Notes from the September 2008 IFRIC meeting

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

07 Sep 2008

The International Financial Reporting Interpretations Committee (IFRIC) met at the IASB's offices in London on Thursday 4 September and Friday 5 September 2008. Presented below are the preliminary and unofficial notes taken by Deloitte observers at the meeting.

Among other things, the IFRIC decided to:
  • Approve a final Interpretation on Distributions of Non-cash Assets to Owners
  • Add to its agenda a project on Customer-Related Intangible Assets

Notes from the IFRIC Meeting
4-5 September 2008

Thursday 4 September 2008


The Chairman opened the IFRIC meeting by introducing a new IFRIC member, Joanna Perry from New Zealand.

gpeg.gif IFRIC D23 Distributions of Non-cash Assets to Owners

Approve drafting changes decided at the July IFRIC meeting

The staff explained the various changes made to the draft Interpretation in response to comments received both from constituents and IFRIC members. Some IFRIC members noted that the examples on the scope should be clearer and that the reporting entity should be, for the avoidance of doubt, a publicly listed company. It was agreed that the staff will rework (and possibly expand) the Illustrative Examples. On that note, it was confirmed that the final Interpretation would create a difference with US GAAP.

Regarding measurement of the dividend payable, the IFRIC discussed whether the Interpretation should prescribe the measurement attribute for the dividend liability. One member noted that difficulties arise when the dividend is neither a financial instrument in scope of IAS 39 nor an IAS 37 liability, as there is no general Standard on liabilities, so the sole reference would be the Framework. The redraft defined fair value of the assets distributed as the measurement attribute. Responding to comments by members, the staff agreed to change the words to state that the dividend payable is measured by reference to the fair value of the assets to be distributed (as stated in the original draft). It was noted that the reason IFRIC referred to fair value was to ensure that all non-cash distributions are measured consistently.

The staff noted that it has expanded the rationale in the Basis for Conclusions explaining why the difference between the carrying amount of the asset to be distributed and the dividend payable (if any) is recognised in profit or loss – rather than in equity. One IFRIC member proposed to keep the alternative view of equity treatment in the Basis for Conclusions. The Chairman reminded the IFRIC that final Interpretations usually do not contain alternative views and that any alternative included must be accompanied with reasons it had been rejected.

On the drafting changes made on the basis of other decisions made in the July IFRIC meeting, the members had a short debate on whether to require presenting the difference between the carrying amount of the asset to be distributed and the dividend payable (if any) as a separate item of profit or loss, because IAS 1.85 would already require separate presentation of material items. It was argued that this would increase discipline in presentation and avoid grouping such transactions with other gains from disposals.

The redraft also reflected the decision made by IFRIC to amend IFRS 5 to scope in non-cash distributions. The amendments to IFRS 5 would introduce guidance that would require entities to include the probability of shareholders' approval to the distribution in assessing the high probability of the transaction occurring, which is a requirement for IFRS 5 to apply. It was agreed that this guidance was also considered useful for 'normal' IFRS 5 transactions and that the IFRIC should recommend to the Board to include such guidance for other disposals covered by IFRS 5.

Discussion of the issue of the accounting mismatch

The IFRIC discussed this issue briefly. It was agreed that the accounting mismatch (asset to be distributed generally at cost, dividend payable by reference to fair value of that asset) is similar to other mismatches that occur frequently in IFRSs due to different measurement attributes applied. It was agreed not to ask the Board to allow upward measurement of the asset to be distributed above its cost and to keep the requirements as set out in the draft Interpretation. However, it was agreed to draft the Basis for Conclusions carefully to explain the rationale behind this conclusion.

Approve the staff proposal regarding minor issues

The staff explained that it would not discuss the minor issues unless IFRIC members wished to discuss particular issues. One member agreed with one comment made regarding the situation where the fair value of the dividend payable cannot be determined reliably. It was agreed to amend the Basis for Conclusions to make clear the rationale of IFRIC on its conclusion. Another IFRIC member agreed with a comment made on one of the illustrative examples. It was agreed to amend or delete the example.

Consider re-exposure

As the redraft of the Interpretation does not differ significantly from the original Draft Interpretation, IFRIC agreed that re-exposure was not required.

Approving the Interpretation

The staff then asked the IFRIC whether it approved the consensus reached in D23. The IFRIC confirmed the consensus with four dissenting votes.

gpeg.gif IFRIC D24 Customer Contributions

The staff presented the IFRIC with a revised draft of D24 Customer Contributions that was aimed to reflect input collected at the July IFRIC meeting. The staff began with recognition and measurement of the contributed asset. It was noted that the redraft aims to simplify deciding whether the contributed asset should be recognised by the receiving entity and that it should determine whether it controls the asset and if it is a lease in accordance with IAS 17 or IFRIC 4.

