D21 Real Estate Sales

The session was devoted to final re-deliberations and approval of a final Interpretation.

Consideration of outstanding issues

(a) Clarification of scope

As part of the clarification of the scope of the Interpretation, the IFRIC agreed that the title of the Interpretation should be changed to something like 'Agreements for the Construction of Real Estate'. This reflects the change in emphasis away from real estate sales and the determination of whether an agreement involving real estate construction activities is within the scope of IAS 11 or IAS 18.

The IFRIC concurred with staff suggestions that the Interpretation be clarified to identify only two parties: 'the entity' and 'the buyer'. It is the entity that contracts with the buyer. The entity may also be the person performing the construction services but may only perform services directly related to a construction contract. The IFRIC agreed that the Interpretation should address the following agreements involving the construction of real estate:

• Construction contracts (IAS 11 contracts)
• Contracts for the rendering of services directly related to construction contracts (IAS 18)
• Contracts for the sale of goods (that is, contracts failing the definition of construction contracts in IAS 11 but still involving the construction of real estate (IAS 18)).

The IFRIC asked for clarification whether IAS 18 IE 9 would be deleted as was intended originally. The Chairman suggested that this be referred to the Board for resolution when it considers the Interpretation prior to issue. It seemed that the IFRIC favoured the deletion of the IE 9, but this was not stated explicitly.

(b) Application of IAS 18

The IFRIC discussed the notion of a 'continuous transfer' by the seller to the buyer of 'control and the significant risks and rewards of ownership of the work in progress in its current state as construction progresses'.

The IFRIC discussed various aspects of this principle, but eventually agreed that it was an appropriate interpretation of IAS 18.14. However, the Interpretation, Basis for Conclusions and Illustrative Examples needed to be explicit that all the conditions in that paragraph must be satisfied before the seller would be able to recognise revenue. In particular, IFRIC members noted that the condition in IAS 18.14(b), 'the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold', would rarely be met in a typical real estate construction agreement.

The IFRIC noted that there was a tension between the percentage of completion method in IAS 11 and the method required in IAS 18. In particular, the two methods produce different revenue recognition patterns. The IFRIC agreed that it was trying to say that contracts involving the construction of real estate may not be IAS 11 contracts, but facts and circumstances might result in the conditions in IAS 18.14 being met at several points during the life of the contract, which would result in a revenue recognition pattern similar to IAS 11. Thus, in a single agreement for the delivery of multiple goods (for instance, residential units in a development), it would be likely that the entity would recognise revenue on each unit as the conditions in IAS 18.14 were met with respect to that unit.

IFRIC members expressed concern that some of the material accompanying the Interpretation (especially the Illustrative Examples) muddied the principle in the Interpretation. In particular, meeting the conditions in IAS 18.14 required proper consideration of the substance of the agreement as well as legal or jurisdictional factors. The staff undertook to review the material in the Basis for Conclusions and the Illustrative Examples related to this principle and circulate it to IFRIC members out of session.

The IFRIC agreed that, since the Interpretation (and in particular the notion of 'continuous transfer') was based explicitly on principles in IAS 18, there was no reason to restrict application of the Interpretation by analogy. IFRIC members suggested that, given the rigorous conditions in IAS 18.14, it was unlikely that 'continuous transfer' could occur outside real estate contracts.

(c) Identification of a component for the sale of land

The IFRIC agreed that the identification of a separate component for the sale of land must be undertaken when analysing any potential separate components. In some cases, a sale of land would be identified clearly at an early stage of analysing a transaction. In other cases, it would be clear that no separate component for the sale of land can be identified, in other words, the right to the constructed elements and the underlying land are not separate assets.

(d) Disclosure

The IFRIC agreed that the disclosures required by IAS 11.39-45 contained the information most likely to be of use to users of the financial statements. However, they were reluctant to require such disclosure explicitly in the Interpretation.

However, the IFRIC agreed to draw attention to the requirements in IAS 1.117, .122, and .125 regarding the application of accounting policies; the significant judgements involved in applying those policies; and any sources of estimation uncertainty involved. In addition, the Interpretation will observe that the disclosures in IAS 11 provide users the most appropriate information in the circumstances addressed in the Interpretation.

