Preliminary Discussion of IFRIC Issues

In his opening remarks, the IFRIC Chairman noted that this session was the first public, non-executive session of what was used to be the Agenda Committee. The purpose of these sessions had not changed: it is to give the IASB staff an opportunity to discuss with IFRIC members potential agenda items prior to the staff making a formal recommendation to the IFRIC about whether a topic should be added to the IFRIC's Agenda. Accordingly, there was no requirement for a quorum and neither technical decisions nor agenda decisions can be made.

The Chairman pointed out that the observer notes provided to the public merely contained brief descriptions of the issues submitted since all documents prepared by the staff contain preliminary views that have not been approved.

IAS 39 Financial Instruments: Recognition and Measurement – Hedging future cash flows with purchased options

The IFRIC received submissions regarding a purchased option in its entirety being designated as a hedging instrument to hedge variability in future cash flows. The submissions suggest using a hypothetical derivative approach in assessing and measuring hedge effectiveness. That approach requires an entity to take into account the time value of the option when it determines changes in the fair value of the hedged item in assessing and measuring hedge effectiveness. The submission asks for guidance on whether the approach is allowed under IAS 39.

It appeared from the discussion that the IFRIC members acknowledged that the issue is widespread and that diversity in practice exists. It seems likely that the IFRIC would want to focus on the type of instrument at inception of the hedge rather than on the type of the hedged risk. The staff was directed to investigate this issue further in close co-operation with the Board's staff working on the Financial Instruments project.

IAS 18 Revenue – Customer contributions

The IFRIC received a submission that asked for guidance on how a government or private sector utility company should account for customer contributions. Such contributions arise when the entity enters into an arrangement with a customer such that the customer has to provide either an infrastructure asset or cash to fund the acquisition and/or construction of such an asset in order to obtain connection to the utility company's network. The contributed infrastructure asset is necessary for the utility entity to provide an ongoing utility service to the customer but does not have a direct impact on the rates the utility company charges its customer.

Some IFRIC members stated that the issue was widespread and that diversity in practice has occurred. There seemed to be a consensus that the first step in this project should be to identify what kind of asset the contribution represents and how this asset should be measured ('what is the debit?'). The second step should be to consider how income arising from the contribution, if any, should be recognised. One IFRIC member noted that the scope might be too broad for an IFRIC project but that further investigations are likely to result in useful insights on accounting for exchange transactions.

The staff was directed to provide a revised paper for discussion at a future meeting.

IAS 39 Financial Instruments: Recognition and Measurement – Hedging multiple risks with a single derivative hedging instrument

The IFRIC received a submission about using a single derivative hedging instrument to hedge more than one type of risk. The submission asks for guidance on whether IAS 39 allows an entity to impute notional cash flows to split the fair value of the derivative hedging instrument into multiple components for the purposes of assessing and measuring hedge effectiveness.

It appeared from the discussion that the IFRIC members acknowledged that the issue is widespread and that diversity in practice exists. Two IFRIC members noted that they tend to allow notional legs.

The staff was directed to provide a revised paper for discussion at a future meeting.

IAS 39 Financial Instruments: Recognition and Measurement – Scope of IAS 39 paragraph 11A

The IFRIC received a submission asking for guidance on whether IAS 39 paragraph 11A can be applied to all contractual arrangements that contain one or more embedded derivatives, particularly whether paragraph 11A can be applied to hybrid contracts that contain financial or non-financial hosts outside the scope of IAS 39.

Many of the IFRIC members stated that the issue is widespread and that diversity in practice has occurred. There seemed to be a consensus that paragraph 11A of IAS 39 can be applied to hybrid contracts that contain hosts within the scope of IAS 39. It was noted that otherwise paragraph 11A would have the character of a general rule that allows all kinds of contracts to be accounted for at fair value through profit and loss. In addition, some IFRIC members noted that paragraph 11A can also not be applied by analogy in connection with the 'GAAP hierarchy' in paragraphs 10-12 of IAS 8.

Some IFRIC members noted that an Interpretation might not be necessary and that an Agenda Decision could resolve the issue.

The staff was directed to prepare a revised paper for discussion at a future meeting.

IAS 18 Revenue – Gaming transactions

The IFRIC received a request for guidance on how a gaming institution should account for bets or wagers received. The question focussed on whether such transactions give rise to revenue or whether unsettled wagers are financial instruments that should be accounted for using IAS 39.

IFRIC members seemed to agree that any project it undertook should only address situations in which the gaming institution takes a position against that of the customer, that is, situations in which the gaming institution acts as an agent should be scoped out.

Some IFRIC members noted that there is a consistent practice to treat outstanding wagers as financial instruments under IAS 39. However, it was assumed that diversity in practice exists regarding the presentation in the income statement, in particular, gross or net presentation of income (revenue/gain).

The staff was directed to analyse the accounting treatments currently applied by gaming institutions and to identify the areas in which diversity has occurred.

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