Notes from the November 2006 IFRIC meeting

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04 Nov 2006

The International Financial Reporting Interpretations Committee (IFRIC) met at the IASB's offices in London on Wednesday to Friday 1-3 November 2006.

Presented below are the preliminary and unofficial notes taken by Deloitte observers at the meeting.

Notes from the IFRIC Meeting

1-3 November 2006

 Draft Handbook on IFRIC Due Process – Review of responses

The IFRIC discussed comments received on the consultation document issued by the IASCF on the Draft Handbook for the IFRIC.
The discussion was based on the four questions raised in the consultation document.

Question 1 - Agenda Committee

Comments received from constituents generally supported the functions performed by the Agenda Committee. The main concern expressed by constituents was that there is not enough transparency and communication around the work performed by the Agenda Committee in its current form. Some respondents had proposed as a solution that Agenda Committee meetings should be held in public, or if meetings are continued to be kept that working papers and meeting notes should be made available to the public.

Based on the responses, two possible alternatives were presented to the IFRIC as possible solutions for the concerns.

  • Keep the current form of the Agenda Committee, but clarify that the IFRIC Agenda Committee is not a decision taking body, but merely a working group which provide input on how to form issues received and which help the staff to prepare working papers for the IFRIC.
  • To 'absorb' the Agenda Committee back in the IFRIC. All staff papers would then be brought directly to the IFRIC without any 'refining' process by the Agenda Committee.

In general IFRIC members were supportive of alternative one, which is to continue the Agenda Committee in its current form. The current form allows every member to attend the Agenda Committee meeting and all Agenda Committee working papers are currently available to all IFRIC members. IFRIC members expressed that if it would go forward with the current model it would be necessary to clarify that the Agenda Committee does not have a quorum and is therefore not in a position to decide on an issue (which is not the intention either).

The staff will amend the Due Process Draft Handbook based on comments from constituents and the IFRIC.

Question 2 - Agenda Criteria

Staff presented comments received on the agenda criteria which the IFRIC uses to decide whether an issue should be taken on its agenda for interpretations or not. Comments and concerns were spread evenly on the criteria, but staff had not identified any pattern of concerns raised towards specific criteria.

There was no specific discussion regarding responses to this question.

Question 3 - Consultation regarding issues not added to the IFRIC agenda

Respondents had expressed concerns about the wording used by IFRIC when rejecting an issue to be added to its agenda for interpretations. Concerns were particularly directed to the authority the rejection had in cases where the IFRIC rejected an issue by stating 'the standard is clear'. Respondents were concerned that such wording would give authority to the statement given by IFRIC without the necessary due process. IFRIC members expressed agreement that this particular wording was unfortunate for issues not taken on the agenda.

Some respondents had proposed that the IFRIC introduced a category of 'clarifications' that would undergo a strengthened due process compared to issues that are rejected due to lack of practical relevance, because it is not widespread or because standards are clear about the issue. The staff had introduced a flow-chart decision tree that the IFRIC used in their deliberations.

The IFRIC will propose to the Trustees that they should continue to publish short explanations for why items are not taken on its agenda for interpretations as they stated that respondents seem to find this more helpful than the alternative. There was no appetite for including a formal flow-chart in the due process handbook, but the staff would look into whether it could extract some wording which could be included to further explain the due process.

Question 4 - Relationship with national standard-setters and interpretative groups

The majority of respondents commented that the IFRIC should continue to liaise with national standard-setters and interpretative groups, but that it should not be monitoring these groups and be required to respond to national interpretations that are not referred to the IFRIC.

The IFRIC did not discuss the issue.

It was agreed that the Draft Handbook would be amended based on major concerns raised by constituents and comments made by the IFRIC during this session. A draft paper will be circulated to IFRIC members offline for input.

It is expected that a proposal will be presented to the Trustees at their meeting in January 2007.

Thursday 2 November 2006

IAS 18 Revenue: Real Estate Sales

The IFRIC discussed the draft text of a Draft Interpretation and related Basis for Conclusions.

