRS 2 were sufficiently clear to recommend that an interpretation not be issued. The IFRIC did not discuss those two issues but focused its discussion on the accounting treatment for issue (c) and )d), and specifically the accounting treatment in the subsidiary's separate financial statements.

The staff's paper outlined a treatment that would be similar for issues (c) and (d), resulting in equity-settled treatment for both. The IFRIC members were divided in their views. Some disagreed with the staff analysis as they did not think that equity-settlement accounting is appropriate in the separate accounts of the subsidiary under (d). This led to debate on the issue of 'push-down' accounting (that is, if the transactions are accounted as equity-settled share-based payment in consolidation, that accounting should be 'pushed down' to the parent's and the subsidiary's separate accounts).

At the end of the discussion, the IFRIC asked the staff to review the wording in IFRS 2 and to explore whether it possible to read into the current standard how accounting in the separate financial accounts the subsidiary and a parent in at group share-based payment transaction should be accounted for.

The IFRIC decided to postpone the decision on whether to issue an interpretation or whether to discontinue the project until the staff had analysed the wording of IFRS 2.

IFRIC D18 - Interim Reporting and Impairment – Review of responses and staff proposals

The staff presented the IFRIC with an analysis of the comment letters received on D18, along with staff's proposed responses. Staff asked the IFRIC for how to proceed.

Although the majority of respondents agreed with the consensus in the draft interpretation, there was some strong disagreement as well. The IFRIC therefore decided that the Basis for Conclusion should include a paragraph stating that the IFRIC respondents were divided and that the IFRIC had considered their views.

Some respondents believed that the consensus lacked a clear principle or failed to identify such a principle. The IFRIC said that this was the reason that they had chosen to issue a narrow interpretation that will reduce divergence, and that there should be no amendment to the interpretation based on this comment.

Some respondents said the transitional requirements were bit clear and could be read to require retrospective application from a date before the effective date of IAS 36 and IAS 39. The IFRIC decided that the draft interpretation should be amended to clarify that the draft interpretation should apply prospectively from the date when the entity first applies IAS 36 and/or IAS 39.

One respondent would include the following statement from BC8 "the draft interpretation applies only to reversals of impairment losses on goodwill and investments in equity instruments and financial assets carried at cost" in the body of the standard rather than in the Basis for Conclusions. The IFRIC stated that this is merely emphasising what is already in the interpretation and decided not to move the wording.

A number of respondents commented that the requirements in IAS 34 were more specific to interim reporting than IAS 36 and IAS 39. They disagreed with the statement in the Basis for Conclusions that IAS 36 and IAS 39 should take precedence over IAS 34 on this matter. The IFRIC agreed to the staff proposal that IAS 36 and IAS 39 is more specific regarding reversal of impairment, and that identifying which standard is more specific is a matter of judgement and central to the consensus reached. No changes will be made.

A number of respondents stated that the argument that IAS 34 was issued before IAS 36 and IAS 39 and could therefore not have considered the implications is weak and could potentially set precedent for other standards. The IFRIC agreed and decided to remove this argument.

One respondent commented that it was not clear whether the interpretation would apply to interim financial statements other than those prepared in compliance with IAS 34. The IFRIC decided that they would not amend the interpretation in this regard as the implications of this had not been considered.

A respondent suggested amending the consensus to more closely reflect the wording in IAS 39. The IFRIC stated that the consensus is sufficiently clear and would not be changed.

The IFRIC decided that the revised draft should be presented to the IASB at the meeting in June as the IFRIC's agreed position.

