• Margaret M. (Peggy) Smyth, Vice President, Controller, United Technologies Corp., United States
• Scott Taub, Managing Director, Financial Reporting Advisors, LLC, United States, and former Acting Chief Accountant and Deputy Chief Accountant, US Securities and Exchange Commission.

Exposure Draft IFRS 2 Share-Based Payment and IFRIC 11: IFRS 2 – Group Treasury Share Transactions – Preliminary Comment Letter Analysis

The IFRIC commenced its detailed redeliberation of the proposed amendments to IFRS 2 and IFRIC 11. The exposure draft (ED) proposes to include cash-settled group share-based payment transactions within the scope of IFRS 2 and would provide guidance on the appropriate accounting. In May 2008 the IFRIC had been presented with a preliminary analysis. The staff structured the session as follows:

• Scope
• Accounting for transactions within the scope

Scope

Regarding the topic of scope the staff highlighted that even with the scope definition as proposed there would still be group share-based payment transactions that would not be covered by IFRS 2 and that the proposals aggravate that issue. One reason for that seemed to be that the proposals would amend the scope, not the defined terms. The staff therefore presented the following recommendations:

• To amend the related definitions in Appendix A of IFRS 2;
• Paragraph 2 of IFRS 2 be amended to mirror the revised defined terms;
• Paragraph 3 of IFRS 2 be amended to more clearly articulate the principle of IFRS 2 when a party other than the entity receiving the goods or services settles the group share-based payment transaction.

One IFRIC member asked whether this is something the Board should deliberate. The chairman answered that the issue originally came from the IFRIC, but the Board formally issued the ED as it included amendments to existing Standards and that once IFRIC concludes its redeliberations it recommends its conclusions to the Board.

Some IFRIC members expressed concerns over the view the ED takes – group or entity view, that is, is the group accounting relevant for the accounting in the subsidiary? One IFRIC member questioned whether separate financial statements of joint ventures or associates would be addressed by the amendments. It was stated that only subsidiaries would be covered and that this would be made clear by referring to the definitions in IAS 27.

The IFRIC agreed to the staff recommendations subject to editorial changes.

Accounting for transactions within the scope

The staff then turned to the accounting for the transactions within the scope of IFRS 2 in a group situation. Many commentators had argued that if an entity (the subsidiary) has no obligation to make a payment, it would not be sound to require the subsidiary in the its financial statements to recognise a liability. This would also conflict with the Framework. The IFRIC had a lengthy debate about whether the accounting in the parent and in the subsidiary should be symmetrical. Some IFRIC members were of the view that there should be some relationship – which would often result in some form of push-down accounting. Others followed the entity route and concluded that the subsidiary should account for the transaction as an equity-settled share-based payment. One of the Board members present highlighted the structuring opportunities that would result if the subsidiary would account for such a transaction as an contribution by the parent under an equity-settled accounting model.

One IFRIC member highlighted that the solution should be in line with the conclusions reached during the redeliberation of D23.

There was a lengthy debate about whether, when a transaction is accounted for as equity-settled, it should reflect any true-ups when value and/or vesting changes which would be important in some scenarios (for example, if the share-based payments are granted to employees of the subsidiary) should be considered.

The IFRIC coordinator highlighted that the staff wanted to avoid introducing an additional accounting model and tried to be as close to IFRS 2 as possible.

In the end, there seemed to be agreement over a model that would true-up for vesting of the share-based payments, but not for other changes in value. This would effectively be the accounting for equity-settled share-based payments as per current IFRS 2.

The chairman summed up the discussions and highlighted that any conclusion reached would be reported back to the Board including any strong minority views. The IFRIC coordinator reemphasised that the general approach to the accounting model was not to increase complexity.

The chairman than took a vote on the staff recommendations reflecting the outcome of the discussions as suggested by one of the Board members present. The IFRIC accepted the recommendations with two dissents.