Applicable standards - Definition of a construction contract

The IFRIC tentatively concluded in September that agreements for the sale of real estate would meet the definition of a construction contract under IAS 11 Construction Contracts only if they require the seller to provide construction services to the buyer's specifications. The staff had concerns about the use of the word 'specifications' which in their opinion might be read in the narrow sense of technical design specification rather than in the wider sense of directions or instructions. Therefore, in the draft text the word 'directions' was used.

The IFRIC agreed in principle to this proposed wording but observed that the more important question was whether the buyer has purchased goods or construction services and that this question should be answered for the underlying real estate in its current state and condition. Only in case of the latter would IAS 11 apply. The IFRIC asked the staff to highlight this in the revised draft.

Applying IAS 18

The IFRIC confirmed the approach outlined in the draft text regarding the applicable revenue recognition criteria and the treatment of remaining obligations. However, the IFRIC asked the staff to concentrate on the basic principles in the respective paragraphs and to move any application guidance currently included in these paragraphs of the draft text to an appendix.

The IFRIC reaffirmed that revenue from the sale of real estate should be recognised in accordance with recognition criteria in paragraph 14 of IAS 18.

When the seller has to perform further work (such as to remedy minor defects or to complete internal decoration) the corresponding expenses should be recognised in accordance with paragraph 19 of IAS 18 and a liability should be recognised in accordance with IAS 37. If the seller has to deliver further goods or services that are separately identifiable from the real estate (such as communal amenities) paragraph 13 of IAS 18 should be applied.

Amendments to appendix to IAS 18

The staff proposed to withdraw Example 9 (Real Estate Sales) from the appendix to IAS 18 and to locate all guidance in the draft Interpretation. The IFRIC decided to consider this suggestion after the draft text has been finalised.

The IFRIC directed the staff to prepare a revised draft text of the Draft Interpretation reflecting these decisions for discussion at its January 2007 meeting.

IAS 18 Revenue – Revenue Recognition in Respect of Initial Fees Received by a Fund Manager

In September 2006 the IFRIC discussed how revenue should be recognised by a fund manager when a fund manager receives a one-off non-refundable upfront fee followed by regular payments for ongoing services received. At this meeting the IFRIC discussed a staff paper based on the decisions made in September.

Treatment of upfront investment advice

The IFRIC had a thorough debate on the identification of services provided at the initial investment in a fund.

The IFRIC confirmed that revenue is to be recognised to the extent that the upfront fee received or receivable relates to identifiable services that have been provided and can be measured reliably. The remainder of the upfront fee should be treated as deferred revenue.

The customer perspective

In September 2006 the IFRIC tentatively concluded that the recognition of revenue should be based on the customer's perspective of when the benefit of the services are received not the supplier's perspective of when the services are delivered. The staff concluded that the use of the customer perspective is not required by IAS 18 Revenue and that an Interpretation based on a customer perspective model would likely result in significant changes to the recognition of revenue in a wide range of situations which are not necessarily required by IAS 18. The IFRIC agreed with the staff and concluded that revenue should be recognised at the point at which the selling entity provides the services.

How should revenue in respect of upfront fees be recognised?

The staff proposed a hierarchy that could be used to determine the extent to which revenue in respect of upfront fees should be deferred:

  • To the extent that an entity performs upfront services which can be separately measured at fair value, revenue should first be measured at fair value in respect of those items.
  • To the extent that an entity is able to measure progress in providing its services, revenue should next be measured with reference to the stage of completion of the services.
  • To the extent that an entity can estimate its progress in providing its services based upon the costs of providing those services, the entity should next apportion revenue based upon the cost of delivering services.
  • To the extent that an entity cannot reliably measure its progress in delivering its services, revenue should be recognised on a straight line basis over the period of the services' delivery.

The IFRIC did not explicitly discuss the hierarchy but observed that revenue has to be recognised on a systematic basis reflecting how the service is provided to the customer. The IFRIC assumed that in most cases this would be over the expected investment period for a portfolio of investors. However, the IFRIC stated that other systematic approaches might also be appropriate.


The IFRIC agreed that the Draft Interpretation should apply to all situations where a selling entity receives a one-off non-refundable upfront fee followed by ongoing services and that it should not apply to situations where an entity receives an upfront payment for the supply of goods followed by an ongoing fee for the supply of services (for example the sale of electrical goods followed by the sale of a warranty service).

