Notes from the November 2008 IFRIC meeting

  • IFRIC (International Financial Reporting Interpretations Committee) (blue) Image

08 Nov 2008

The International Financial Reporting Interpretations Committee (IFRIC) met at the IASB's offices in London on Thursday 6 November 2008. Presented below are the preliminary and unofficial notes taken by Deloitte observers at the meeting.

Among IFRIC's key decisions were the following:
  • The IFRIC approved an Interpretation based on D24 Customer Contributions;
  • A potential topic on REACH costs was referred to the staff for more work, principally to identify an underlying principle;
  • Tentative agenda items issued in September were finalised;
  • A proposal for an Interpretation on the effects of rate regulation was tentatively rejected; the topic will not be referred to the IASB.

Notes from the IFRIC Meeting6 November 2008

gpeg.gif Introduction

The minutes of the September 2008 IFRIC meeting were approved.

gpeg.gif D24 Customer Contributions (Transfers of Assets from Customers)

The IFRIC approved an Interpretation based on that exposed in D24 Customer Contributions.


The IFRIC agreed that the title of the Interpretation should be changed to refer to 'transfers' of assets from customers. This is because, in many jurisdictions, 'contributions' are non-reciprocal transactions. The transaction being addressed by this Interpretation is a reciprocal transaction.


Control of an asset

Much of the discussion centred on whether an asset can be recognised by the recipient. The IFRIC was presented with wording revised since the Observer Notes were released. The revised wording concentrates on the definition of an asset in the IASB Framework. The IFRIC concluded that references to IAS 17 and IFRIC 4 were confusing and detracted from the issue being articulated in D24: who controls the asset transferred?

The IFRIC noted that paragraph 49(a) of the IASB Framework states that an asset is a resource 'controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.'

The IFRIC thought that a key indicator of control of an item of property, plant and equipment would be that the entity is responsible for the repair, maintenance, upgrade and replacement of the item transferred.

The IFRIC agreed that if an item of property, plant and equipment received by a service provider meets the definition of an asset, it should be recognised as an asset by the recipient at its transfer date fair value.

Accounting for the credit

The IFRIC agreed that, should the item of property, plant and equipment meet the definition of an asset of the recipient, the credit side of the recognition entry would be a component of revenue.

IFRIC members suggested that the Interpretation should clarify use of the term 'the customer.' Currently, the drafting has been simplified so that 'customer' includes both the entity transferring the item of property, plant and equipment and the entity receiving on-going services through the item transferred. IFRIC members noted that, in many cases, the entity transferring the item of property, plant and equipment will have no further association with the item and that using one term to describe two or more parties might cause more confusion than it was intended to avoid.

Much of the discussion centred on whether that revenue was earned as the result of a single or multiple element transaction. If there was a multiple element transaction, some portion of the revenue would be deferred and amortised over the related service period. However, if there was a single element transaction immediate recognition of revenue would be required.

The IFRIC requested that the Interpretation clarify that what the customer receives (e.g. when an office building is connected to the power grid) is the ongoing access to the distribution network, not the goods or services provided by that network. The goods and services (e.g. electrical power) are usually the subject of a separate transaction between the distributor and the customer. Only when connection to the distribution network is bundled with a preferential rate for the future supply of services would the transaction be treated as a multiple element transaction and unbundled in to its constituent elements.

IFRIC members were concerned that some of the terminology confused this intention, especially in situations in which the distributor had a statutory obligation to supply to all customers connected to its distribution network. The IFRIC agreed that the Interpretation should be clarified to avoid the inference that an obligation would be created by a connexion to a distribution network.

Effective date and transition

The IFRIC agreed that the Interpretation should be effective three months after it is issued. The transition provisions caused more discussion, with some IFRIC members favouring some degree of retrospective application. However, there were others who expressed reservations about this approach on practicability grounds and because of the use of hindsight in determining fair value.

The IFRIC agreed that the Interpretation should apply to transfers of assets within the scope of the Interpretation occurring on or after the effective date (i.e., prospective application only).


The IFRIC discussed whether re-exposure was necessary. Although there have been some significant changes to the consensus, the IFRIC agreed with the staff analysis of the IFRIC's criteria for re-exposure that re-exposure was not necessary. However, the IFRIC staff agreed that they would publicise the post-approval steps to a greater extent than usual, which would delay the issuance of the Interpretation until January 2009 (see next steps, below).


Subject to drafting, the IFRIC approved the Interpretation, with one member dissenting.