Flowchart and Illustrative Examples

The IFRIC agreed that a flowchart developed by the staff analysing a single agreement including the construction of real estate should be included in the material accompanying the Interpretation. In addition, subject to amendments to address IFRIC members' comments, the Illustrative Examples should also be issued as non-authoritative guidance accompanying the Interpretation.

Scope: should the scope be extended explicitly beyond contracts involving real estate?

The IFRIC agreed that the scope should not be extended explicitly beyond contracts involving the construction of real estate. The IFRIC had already agreed that the Interpretation could be applied by analogy. Any explicit extension of scope would trigger re-exposure.

Re-exposure

The IFRIC reviewed the triggers in the Due Process Handbook for the IFRIC that would require re-exposure and agreed that the changes made to the Interpretation since exposure did not trigger re-exposure.

Effective date

The IFRIC agreed to recommend to the IASB that the Interpretation be effective for annual financial statements for periods beginning on or after 1 January 2009. Transition would be in accordance with IAS 8.

Approval of the Interpretation

The Chairman asked whether any IFRIC member would dissent from issuing the Interpretation. No members indicated that they would dissent. The Interpretation was approved unanimously.

Next steps

The IFRIC will complete its review of the final text in time for the Interpretation to be sent to the Board for approval by written ballot at the June IASB meeting. If approved, the Interpretation would be issued before the end of June 2008.

D22 Hedges of a Net Investment in a Foreign Operation

The IFRIC discussed a revised draft of the Interpretation reflecting the decisions made at previous meetings.

Consideration of outstanding issues

The main changes made to D22 since it was exposed for comment are as follows:

• Clarification that the carrying amount of the net assets of a foreign operation that may be hedged in the consolidated financial statements of a parent depends on whether any lower level parent of the foreign operation has hedged all or part of the net assets of that foreign operation.
• Clarification that the assessment of hedge effectiveness is not affected by the method of consolidation (direct or step-by-step).
• Additional guidance on what amounts should be reclassified from equity to profit or loss as reclassification adjustments on disposal of the foreign operation. The revised draft clarifies that the consolidation method (direct or step-by-step) may affect the amount included in the foreign currency translation reserve (FCTR) in respect of the individual foreign operations, in particular, "(w)hen the hedging instrument is not held by the parent entity hedging its net investment, the use of the step-by-step method of consolidation may result in the reclassification to profit or loss of an amount different from that used to determine hedge effectiveness". In this case an entity may (but is not required to) eliminate this difference "by retrospectively determining the amount relating to that foreign operation using the direct method of consolidation".
• Inclusion of Application Guidance that replaces all Illustrative Examples in D22.
• Additional transitional provisions stating that any existing hedge relationships that do not meet the conditions for hedge accounting in the Interpretation should be discontinued prospectively in accordance with the requirements of IAS 39.

One IFRIC member questioned whether some language in the draft Interpretation may undermine the IFRIC consensus that the method of consolidation has no impact on hedge effectiveness and where the hedge instrument can be held. The IFRIC decided to remove this language; in particular to delete the last sentence of paragraph 12 of the draft Interpretation stating "(h)owever, different methods of consolidation may affect the foreign currency risk that can be hedged merely due to the mechanics of the consolidation methods (see Appendix AG4)".

The IFRIC also decided to clarify the application guidance relating to paragraphs 11 and 13 of the draft Interpretation. Among other things paragraphs 11 and 13 state that "the carrying amounts of the net assets of a foreign operation that may be designed as the hedged item in the consolidated financial statements of a parent depends on whether any lower level parent of the foreign operation has applied hedge accounting for all or part of the net assets of that foreign operation" and that "(a)n exposure to foreign currency risk arising from a net investment in a foreign operation may qualify for hedge accounting only once in the consolidated financial statements". Some IFRIC members noted that the application guidance in AG7 (third bullet) and AG9 relating to is difficult to understand and may be misleading. The staff was asked to clarify the application guidance to better reflect the consensus.