Consideration of the legal arrangements for fund managers

The staff noted that sometimes a fund manager receives its upfront fee from an investor and its ongoing fee from a fund. It stated that concluding that the two transactions should be considered together is a fundamental step in the argument that a fund manager should defer the recognition of revenue in respect of upfront fees and that the rationale for this conclusion should be explained in the basis for conclusions. The IFRIC agreed that the fact that the owners of a unit have sufficient control over a unit to be able to end the fund manager's fees in respect of that unit (by withdrawing from the fund) may be able to provide a rationale for considering the two transactions together.

The IFRIC directed the staff to prepare a draft text of a Draft Interpretation reflecting these decisions for discussion at the January 2007 meeting.

Review of tentative agenda decisions published in July and September IFRIC Update

Topics confirmed not to be added to the agenda

The IFRIC reviewed its tentative agenda decisions on the following topics in light of comments received from constituents. After discussing those comments, the IFRIC confirmed its previous decisions not to add the following items to the agenda. An Agenda Decision notice will be published in the IFRIC Update for this meeting.

  • IFRS 2 Share-based Payment – Employee benefit trusts in the separate financial statements of the sponsor
  • IFRS 2 Share-based Payment – Fair value measurement of post-vesting transfer restrictions
  • IFRS 2 Share-based Payment – Incremental fair value to employees as a result of unexpected capital restructurings
  • IFRS 7 Financial instruments: Disclosures – Presentation of 'net finance costs' on the face of the income statement
  • IAS 11 Construction Contracts – Allocation of profit in a single contract
  • IAS 16 Property, Plant and Equipment – Revaluation of investment properties under construction
  • IAS 32 Financial Instruments: Presentation – Foreign currency instruments exchangeable into equity instruments of the parent entity of the issuer
  • IAS 32 Financial Instruments: Presentation – Changes in the contractual terms of an existing equity instrument resulting in it being reclassified to financial liability
  • IAS 32 Financial Instruments: Presentation – Puts and forwards held by minority interests and IFRS 3 Business Combinations – Are puts or forwards received by minority interests in a business combination contingent consideration?
  • IAS 38 Intangible Assets – Classification and accounting for SIM cards
  • IAS 38 Intangible Assets – Adoption of IAS 38 (revised 2004)
  • IAS 39 Financial Instruments: Recognition and Measurement – Testing of hedge effectiveness on a cumulative basis
  • IAS 39 Financial Instruments: Recognition and Measurement – Valuation of electricity derivatives
  • SIC 12 Consolidation of Special Purpose Entities – Relinquishment of control

IAS 32 Financial Instruments: Presentation – Classification of a financial instrument as liability or equity

The IFRIC reviewed its tentative decision to not interpret an issue relating to whether 'economic compulsion' should affect classification of a financial instrument as a financial liability or equity.

The IFRIC initially provided split views on how to move forward on this issue. Several respondents had expressed concerns about the tentative decision made by the Board. Some members expressed a preference for an interpretation while other members expressed a preference for an amendment of the standard.

The result of the discussion was that the IFRIC decided it would not be able to reach agreement on this issue. The issue will therefore not be taken on by the IFRIC; however the IFRIC decided it would refer the issue back to the Board to let it decide whether this could be solved in the IASB's liabilities and equity project.

IAS 39 Financial Instruments: Recognition and Measurement – Definitions of a derivative: indexation on own EBITDA or own revenue

The IFRIC reviewed comments on the agenda decision to not to interpret the issue on whether contracts indexed on own EBITDA or own revenue would meet the definition of a derivative under IAS 39.

Several respondents had raised the concern that the IFRIC had not provided guidance on what the distinction is between a non-financial and a financial variable. IFRIC members supported the concerns raised. As FASB is doing preliminary deliberations on this issue the IFRIC decided that staff should look into and discuss with FASB staff whether this issue can be solved by the IFRIC.

The IFRIC decided not to confirm the agenda at this point, but decided to come back at a later stage when the staff has had a chance to discuss the time schedule for the FASB project.

IAS 41 Agriculture – Recognition and measurement of biological produce in accordance with IAS 41

The IFRIC continued its discussion on an issue relating to accounting for biological assets and agricultural produce.