Next steps

In response to requests from IFRIC members, the IFRIC staff agreed to:

  • Highlight the release of the 'near-final draft' of the Interpretation on the IASB's Website (in mid-December 2008) for longer than normal. Although this document would not represent an Invitation to Comment, any comments received would be considered by the IFRIC in January 2009.
  • Refer the Interpretation to the IASB for approval in January 2009 (rather than December 2008).


gpeg.gif Compliance Costs for REACH (European Commission Regulation Concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals)

The staff introduced a paper on accounting for costs incurred to comply with the requirements of the European Regulation concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH). The IFRIC in July 2008 tentatively agreed to add the issue to its agenda and asked the staff to provide additional analysis on the basis of broader principles. The purpose of this session was to make a decision whether the item meets the IFRIC's criteria for adding it to the agenda in the light of the analysis provided by the staff.

The staff continued to introduce the background and regulation mechanisms of REACH noting that entities that have to comply with the regulation would regularly incur significant costs, particularly in connection with the technical dossier and safety tests required by the regulation. This was confirmed by some of the IFRIC members.

The staff noted that there is no specific guidance in IFRSs that would address schemes like REACH. The key accounting issues identified were:

  • Should a provision for expected REACH costs be recognised?
  • Should REACH costs be expensed or capitalised as an intangible asset?


Regarding the first issue it was noted that there was general consensus amongst constituents that expected REACH costs should not be provided for.

On the second issue the IFRIC had a discussion over how to distinguish between REACH costs and other costs of compliance if one would go down a capitalisation route.

Again, it was confirmed that the costs are generally significant (ranging between 50.000 to 1 million per substance), leading entities to gather in consortia to share costs. Another IFRIC member noted that the first couple of years will be particularly significant when companies have to register existing substances.

Many IFRIC members asked whether there was a distinguishing feature of REACH costs compared to general compliance costs and whether such a feature could be used for developing a wider principle for a wider range of situations. One IFRIC member noted that one such feature could be that the registration is specific to the contract. Members acknowledged that a wide range of such regulation schemes existed across the globe.

The Chairman reminded the IFRIC that addressing a jurisdictional matter without an underlying principle would lead to further submissions that could not be turned down because they are jurisdiction-specific.

There was some uncertainty around the table about the mechanism of REACH when a substance was actually registered. Some believed other market participants could then use the substance without further costs. Others opposed to this. The staff was asked to follow up on this.

The IFRIC then turned to the question on how to proceed with this issue. Some wanted to expand the scope of the issue others tried to narrow it down with the intent to find a consensus on a timely basis. It was agreed that any narrow scope should be 'natural' and not artificial.

The staff was asked to bring this issue back and find characteristics based on the REACH scheme that would be a starting point for the scope of a potential project. It was also asked to look at cost-sharing agreements in consortia and also whether an asset exists.

gpeg.gif Customer-related Intangible Assets

At the last IFRIC meeting it was agreed to tentatively add to the agenda a project on accounting for customer-related intangible assets with regard to the contractual/non-contractual notion. This session aimed to identify a scope for a possible interpretation.

The staff began to talk the IFRIC through the agenda paper. The staff highlighted that the issue arises in practice when determining the meaning of 'non-contractual' customer relationship and the link to contractual customer relationship.

The IFRIC discussed at length the question what would be subsumed under both notions and whether the approach taken in IFRS 3 (Revised) – ie, separating from goodwill any non-contractual customer relationship that is separable).

The IFRIC finally agreed to refer this issue to the Board with a recommendation to remove the distinction in IFRS 3 (Revised) and IAS 38 between contractual and non-contractual customer relationships.

gpeg.gif Review of Tentative Agenda Decisions published in September 2008 IFRIC Update

IAS 39: – Restricted securities

The IFRIC confirmed the wording of the tentative agenda decision published in the September IFRIC Update.

IFRIC 14 - Stable workforce assumption

The IFRIC confirmed its decision not to take the issue originally submitted on its agenda.

On a different issue identified by the staff during the deliberations of the submission the staff acknowledged that this issue causes problems in cases where an entity voluntarily prepays contributions under a minimum funding requirement, but proposed to address this issue in the upcoming ED/Standard on employee benefits accounting as a result of the IASB's discussion paper on this area.

One IFRIC member noted that this would not happen before 2011 and highlighted that the numbers produced would be wrong and IFRIC would confirm this, but not fix it. This member was sympathetic to address this issue before any improved Standard on pension accounting. Most IFRIC members shared this view.

Finally, it was decided to propose an amendment to IFRIC 14 with regard to paragraph 22 of the agenda to resolve the issue described above.

gpeg.gif Staff Recommendations for Tentative Agenda Decision

Regulatory assets and liabilities

The staff presented the IFRIC with its recommendation on regulatory assets and liabilities based on the background information research it undertook. The staff's proposal was not to add the item to the IFRIC's agenda, but to refer it to the Board with a recommendation to add it to the agenda.