The IFRIC had a lengthy debate on this topic. Some members noted that this is not the main issue to be addressed by the Interpretation and that it is the credit, that is revenue, of the journal entry that was not clear. The Chairman highlighted that before a credit is a debit (that is the asset to be recognised).

Other members wanted more indicators on asset recognition and said that sole reference to IFRIC 4 is not sufficient. The IFRIC Coordinator responded that sole reference to IFRIC 4 was not intended. The staff needed an indication whether to cut back the guidance or expand it. It was also noted by IFRIC members that the final Interpretation should not introduce new guidance on control and that people might get confused over the references to the leasing guidance in IFRS. One IFRIC member noted that some transactions might indeed be linked transactions.

The Chairman then summarised the discussion and asked the staff to include more guidance in the Interpretation, but try to keep it simple.

The staff then turned to the question how the credit should be accounted for, especially, whether the IFRIC agreed to the guidance on identifying separate components of the transaction (that is, are connecting the customer to the network and on-going access to a supply separate components).

The IFRIC, again, had a lengthy discussion on this topic with no clear direction. Much of the discussion centred around whether and what amount to recognise immediately and what amount should be deferred. One member thought of the examples as being too simplistic. Others wondered whether this guidance could be applied by analogy. The Chairman stated that if the principles identified are good, this would be appropriate.

Another member highlighted that in case the obligation is legal, it is a non-issue. Others were concerned about the practical implications and difficulties of splitting up the revenue stream and recognising some revenue up front and some over time. It was also noted that the guidance might lead to up front revenue recognition where it is not desirable.

The Chairman asked the IFRIC whether to provide guidance on these issues subject to drafting changes. The IFRIC seemed to agree.

The staff then asked for further questions on the drafting of the interpretation. One IFRIC member asked the staff to be clear in the Basis for Conclusions on what issues IFRIC wanted to address. Also, it was noted that depending on the final guidance provided on adoption some transitional relief should be provided.

The IFRIC Coordinator also proposed to add an example of asset contribution in a non-regulated activity.

The Chairman asked the staff to prepare a revised draft including a Basis for Conclusions and bring back any issues. Although the agenda papers included a question on disclosures this was not discussed at this meeting.

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

The staff asked the IFRIC to confirm the tentative agenda decisions published in the July IFRIC Update in the light of comments received.

Recognition of Lease Expense under an Operating Lease

The IFRIC agreed to keep the original wording of the tentative agenda decision and remove the proposed reference to the right to use the leased asset. The Agenda Decision was confirmed.

Accounting for Trailing Commissions

The IFRIC discussed in length the comments received on this tentative agenda decision. There seemed to be agreement around the table that the Agenda Decision as currently drafted did not answer the question asked in the submission. Furthermore, it was agreed that the difficulty of identifying whether future services must be rendered does not only arise from contractual obligations, but also from implicit obligations. Some members acknowledged that the reason IFRIC could not find a consensus on this issue was because the relevant Standards IAS 32 and IAS 18 have different underlying concepts. IAS 18 incorporated a reliability threshold, something that IAS 32 would not require. The IFRIC reconfirmed the decision not to take the item on the agenda. However, it was agreed that the wording would be amended and circulated, and if IFRIC members cannot agree on the wording, it will be brought back to the next meeting. Also, it will be considered whether re-exposing would be required.

Transaction Costs Deducted from Equity

The IFRIC discussed this issue in length, especially on the issue whether the agenda decision would 'interpret' the requirements in IAS 32.37 and .38 too narrowly. It was highlighted that the decision whether transaction costs relate to a equity transaction require judgement in some instances – something that the agenda decision did not include. The Chairman stated that practice interpreted the guidance too widely resulting in too many costs deducted from equity. Finally, it was decided to redraft the Agenda Decision to include judgement.

gpeg.gif Administrative Session

The IFRIC Coordinator asked for questions on IFRIC work in progress. It was noted that two items still await further progress: accounting for REACH cost (as tentatively added to the agenda in July 2008) and derecognition. Regarding the first topic it was highlighted that national standard-setters expressed their will to support the IFRIC and that this is currently being coordinated. On the second topic, the IFRIC Coordinator highlighted that there will be a proposal at the next meeting to remove it permanently from IFRIC's agenda as the IASB has accelerated its own derecognition project. This closed the public part of this session.