The IFRIC referred these issues to the IASB in May 2004, however the Board's agenda did not permit the referral to be discussed. In the meantime the IASB agreed to undertake a project on fair value measurement (FVM) which is likely to affect how the IFRIC should deal with the issues raised.

The IFRIC's issues relate to paragraph 21 and 22 in IAS 41. Two questions have been addressed by the IFRIC as a result of the submissions it received:

  • How should an entity account for an obligation to replant a biological asset after harvest?
  • What does the exclusion from taking into account increases in value from 'additional biological transformation' mean in the context of IAS41.21? In particular, what is the implication of this exclusion where a valuation is based on forecast future cash flows (which can only be achieved after future biological growth)?

The IFRIC previously decided that it would not issue guidance on how to account for an obligation to replant a biological asset after harvest.

At the November 2006 meeting the IFRIC focused the discussion on the content in paragraph 21 of IAS 41. IFRIC members supported removing the prohibition against taking into account future growth on biological assets.

IFRIC members considered that market participants would take into account future growth when valuing these items and also commented that there are risk factors in future growth that should be considered when measuring those assets.

The IFRIC then discussed whether agricultural assets should be measured according to its 'highest and best use in the most advantageous market', a principle that will feature in the forthcoming IASB Discussion Paper on Fair Value Measurement. IFRIC members were split; some members did not think the IFRIC should move forward with a measurement concept that has not yet been explored fully and adopted by the IASB, while others would include the concept as it is likely to survive in the FVM project.

Paragraph 21 of IAS 41 refers to increases in value from 'transformation'. IFRIC members seemed to agree that the staff needed to clarify the underlying meaning of this concept.

The IFRIC decided that it should continue the work on this issue as there appears to be widespread diversity in practice. The staff was directed to address the problems specifically with paragraph 21 in IAS 41, and consider if and how IAS 41 can be amended to address the concerns raised by constituents.

IAS 21 The Effects of Changes in Foreign Exchange Rates – Hedging a net investment

The IFRIC considered an issue requesting guidance for how to account for a hedge in a 'net investment hedge in a foreign operation' in a group's consolidated financial statements. The staff presented two questions that they believed the IFRIC would need to consider when dealing with net investment hedging:

  • What is the hedged risk: Is it the exposure between two entities with different functional currencies in a group or is it the exposure between the presentation currency of the group and the functional currency of the entity being hedged. The First would indicate that the group is hedging economic risk between two difference functional currencies, while the latter would be based on hedging an accounting exposure when consolidating in the hedged entity (into the presentation currency of the group).
  • Where in the group can the hedging instrument be held: That is whether the hedging instrument must be held by the immediate parent or the ultimate parent of the hedged entity, or whether other entities in the consolidated groups should be allowed to hold the hedging instrument.

What is the hedged risk?

IFRIC members did not agree on whether the reading of paragraph 18 in IAS 21 indicates that consolidation occurs in one single process or whether it is done step-by-step. To solve this issue would be fundamental as a one-step consolidation (where entities are consolidated directly into the group) would indicate that exposure only arises when the entity's functional currency is translated into the group's presentation currency. The only exposure to hedge would then be the exposure between the presentation currency of the group and the functional currency of the hedged entity. Other IFRIC members thought that entities use net investment hedging to hedge dividends from foreign entities and that there is a real economic risk between entities with different functional currencies which is not considered if hedging a presentation currency was permitted.

Where in the group can the hedging instrument be held?

The staff had identified two different possible alternatives that the IFRIC discussed (note that the alternatives is based on that only economic exposure can be hedged):

  • The hedging instrument can be held by any parent, from the immediate to the ultimate, which is exposed to economic risk with holding the foreign investment.
  • The second option would be to allow any entity in the group to hold the hedging instrument as long as it is passed, through intra-group transactions, to the specified parent. Provided the hedging instrument is hedging the same functional currencies as those of the net investment and the specified parent, the gains and losses on the instrument would offset the economic exposure in the consolidated statements.

IFRIC members discussed whether it would wish to diverge from US GAAP by allowing the first alternative. US GAAP only allows the group to hedge the risk between the immediate parent and the net investment while it allows the group to put the hedging instrument anywhere in the group. The second alternative would be closer to US GAAP, but would still diverge as it would allow the entity to hedge the exposure between the net investment and any parent between the immediate parent and the ultimate parent of the group.

