Notes from day 2 of the September 2006 IFRIC meeting

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09 Sep 2006

The International Financial Reporting Interpretations Committee (IFRIC) met at the IASB's offices in London on Thursday 7 September and Friday 8 September 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 Meeting8 September 2006 IAS 18 Revenue – Revenue Recognition in Respect of Initial Fees Received by Fund Managers At its May 2006 meeting, the IFRIC decided to develop an Interpretation on how revenue should be recognised in respect of non-refundable fees received up front by a mutual (or investment) fund manager when an investor initially invests in a particular fund. Discussion at IFRIC's September 2006 meeting resulted in the IFRIC asking the staff to explore two issues: The first issue was to identify the service provided by the fund manager that is being compensated by the up-front payment.

Several IFRIC members expressed a view that, for the initial fee to be recognised at the time the investor makes the initial investment, the fund manager must already have provided a service to the customer.

Staff identified the following as services that may been provided to the customer in advance of the initial investment:

  • Services relating to the provision of up-front investment advice.
  • Services relating to the creation of units in the fund and brokerage.
  • Services related to the payment of a sales commission.
  • Services connected to ongoing fund management.

IFRIC discussed each of these. Much of the discussion was focused on the provision related to up-front investment advice. IFRIC members expressed concern on recognising revenue on up-front investment advice. In many cases, this advice would be free even if the investor decides not to invest in the fund. The IFRIC questioned the value that could be allocated to such services.

In general, the IFRIC agreed that as long as services given to the customer could be identified at inception, revenue in respect of those services could be recognised when the services were provided. IFRIC also decided that since not all services could be identified up front, revenues relating to post-investment services should be deferred.

The second issue was how the deferred income should be measured. This discussion was fairly short. The IFRIC agreed that revenue deferred in regards to the fee received up front had to be recognised based on a 'systematic approach' that reflects how the service is provided to the investor.

The IFRIC asked the staff to develop a paper based on the decisions taken by the IFRIC.

IAS 38 Intangible Assets – Treatment of Catalogues and Other Advertising Costs

The IFRIC considered a request for an Interpretation on how to account for:

  • costs incurred by an entity to develop and print advertising and marketing catalogues when the catalogues have been received by the entity but have not yet been delivered to the customer; and
  • costs incurred by an entity to produce TV spot advertisements when the advertisements have been produced and received by the entity but have not yet been broadcast.

Some IFRIC members said that practice differs especially concerning the treatment of catalogue costs. Practices include:

  • expensing the costs when incurred;
  • capitalising and amortising the costs as an intangible asset; and
  • capitalising the costs as inventory and expensing them when the catalogures are distributed to customers.

Other IFRIC members said that even if differences exist in practice in accounting for catalogues, the impact would not be material. In their view, if an Interpretation were developed, it should have a broader scope than just catalogues. In response, other members noted that IAS 38.70 addresses prepayments for intangibles, and if the scope of the Interpretation were expanded to include all prepayments for intangibles, the scope might be a too wide for the IFRIC to resolve on a timely basis.

After discussion, the IFRIC agreed that the issue should be added to the agenda, but that the scope should be the distinction between IAS 38.69(d), which requires expensing of advertising and promotional activities, and IAS 38.70, which does not preclude recognising prepayments as an asset.

Recommendations from the IFRIC Agenda Committee and the Staff

IAS 39 Financial Instruments: Recognition and Measurement - Hedge Effectiveness on a Cumulative Basis

The IFRIC considered a submission related to assessing hedge effectiveness. The issue is when an entity uses regression analysis to perform retrospective and prospective hedge effectiveness test on an interim date, whether the fact that an actual dollar-to-dollar comparison between the change in cash flows of the hedging instrument and that of the hedged item falls outside the range of 80-125% over a small period of time (for instance, five days) necessarily means that the entity fails to qualify for hedge accounting.

IFRIC decided to publish a Agenda Decision that clarifies that IAS 39 distinguishes between the requirement to measure hedge effectiveness and the requirement to perform hedge effectiveness testing. The dollar offset can fall outside the 80-125% requirements on a particular date without the entity failing to qualify for hedge accounting, but an entity would still be required to measure the dollar offset to record hedge ineffectiveness in profit and loss.

IFRS 7 Financial Instruments: Disclosures – Presentation of 'net finance costs' on the face of the income statement

The IFRIC considered whether IFRS 7 permits entities to present finance costs and finance income net on the face of the income statement. IG.13 of IFRS 7 states "The total interest income and total interest expense disclosed in accordance with paragraph 20(b) is a component of finance costs, which paragraph 81(b) of IAS 1 requires to be presented separately on the face of the income statement". This would appear to be inconsistent with the IFRIC decision published in the October 2004 IFRIC Update on 'net finance costs'.

The IFRIC decided that the issue should not be added to the Agenda, and that a clear distinction should be drawn between the disclosure requirements in IFRS 7 and presentation on the face of the income statement. Further the IFRIC stated that IAS 1.32 clarifies that income and expenses should not be offset unless required or permitted by a Standard. It was also decided that a recommendation would be given to the Board to amend the text in IG.13 of IFRS 7, which currently can be misleading.

IAS 38 Intangible Assets – Classification of and accounting for SIM cards

In May 2006 the IFRIC received a submission asking for guidance on how mobile phone operators should account for Subscriber Identity Module (SIM) cards. The issue was whether SIM cards should be accounted for as inventory on initial acquisition.

IFRIC stated that this issue is closely linked to the issue on 'Subscriber Acquisition Costs in the Telecommunications Industry' that the IFRIC decided not to take on the agenda, for which an agenda decision was published in the March 2006 IFRIC Update. Consistent with that decision, the IFRIC concluded that it would not be able to reach a consensus on the SIM cards issue on a timely basis and that the issue should not be added to the agenda.

IAS 38 Intangible Assets: Adoption of IAS 38 (2004)

Consequential amendments were made to IAS 38 in December 2003 via the improvements to IAS 16 Property, Plant and Equipment. Further consequential amendments were made to IAS 38 in March 2004 by IFRS 3 Business Combinations, which changed the provisions in IAS 38 to require prospective application. The issue submitted to IFRIC was whether the amendments made by IFRS 3 would require retrospective or prospective application of IAS 38 if a constituent adopted the IAS 38 (2004 version) early.

The IFRIC agreed that divergence may have existed earlier on this issue, but that ongoing divergence would be unlikely as the transitional provisions in the current version of IAS 38 are clear. The IFRIC decided that the issue should not be added to the Agenda.

IAS 11 Construction Contracts: Allocation of profit in unsegmented contracts

During their deliberations on Service Concessions, the IFRIC identified an issue on recognition and measurement relating to certain contractual arrangements. The issue was whether it is appropriate in an unsegmented contract to allocate different profit margins to different components of a contract. The issue has been rejected, but the IFRIC wanted to defer publishing a rejection until they had published their Draft Interpretation D20 Customer Loyalty Programmes, as the issues were considered to be interrelated.

The IFRIC decided that this issue should not be added to the Agenda.

Scroll down for notes from the first day of IFRIC's September 2006 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.

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