Some IFRIC members thought the question which amount is to be reclassified from equity to profit or loss as a reclassification adjustment on disposal of the foreign operation is an important practical issue and suggested that an example be included. One IFRIC member offered to provide such an example to the staff. The IFRIC decided that this example should be examined by the staff and included as an illustrative example if it is considered helpful.

Re-exposure

The IFRIC reviewed the triggers in the Due Process Handbook for the IFRIC that would require re-exposure and agreed that the changes made to the Interpretation since exposure did not trigger re-exposure.

Effective date

The IFRIC agreed to recommend to the IASB that the Interpretation be effective for annual financial statements for periods beginning on or after 1 October 2008. The Interpretation should be applied prospectively with retrospective application in accordance with IAS 8 being permitted.

Approval of the Interpretation

The Chairman asked whether any IFRIC member would dissent from issuing the Interpretation. No members indicated that they would dissent. The Interpretation was approved unanimously.

Next steps

The IFRIC will complete its review of the final text in time for the Interpretation to be sent to the Board for approval by written ballot at the June IASB meeting. If approved, the Interpretation would be issued before the end of June 2008.

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

The IFRIC discussed comments received on the IASB's exposure draft of proposed amendments to IFRS 2 Share-based Payment and IFRIC 11 IFRS 2–Group and Treasury Share Transactions – Group Cash-settled Share-based Payment Transactions (the ED).

The staff noted that this ED was being discussed with the IFRIC because the IASB's ED was triggered by a reference from the IFRIC to the IASB.

The staff noted that respondents expressed general agreement with the proposals regarding scope and measurement for group arrangements between parent and subsidiary but that severe concerns were raised regarding the application of the proposals to arrangements other than those between parent and subsidiary.

Scope and classification

The main concerns raised by constituents were:

• A contribution in equity from parent should not be recorded for arrangements other than those between parent and subsidiary.
• There are inconsistencies between the scope of IFRS 2 and IFRIC 11 as proposed and, therefore, the scope and terminology should be aligned among these IFRSs.
• The ED extends the scope of IFRS 2 on a case-by-case basis. Instead the definitions of 'equity-settled share-based payments' and 'cash-settled share-based payments' in Appendix A of IFRS 2 should be amended.

Alternatively, a more comprehensive project could be undertaken to amend IFRS 2 and in this context the main principles of IFRIC 11 and IFRIC 8 could be incorporated in IFRS 2.

Classification and measurement

The main concerns raised by constituents were:

• A classification as cash-settled share-based payments in the financial statements of the subsidiary would be inappropriate since the subsidiary has no liability in either of the arrangements described in the ED.
• The ED has not articulated the IFRS principle for the 'push-down accounting' of the parent's liability in the financial statements of the subsidiary.
• Remeasurement: The changes in the fair value of the parent's liability should not be recorded in the subsidiary's profit or loss since these changes would be changes in the parent's liability.

The IFRIC had a very preliminary discussion of some of these issues and made suggestions to the staff, but no decisions were requested or made. Project plan/ way forward The IFRIC agreed to participate in assisting the IASB to redeliberate issues in the ED in light of respondents' comments. Specifically, it will address issues related to scope and classification in July 2008 and issues related to measurement at its September 2008 meeting. The IASB will discuss the IFRIC's conclusions at the October 2008 IASB meeting. If no further Board discussion is required, the amendments to IFRS 2 and IFRIC 11 should be issued in December 2008.

Review of Tentative Agenda Decisions published in March 2008 IFRIC Update

The IFRIC confirmed its decisions not to take the following items to the Agenda:

• IAS 19 Employee Benefits – Settlements
• IAS 37 Provisions, Contingent Liabilities and Contingent Assets-Deposits on returnable containers

The Agenda Decision on IAS 19 was agreed as issued in the March 2008 issue of IFRIC Update, without amendment.

The IFRIC agreed to amend the third paragraph of the Agenda Decision on IAS 37 included in the March 2008 issue of IFRIC Update as follows:

In circumstances in which the containers are derecognised as part of the sale transaction, either completely at the time of the first sale or partially by depreciation over a number of sales, the obligation is an exchange of cash (the deposit) for the containers (non-financial assets). Whether that exchange transaction occurs is at the option of the customer. Because the transaction involves the exchange of a non-financial item, it does not meet the definition of a financial instrument in accordance with IAS 32 and is therefore is not within the scope of IAS 39.

