Staff Recommendations for Tentative Agenda Decision

Recognition of Lease Expense under an Operating Lease

The IFRIC considered a request that it provide guidance on how a lessee should determine an appropriate pattern of recognition of expense for an operating lease with non-level payments.

The IFRIC agreed that it should not add the issue to its agenda. The tentative agenda decision will compare and contrast guidance in IAS 16 paragraph 60 and IAS 38 paragraph 97 (which refer to a depreciation/amortisation method reflecting 'the pattern in which the asset's future economic benefits are expected to be consumed by the entity') with that in IAS 17 paragraphs 33 and 34, which refer to a method being 'representative of the time pattern of the user's benefit'. In an operating lease no asset is recognised in the financial statements, and thus cannot be consumed; thus it is the access or right to use the asset that determines the appropriate accounting.

Accounting for Trailing Commissions

The IFRIC considered a request that it provide guidance on how an entity should account for ongoing commission arrangements, referred to as trailing commissions. The submission was made in the context of investment funds, but IFRIC members noted that such arrangements exist in other contexts, for example, telecommunications.

The IFRIC agreed that it should not add the item to its agenda. However, the IFRIC disagreed with the preliminary staff analysis that suggested that diversity in practice should not arise. Instead, IFRIC members noted that diversity already exists, across industries and across jurisdictions. There was agreement that IAS 32 provided sufficient guidance for the financial asset (although there were measurement challenges) but that revenue recognition was more challenging. However, to address this issue effectively, the IFRIC would have to interpret several different IFRSs, including IAS 18, 32, 27, and 39. As such, the IFRIC was probably the wrong forum to decide the accounting and was unlikely to achieve consensus in a reasonable period of time.

Transaction Costs Deducted from Equity

The IFRIC considered a request that it provide guidance on the extent of transaction costs to be accounted for as a deduction from equity in accordance with IAS 32 paragraph 37. In addition the submission requests guidance on how the requirements of IAS 32.38 to allocate transaction costs that relate jointly to more than one transaction should be applied.

The IFRIC agreed that it should not add the item to its agenda as it could be addressed more conveniently within the Annual Improvements process. In making this recommendation to the IASB, the IFRIC may suggest that the action of listing on a recognised exchange without issuing new equity (that is, a secondary offering of existing shares) was not an equity transaction because no new equity is introduced to the entity.

Compliance Costs for REACH

REACH is an EU regulation on the Registration, Evaluation, Authorisation, and Restriction of Chemicals.

The IFRIC considered a request that it provide guidance on the treatment of costs incurred to comply with the requirements of the European Commission Regulation concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH). The Regulation came into force in part on 1 June 2007, is binding immediately on Member States, and companies have begun to account for the first costs incurred to comply.

The staff noted that they had not completed their information gathering and analysis of this issue, but that their preliminary assessment was to recommend tentatively adding the issue to the agenda. IFRIC members agreed, noting that the retrospective cost of new regulation was a generic issue faced by entities in a variety of jurisdictions. The staff noted that scoping the issue would be critical, and that the costs of implementing the REACH Regulation could be used as examples, rather than scope the issue to address REACH specifically.

The staff will return with scope recommendations at the September 2008 IFRIC meeting.

Administrative Session – IFRIC work in progress

The IFRIC reviewed the status and progress made on issues on its agenda and new issues referred to it but not yet brought to the IFRIC. In particular, the chairman noted two new issues (customer related intangible assets and valuation of restricted securities) for which the staff will present its agenda decision recommendations at the September 2008 meeting.