The IFRIC agreed to add this issue to its agenda. The staff was directed to clarify the scope, identify what the net investment could be, identify the risk being hedged and determine which instruments could be used.

IAS 38 Intangible Assets – Treatment of catalogues and other advertising costs

IFRIC continued its deliberations on the project for developing an interpretation on how to account for catalogues, advertising and promotional costs.

The project has identified two issues:

  • Which accounting model to apply for advertising and promotional cost. Some believe such costs should be accounted for under IAS 38, while others believe that IAS 2 would apply.
  • How to apply the chosen accounting model for these costs.

IFRIC members were divided on whether such costs should be accounted for as inventory or according to IAS 38. Some thought that catalogues in particular are tangible assets, and that these should be accounted for as inventory rather than as intangible assets. However, the majority of IFRIC members seemed to support the intangible asset model.

Further, the IFRIC discussed how to apply IAS 38. The discussion was focused on the apparent inconsistency between paragraph 68 and paragraph 70 in IAS 38. IAS 38.68 requires that expenditure on intangible items be expensed when incurred, while IAS 38.70 permits recognising a prepayment when the payment has been made in advance of the delivery of goods or the rendering of services. The majority of IFRIC members seemed to agree that costs should not be expensed at the time they are incurred if they are not consumed at the same time.

The IFRIC decided that the staff should seek to clarify the inconsistency between IAS 38 paragraphs 68 and 70 and propose an amendment in relation to those costs that should not be expensed when incurred if not consumed when costs are incurred. As this inconsistency also arises in SIC 32 paragraph 9, the staff was directed to clarify that paragraph also.

Friday 3 November 2006

Status Report: IAS 19 Employee Benefits – Outstanding IFRIC Issues

The staff presented a status report that grouped the outstanding IAS 19 issues into four categories:

  • Group 1 - Active issues under development
    • Impact of minimum funding requirements on the asset ceiling [D19]
  • Group 2 - Issues pending deliberations
    • Issues related to the non-consolidation model and definition of plan assets
    • Distinction between curtailments and negative past service costs
  • Group 3 - Issues to be completed when staff resources allow
    • Pension promises based on performance hurdles
    • Changes to a plan caused by government
    • Treatment of employee contributions
    • Treatment of death-in-service and other risk benefits
  • Group 4 - Issues to be incorporated as part of the IASB project on employee benefits
    • D9 - plans with a promised return on contributions
    • Distinction between defined benefit and defined contribution plans

The staff noted that the comment period for IFRIC D19 IAS 19 – The Asset Ceiling: Availability of Economic Benefits and Minimum Funding Requirements ended on 31 October 2006 and that it expects to bring a preliminary comment analysis to the January 2007 IFRIC meeting.

The staff noted that most of the issues in Group 3 have arisen in discussions with constituents or in comment letters on other proposals. The IFRIC concluded that a more detailed summary of the issues in Group 3 should be presented to the IFRIC before any agenda decisions are made.

The IFRIC agreed to remove D9 from its agenda, provided it had the option to restart the project should developments in the IASB's project on post-retirement benefits make it necessary or appropriate. With respect to the distinction between defined benefit and defined contribution plans, the IFRIC decided to split the project into two parts. The part dealing with the distinction of defined benefit plans and defined contribution plans should stay in group 4 and be addressed by the IASB. The other part, addressing how to determine the allocation of future salary increases in the measurement of the present value of the defined benefit obligation, should be developed further by the staff and submitted to the Agenda Committee and the IFRIC as a potential agenda item.

The IFRIC agreed to include a comment on these decisions in the next IFRIC Update.

Status Report: De-mergers and Other In-specie Distributions

The IFRIC discussed a request that it provide guidance on how to account for de-mergers and other in-specie distributions in the financial statements of the entity making such distributions to its shareholders. The IFRIC seemed to agree with the staff that the issues were significant and related to its on-going work on amendments to IAS 27 Consolidated and Separate Financial Statements (and Business Combinations Phase II) and that the IASB should be consulted before further work was undertaken by the IFRIC.