Next steps

The modified staff recommendations will be presented to the Board in one of the next Board meetings.

D23 Distributions of Non-cash Assets to Owners – First redeliberations

D23 is aimed to provide guidance on the accounting for non-cash distributions to owners. The purpose of this session was to present to the IFRIC a comment letter analysis along with recommendation of the staff on how to proceed with D23. The issues addressed were:

• General approach in D23
• Applicability of IFRS 5 for the asset to be distributed and timing of recognition of the liability

General approach in D23

The staff highlighted in its overview of the comment letter analysis that the following significant concerns were expressed by commentators:

• The scope is too narrow by excluding common control transactions
• Fair value measurement of the liability and reference to IAS 37 is not appropriate
• The difference between book value of the asset distributed and the distribution liability should not be recognised in profit or loss

Based on those concerns the staff proposed the following:

• Continue with the project
• Include common control transactions
• Provide an consistently applicable accounting policy choice to measure the dividend liability at either fair value or book value of the assets to be distributed
• Keep the disclosures proposed in D23

The staff noted that under the fair value approach taken in D23 most respondents would support recognition of the difference in profit or loss. One IFRIC member asked if the staff analysed whether those respondents would accept recognising the difference directly in equity. The staff answered it did not analyse this.

The IFRIC coordinator explained that most of the transactions that the draft Interpretation attempts to address arise in common control situations. However, some IFRIC members expressed their concerns about the dramatic change in scope. The chairman proposed first to answer the question if common control transactions should be within the scope of the draft Interpretation before proceeding to the remaining issues. Some of the IFRIC members said that in the case of inclusion of common control transactions this would trigger re-exposure.

The IFRIC discussed at length whether common control transactions should be within the scope. Some IFRIC members noted that while the scope should not be extended it should be made clear, possibly in the Basis for Conclusions, what transactions IFRIC considers to be within the scope of the draft Interpretation.

The staff highlighted that even with a scope excluding common control transactions, constituents consider an Interpretation useful. There seemed to be agreement around the table that the scope should not be broadened, but that the scope should be clarified.

Most IFRIC members were against providing an accounting option as proposed by the staff although it might be appropriate if the scope would be extended to include common control transactions.

However some IFRIC members had difficulties with the proposed measurement of the liability and acknowledged that this was shared by commentators. Notably, the reference solely to IAS 37 caused concern. One IFRIC member highlighted that often the liability recognised would be a financial liability as defined in IAS 32 and hence, in the scope of IAS 39. Others proposed to prescribe the measurement attribute 'fair value' instead of referring to IAS 39 which requires applying the best estimate which some considered not to be equal to fair value.

The chairman noted that the IFRIC rejected the staff proposal to provide for an accounting option.

Applicability of IFRS 5 for the asset to be distributed and timing of recognition of the liability

The staff then presented the comment letter analysis regarding the proposed amendment to IFRS 5 resulting from the deliberation of D23. Both the IFRIC and the Board concluded that IFRS 5 should apply to non-cash distributions although this is not a sales transaction. The staff noted that the majority of commentators agreed.

The IFRIC discussed whether IFRS 5 should also be amended to allow fair value measurement above the carrying amount that would avoid creating a mismatch between the measurement of the dividend liability and the asset to be distributed in settlement of that liability.

The IFRIC reaffirmed its position that the assets (groups) should be within the scope of IFRS but that allowing measurement above the carrying amount would be a big change to the principle of IFRS 5.

The staff then asked the IFRIC when the assets should be reclassified in accordance with IFRS 5. The possible options would be commitment date or obligation date, notably in jurisdictions where shareholder approval is necessary. After a short discussion, the IFRIC agreed that the principles of IFRS 5 should apply and that any shareholder approval would be included in the assessment of high probability (one IFRIC member dissented).