Review of tentative agenda decisions published in March 2006 IFRIC Update

  • IFRS 2 Share-based Payment – Scope of IFRS 2: Share plans with cash alternative at the discretion of the entity As no comments were received, the IFRIC approved the tentative decision not to add this issue to its agenda. The final decision will be published in the next IFRIC Update.
  • IFRS 2 Share-based Payment – Share plans with cash alternative at the discretion of the employees: grant date and vesting periods As no comments were received, the IFRIC approved the tentative decision not to add this issue to its agenda. The final decision will be published in the next IFRIC Update.
  • IFRS 2 Share-based Payment – Fair value measurement of a post-vesting transfer restriction In deciding tentatively not to add this topic to its agenda, the IFRIC had outlined a two-stage approach where the issue was whether the value of post vesting restrictions could be based on the 'opportunity cost' borne by employees. The IFRIC had received comments asking whether the approach taken in the rejection note was consistent with the requirements of IFRS 2. The staff presented revised wording of the earlier published tentative agenda decision (not handed out to observers). The IFRIC discussed the issue and decided to amend the wording to focus on the market opportunities available to the option holder. It was decided that a revised wording of the issue would be circulated to the IFRIC.

Recommendations by Agenda Committee regarding requests for IFRIC agenda items

  • IFRS 2 Share-Based Payment - Employee Benefit Trusts The IFRIC considered a request from the IASB to consider whether any guidance should be issued on accounting for employee benefit trusts relating to share-based payment arrangements. In November 2004, the IFRIC amended the scope of SIC 12 to remove the scope exclusion for equity compensation plans. However, the IFRIC believes that there is need for additional guidance on the separate or individual accounts, because current IFRSs do not specifically deal with accounting for employee benefit trusts relating to share-based payments. Accordingly, the IFRIC agreed take add this issue to its agenda.
  • IAS 18 Revenue - Up-front revenue recognition by a fund manager The IFRIC has received three requests for an interpretation on how a fund manager should recognise revenue arising from sale of mutual funds. Views diverge on whether all revenue received up front should be recognised immediately or whether some amount should be deferred and amortised over the investment period. After a brief discussion, the IFRIC agreed that because practice is divergent, it should add the issue to its agenda.
  • IAS 32 Financial Instruments: Presentation - Classification of a financial instrument as a liability or equity At its March 2006 meeting, the IFRIC had decided that IAS 32 was clear that a contractual financial obligation was necessary to classify a financial instrument as a liability. It also decided that economic compulsion may affect the manner of settlement but does not affect classification of a financial instrument as a liability or equity. At the current meeting, the IFRIC was presented a draft rejection based on the above for not taking the item on the agenda (not handed out to observers). Some IFRIC members expressed strong reservations about the current draft wording, as well as the decision made, as they did not believe the answer was clear regarding economic compulsion. Due to the strong reservations, the IFRIC decided that the rejection note should rather state that the reason for rejection is that the IFRIC would not be able to resolve the matter on a timely basis.
  • IAS 32 Financial Instruments: Presentation - Puts and forwards held by minority interests The IFRIC considered an issue where a parent either writes a put or agrees on a forward purchase to acquire shares in a subsidiary held by a third party. Essentially this issue raised two questions:
    • a. Should the parent entity recognise a liability for the amount potentially payable under the contract?
    • b. Should a minority interest continue to be recognised for the minority's shares that are subject to the agreement?
    The IFRIC agreed that a liability would arise when the parent have a contractual obligation to pay cash even if that is conditional on the option being exercised by the holder. On the second issue the IFRIC acknowledged that there is diversity in practice – some entities derecognise minority while others convey the reclassification through presentation. IFRIC members differed in their view on how to proceed. As the IFRIC could not agree, it decided to issue a rejection note stating that IFRIC could not reach a consensus on a timely basis. The agenda for this meeting included the following potential agenda items that were not discussed due to time constraints. The IFRIC will address these issues at a future meeting.
    • IFRS 3 Business Combinations – Are puts or forwards received by minority interests in a business combination contingent consideration
    • IAS 39 Financial Instruments: Recognition and Measurement – Definition of a derivative: Indexation on own EBITDA or own revenue
    • IAS 32 Financial Instruments: Presentation – Foreign Currency Instruments exchangeable into Equity Instruments of the Parent Entity of the Issuer
    • SIC 12 Consolidation - Special Purpose Entities – Relinquishment of control
    • IAS 11 Construction Contracts/ IAS 18 Revenue – Allocation of profit in unsegmented contracts
    Scroll down for a summary of the first day of the IFRIC 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.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.