The IFRIC agreed that it was not appropriate for it to undertake a project to interpret IAS 27 while that Standard was under revision and that it should await the outcome of that IASB project before making an Agenda Decision on this issue. It is likely that a report will be included in IFRIC Update acknowledging two acceptable methods of accounting for these transactions, namely:

  • distributions recorded at the carrying amounts (in the financial statements of the parent) of the assets or businesses distributed;
  • distributions recorded at the fair values of the assets or businesses distributed, with any difference between the fair values and the carrying amounts of the assets or businesses recognised in the parent's profit or loss.

Status Report: IAS 39 Financial Instruments: Recognition and Measurement – Derecognition Application Issues

The staff reminded the IFRIC that two application issues related to derecognition of financial instruments had been referred to the IASB at the request of IFRIC.

The IASB had discussed both issues at their September 2006 meeting and the IASB had given their views on those issues. In particular, the Board had noted that derivative instruments are not 'similar' to non-derivative financial assets for the purposes of IAS 39 paragraph 16 and that transferred derivatives that could be assets or liabilities (such as interest rate swaps) would have to meet both the financial asset and financial liability derecognition criteria. In addition, the IASB indicated that a transaction in which an entity transfers all the contractual rights to receive the cash flows without transferring legal ownership of the financial asset, would not necessarily be assessed as a potential pass through. Conversely, the pass through tests in IAS 39 paragraph 19 would be applied when the entity does not transfer all the legal rights to the cash flows of a financial asset, such as in a disproportionate transfer.

The IFRIC agreed that it should not take these issues to the Agenda. However, the level of discussion, including referral to the IASB, suggested that there was a lack of clarity in the guidance available, and that the Agenda Decision should seek to clarify the current requirements as well as giving constituents a definite indication about the way in which the IASB would seek those requirements to be applied.

The IFRIC will consider the Agenda Decision wording at a subsequent meeting.

IAS 39 Financial Instruments: Recognition and Measurement – Accounting for Short Sales of Financial Assets

The IFRIC agreed not to address an issue that asked whether the 'regular way purchase and sale' exemption in IAS 39 could be applied to short sales of financial assets. IFRIC members noted that the 'regular way' exemption in IAS 39 had not been extended to short sales because the IASC Board and the IASB had considered that the risks associated with short sales to be quite different to those involving 'long' positions.

A Tentative Agenda Decision notice will appear in the forthcoming IFRIC Update.

IAS 39 Financial Instruments: Recognition and Measurement – Financial instruments puttable at an amount other than fair value

The IFRIC agreed not to address issues related to how a financial instrument should be accounted for in the financial statements of the holder when the financial instrument is classified as a financial liability in the financial statements of the issuer.

A Tentative Agenda Decision notice will appear in the forthcoming IFRIC Update.

IAS 19 Employee Benefits – 'Special wage tax'

The IFRIC discussed a proposal that the IFRIC consider the accounting treatment for taxes on pension costs. These taxes may be payable when an entity recognises an expense for pension costs or when an entity makes a contribution to a pension plan. These taxes can be significant in some jurisdictions and it was evident from the discussion that a variety of accounting treatments exist. There is a tension between the smoothing mechanisms in IAS 19 and the characteristics of the expenses involved (i.e., some IFRIC members were uncomfortable about allowing taxes to be included in those items that are subject to the smoothing mechanisms in IAS 19).

The Chairman terminated the debate, asking the staff to explore the issues raised during the session. No agenda decision was made.

Agenda Committee Report

The IFRIC Director reported that there were four issues under consideration at by the Agenda Committee that were not yet in a position such that a recommendation could be made to the IFRIC. These were:

  • IAS 17 - Sales and lease-back transactions with repurchase agreements (expected to come to the January 2007 IFRIC meeting for an Agenda Decision),
  • IAS 39 - Written options and energy supply contracts (expected to come to the January 2007 IFRIC meeting for an Agenda Decision),
  • IAS 39 - Effectiveness and cash flow hedges (expected to come to the January 2007 IFRIC meeting for an Agenda Decision)
  • Sale of assets in a rental business (not discussed in November; staff research still being conducted).

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

Related Topics

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