The Agenda Decisions will be published in the May 2008 IFRIC Update.

Staff Recommendations for Tentative Agenda Decision

IAS 39 Financial Instruments: Recognition and Measurement – Applying the effective interest rate method

The IFRIC considered a request for guidance on the application of the effective interest rate method (EIRM) to a debt instrument with future cash flows (principal and interest) linked to changes in an inflation index. The request was limited to 'inflation-linked instruments' that are not classified at fair value through profit or loss and in which the embedded derivative (the inflation linked mechanism) is determined to be closely related to the host contract.

The following views were discussed:

View A: Apply AG 7 of IAS 39

AG7 of IAS 39 applies to floating rate financial instruments and states that re-estimations of cash flows alter the effective interest. AG7 of IAS 39 assumes that "(i)f a floating rate financial asset or floating rate financial liability is recognised initially at an amount equal to the principal receivable or payable on maturity, re-estimating the future interest payments normally has no significant effect on the carrying amount of the asset or liability".

Supporters of View A argue that an inflation-linked instrument is analogous to a floating rate instrument because varying interest amounts are a contractual term of the instrument. Consequently, changes in the inflation index result in changes to the instrument's effective yield and it would be inappropriate to determine a single effective interest rate for the life of the instrument.

View B: Apply AG 8 of IAS 39

According to AG8 of IAS 39 re-estimations of cash flows alter the carrying amount of the financial instrument since the carrying amount is to be recalculated using the original effective interest rate.

Supporters of View B argue that an inflation-linked instrument is not within the scope of paragraph AG7 because the changes in estimated future cash flows do not reflect movements in market interest rates. In their view paragraph AG8 applies to changes in estimated future cash flows other than those that are explicitly addressed in paragraph AG7.

View C: Analogise to the requirements of IAS 29 Financial Reporting in Hyperinflationary Economies

The IFRIC agreed with a staff analysis that it would be inappropriate for entities in non-hyperinflationary economies to analogise to IAS 29.

An IASB Observer noted that this issue might be resolved by applying paragraph AG6 of IAS 39; that is, if the link to an inflation index represents a repricing to market rates, no adjustments may need to be made.

The IFRIC unanimously decided not to add this item to its agenda as any guidance would be more in the nature of application guidance.

The staff was asked to redraft the proposed agenda decision by referring to AG6 rather than AG7 and AG8 and to submit the redrafted version to the IFRIC as soon as possible. The IFRIC will then examine whether the inclusion of AG6 requires further research. If yes, the issue will be discussed again at the July meeting. Otherwise a tentative agenda decision will be published in the IFRIC Update for this meeting.

Staff Recommendations for New Agenda Item

The staff presented a project plan for an agenda request on rate regulated liabilities.

In January 2008 the IFRIC received a request on whether regulated entities should be permitted or required to recognise a liability (or an asset) as a result of price regulation by regulator bodies or governments, that is, to defer excess profits (costs) that will be returned through future price decreases (or increases).

The IFRIC agreed with a staff analysis that the issue is widespread and has practical relevance. In addition, some IFRIC members noted that divergent interpretations exist in practice mainly because national GAAPs allow a variety of accounting treatments.

The IFRIC agreed with the staff that the question whether a consensus can be reached on a timely basis mainly depends on the definition of the scope.

The IFRIC asked the staff to prepare a paper on the scope of the potential agenda item for discussion at the July meeting.

Administrative Session – IFRIC Work in Progress

The IFRIC Co-ordinator updated the IFRIC on the current working plan of the IFRIC. The IFRIC Co-ordinator noted that the staff plans to prepare a paper on 'accounting for trailing commissions' for consideration as an agenda item and that several other requests were received recently.

Main topics of the July IFRIC meeting will be the comment letter analyses of D23 Distributions of Non-cash Assets to Owners and D24 Customer Contributions, the redeliberation of amendments to IFRS 2 and IFRIC 11 and the discussion of several tentative agenda decisions.

The IFRIC Co-ordinator also noted that a separate session on preliminary discussion of potential new agenda items may be required.

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