It was acknowledged that this issue was of particular relevance for jurisdictions moving towards IFRS that, under local GAAP, recognised regulatory assets and liabilities.

The IFRIC had some discussion on whether such assets and liabilities exist at all or only in very rare circumstances. Some IFRIC members had strong views on this issue. It was noted that the ability to charge favourable prices in the future does not create an asset as their realisation depended on future revenues; nor does the requirement to charge a lower price in the future create a liability (unless the contract is made onerous thereby).

Many IFRIC members disagreed with the staff analysis while agreeing with the staff's recommendation not to add the item to the agenda.

It was noted that this issue can be addressed using existing Standards, but there was no divergence in practice under IFRS as such items are only rarely recognised by entities using IFRS.

Ultimately, the IFRIC agreed by a majority vote tentatively not to add the item to the agenda and not to recommend that the item be referred to the IASB.

IAS 32 – Classification of puttable and perpetual instruments

The staff presented the IFRIC with a submission on the revised version of IAS 32 Financial Instruments: Presentation. The submission asked whether an entity can have more than one class of equity instruments under the revised Standard where one class is a puttable instrument. The scenario described in the submission assumed a perpetual instrument meeting the definition of an equity instrument in IAS 32 and a puttable instrument that would be a deemed equity instrument under the amended provisions.

The staff brought forward two possible views:

  • Perpetual instruments classified as equity do not prohibit an entity from classifying puttable instruments as equity provided the criteria in IAS 32.16A/B are met
  • Perpetual instruments classified as equity prohibit puttable instruments from being classified as equity at the same time since the criterion in IAS 32.16A(c) is not met.


There was consensus around the IFRIC that the first view was in line with the Standard. It was agreed that the agenda decision as drafted should clearly that the existence of more than one class of equity is possible under IAS 32.

IAS 28 Associates – Potential effect of IFRS 3 and IAS 27 (as revised in 2008) on equity method accounting

The staff noted that the FASB's Emerging Issues Task Force (EITF) added EITF Issue No. 08-6 Equity Method Investment Accounting Considerations to its agenda. This draft EITF addresses several potential issues arising from the issue of the revised business combination standards (these are in large parts converged between US GAAP and IFRS).

Four issues are addressed:

  • How the initial carrying value of an equity method investment should be determined
  • How an impairment assessment of an underlying indefinite-lived intangible asset of an equity method investment should be performed
  • How an equity method investee's issuance of shares should be accounted for
  • How to account for a change in an investment from the equity method to the cost method.


The IFRIC had some discussion in principle over the equity method of accounting and issues arising from its application. With regard to the four issues the EITF had identified the IFRIC agreed that the staff should come back with further analysis on the issues of determining the initial carrying amount of an equity method investment and how an equity method investee's issuance of shares should be accounted for. For the remaining two issues the IFRIC will issue a tentative agenda decision not to take them on the agenda.

IAS 39 – Derecognition

The IFRIC decided to remove this item from its agenda in the light of the IASB's project on the topic.

Fair Value Measurement of Financial Instruments in Inactive Markets – Determining the Discount Rate

This was a late entry. The submission specifically asked the IFRIC to address the issue at the November IFRIC meeting as it related to the current market conditions. The IFRIC coordinator informed the IFRIC that the submitter published the submission on its website and hence, normal rules of confidentiality were not relevant. It was noted that the approach presented in the submission was, according to the submission, broadly agreed with by non-accounting standard setting authorities in the jurisdiction the issue had arisen.

The submission was seeking for IFRIC's input on determining the components of a discount rate to be used to determine fair value using a discounted cash flow approach for instruments where markets are considered inactive. In particular, two specific components were identified and a possible approach to that proposed: credit and liquidity spreads that are not observable in a market.

The staff noted that it was clear that any guidance would be more like implementation guidance and that IFRIC generally does not add items to the agenda where the output would be implementation guidance. In addition, it was highlighted that the Board has several activities on its agenda in relation to determining fair value.

One IFRIC member noted that the proposed agenda decision wording was not strong enough in the light of the possibility of being interpreted as implicit consent to the proposed approach. This member proposed to be explicit that the agenda decision should be clear that this approach is not acceptable. It was also noted that the IASB's Expert Advisory Panel has published guidance on this, which was generally considered useful albeit not authoritative and that the agenda decision should refer to the output of the panel published recently.

The IFRIC agreed not to add the item to the agenda, but to change the wording of the tentative agenda decision to:

  • Make explicit reference to the final report of the IASB's Expert Advisory Panel
  • Make clear that the approach presented was not consistent with the measurement objective and the guidance in IAS 39.


gpeg.gif Administrative Session – IFRIC work in progress

The IFRIC coordinator debriefed the IFRIC on the current status of the work in progress.

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


Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.