Friday 5 September 2008 (morning only)

gpeg.gif Staff Recommendations for Tentative Agenda Decision

Customer-Related Intangible Assets

The IFRIC considered a request to add an item to its agenda to provide guidance on the circumstances in which a non-contractual customer relationship arises in a business combination. The submission noted that IFRS 3 (Revised 2008) requires an acquirer to recognise the identifiable intangible assets of the acquiree separately from goodwill. An intangible asset is identifiable if it meets either the contractual-legal criterion or the separability criterion. Customer-related intangible assets might be either contractual or non-contractual. Contractual customer relationships are always recognised separately from goodwill as they meet the contractual-legal criterion. However, non-contractual customer relationships are recognised separately from goodwill only if they meet the separability criterion. Consequently, determining whether a relationship is contractual is critical to identifying and measuring both separately recognised customer relationship intangible assets and goodwill.

The IFRIC Coordinator recommended that this item be added to the agenda – not necessarily to develop an Interpretation but to explore whether IFRS 3 or IAS 38 need clarification or improvement. After a short discussion, the IFRIC agreed to this approach.

Valuation of Restricted Securities

The IFRIC considered a request to add an item to its agenda to provide guidance on whether a discount must be applied to the quoted market price when establishing the fair value of a security quoted in an active market when there is a contractual, governmental or other legally enforceable restriction that prevents the sale of the security for a specified period. The submission restricted its request for guidance to those instruments for which the restriction was specific to the current holder of the security, suggesting that there was diversity in practice. Examples include various participants in initial public offerings, such as underwriters or venture capital investors, who are prohibited from selling securities they hold or receive as part of the IPO for a specified period.

The IFRIC decided not to add this item to its agenda. In doing so, it noted that the issue is addressed specifically in the Application Guidance of IAS 39, which states that the market price of a security traded in an active market should not be adjusted for restrictions specific to the current holder. Consequently, the staff does not expect diversity in practice. With respect to securities traded in inactive markets, the IASB has an ongoing project on measurement issues with respect to inactive markets, whose work is well advanced and which will address such issues. Consequently, the IFRIC would likely be unable to complete its due process with respect to securities traded in an inactive project before the IASB completed its own project. A Tentative Agenda Decision will be issued in the forthcoming issue of IFRIC Update.

IAS 19 and IFRIC 14 – Stable workforce assumption

The IFRIC considered a request to address an issue arising from IFRIC 14 IAS 19–The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. IAS 19 limits the asset that an entity can recognise for a surplus in a defined benefit pension plan to the economic benefit available to the entity from both refunds from the plan and reductions in future contributions to the plan. IFRIC 14 gives guidance on how to determine that amount. The issue raised in the request related to the economic benefit available in the form of reductions in future contributions when there is a minimum funding requirement. IFRIC 14 requires the economic benefit available as reductions in future contributions to be the present value of:

  • the future service cost to the entity for each year less
  • the estimated minimum funding contributions required in respect of the future accrual of benefits in that year.

In determining the future service cost, IFRIC 14 requires the entity to assume a stable workforce unless the entity is demonstrably committed to make a reduction in the number of employees covered by the plan.

The IFRIC agreed not to add this item to its agenda. The effect of the timing of voluntary contributions described in the request was not a new issue, and is an inherent part of the asset ceiling. The only question was whether the determination of the economic benefit available from reductions in future contributions was appropriate. The IFRIC discussed this at length when developing IFRIC 14, and the request provided no new information on this point that was not considered at the time. A Tentative Agenda Decision will be issued in the forthcoming issue of IFRIC Update.

In analysing the issue submitted, the staff identified another potential issue, dealing with the demographic assumptions of a 'stable workforce'. They will explore these issues further and report to the IFRIC at a later meeting.

gpeg.gif Regulatory Assets and Liabilities

The IFRIC held an educational session devoted to accounting for the effects of rate regulation in the context of reporting under IFRS. Although many rate-regulated entities already report using IFRS, several jurisdictions considering or already committed to adopting IFRS have local GAAP requirements that are different to IFRS. Preparers in those jurisdictions, in Europe and North America, have raised questions about the appropriate application of IFRS in their situations.

The IFRIC held a wide-ranging and interesting debate, but it did seem that their initial point of view was that non-IFRS accounting treatments, such as those in FAS 71 Accounting for the Effects of Certain Types of Regulation, were not consistent with IFRS. Although that conclusion might be uncomfortable, there was little to suggest that it was an incorrect analysis of the issue. IFRIC members noted that similar issues had be addressed in the development of IFRIC 12 Service Concession Arrangements but had not led to assets and liabilities being recognised in the financial statements that did not meet the IASB Framework definitions of those items. During the discussion, an observer noted that there were some similarities between 'cost-plus' contract accounting (IAS 11) and rate-regulated activities. However, it was noted that the critical difference between the two was that the IAS 11 relationship was a contractual right to recover the 'plus' bit, something that was usually absent in rate-regulated utilities.

The IFRIC staff will continue its data gathering and analysis of issues and will return to a subsequent meeting with an agenda proposal.

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


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