The staff then brought to IFRIC's attention the question when to recognise the liability, which is not addressed by the draft Interpretation. The staff recommended that this should be covered by the final Interpretation. It further proposed that this should be dependent on the requirement of shareholders' approval in a jurisdiction. If shareholder approval of a distribution declared by management is required, the liability would be recognised on the date of shareholders' approval. Otherwise, it would be recognised on the date of declaration by management.

There seemed to be agreement with the staff recommendations.

The staff was asked to provide a redraft of D23 based on these conclusions and to prepare a paper on possible ways of addressing the accounting mismatch between dividend liability and asset to be distributed in extinguishment of the liability.

It was noted by some IFRIC members on that occasion that when businesses are distributed there might be unrecognised assets and that there could be a difference between the liability and the assets recognised even if they were measured at fair value.

D24 Customer Contributions – First redeliberations

The IFRIC discussed comments received on the draft Interpretation D24 Customer Contributions published in April 2008. The staff noted that of the 58 comment letters received a majority supported IFRIC's proposal to develop an Interpretation. However, almost all comment letters expressed concern regarding certain aspects of D24.

The discussion focussed on the key concern raised by constituents being whether the entity receiving the customer contributions always has an obligation to provide ongoing access to a supply of goods or service.

Some respondents pointed out that when, for example, a utility company is required by law or regulation to provide access to a supply of goods or services to all customers at the same price, the access provider does not have any further obligation once the connection has been made.

The IFRIC discussion was based on the following example relating to customer contributions for connection to a price-regulated network:

A real estate company is developing a residential real estate in a remote area that is not connected to the electricity network. In order to have access to the electricity network, the real estate company is required to construct an electricity substation that is then contributed to the utility company operating the electricity network. The contributed electricity substation becomes an asset of the utility company that it must maintain or replace at its cost. The utility company uses the contributed asset to connect each house of the residential real estate development to its electricity network. The developer then sells the connected houses to customers at a price that includes a share of the costs of the electricity substation. By law or regulation, the utility company has an obligation to provide ongoing access to the electricity network to all connected customers at the same price, regardless of whether they have contributed an asset. Customers can choose to purchase their electricity from suppliers other than the utility company, but the utility company always provides the distribution. In that event, the electricity supplier charges the customers quarterly for the consumption of electricity and collects an ongoing access fee on behalf of the utility company.

The staff was of the view that in contrast to paragraph 16 of D24 in such scenario revenue should be recognised once the connection services have been performed since providing initial access would be the only service provided in exchange for the contributed asset. The staff pointed out that generally speaking they could not see why there is an ongoing obligation arising from the customer contribution when the entity that receives the contribution from a customer has no obligation to this customer that is different from its obligation to other customers who did not contribute.

Some IFRIC members agreed to the staff with regard to this particular (simple) fact pattern but noted that there may be other scenarios where an ongoing obligation may exist.

Other IFRIC members stated that the answer should be given from an IAS 18 Revenue standpoint, that is, whether the service in return for the customer contribution has been provided or not. In doing so the guidance in paragraph 13 of IAS 18 regarding separately identifiable components should be applied. In addition, one IFRIC member noted that the obligation arising from the customer contribution should be considered separately from obligations to other customers.

The IFRIC had a thorough debate on when an ongoing obligation to provide access exists but could not agree on a principle. There seemed to be a consensus that the answer depends on facts and circumstances and that judgement may be required. However, the chairman pointed out that simply referencing to facts, circumstances, and judgement would not be appropriate in an Interpretation but that specific guidance should be given.

The chairman noted that at the September 2008 meeting a decision whether the IFRIC would be able to reach a consensus on this matter on a timely basis should be made.

The IFRIC decided to proceed with the project for the time being and directed the staff to further elaborate this issue by:

• Developing further examples to enable establishing a principle under which circumstances a performance obligation exists. The staff was asked to also address the concerns of constituents raised in respect of analogous application in this context.
• Develop indicators regarding the existence or non-existence of performance obligations.