However, after discussion, the IFRIC confirmed that the title of the Interpretation should refer to 'Service Concession Arrangements' on the basis that the term was well understood by constituents and that to change at this stage was undesirable.
Recognition of property, plant and equipment
The IFRIC confirmed the approach proposed that infrastructure within the scope of the Interpretation should not be recognised as property, plant and equipment of the operator. However, it agreed that it should explain its reasons for adopting the 'control approach' (as opposed to the 'risk and rewards' approach more clearly). A service concession arrangement is distinguished from other similar arrangements when the grantor controls or regulates the services to be provided (that is, specifies how the infrastructure is to be used) that is, the 'control of use' of the infrastructure is not conveyed to the operator.
Recognition and measurement
The IFRIC confirmed that the operator should recognise and measure revenue in accordance with IAS 11 Construction Contracts or IAS 18 Revenue for the services it performs. Any financial asset or intangible asset arising are accounted for subsequently in accordance with IAS 39 Financial Instruments: Recognition and Measurement or IAS 38
Intangible Assets as appropriate.
IFRIC Members stressed that the Interpretation needed to articulate clearly the measurement objective (fair value of the consideration received or receivable) while accommodating a variety of techniques or methods that might be used to arrive at an appropriate measure.
Construction or enhancement
The IFRIC agreed that the Interpretation needed to differentiate enhancement ('upgrades')-activities that enhanced an existing item of infrastructure-from activities that restored the original service capacity of the infrastructure. Enhancements would be IAS 11 activities.
Consideration given by the grantor to the operator
The IFRIC confirmed that if the operator provides construction services the consideration received by the operator might be in the form of (i) a financial asset; (ii) and intangible asset; or (iii) a combination of the two.
If the grantor guarantees the operator's return by agreeing to pay the operator specified amounts or reimbursing the shortfall (if any) between the user payments and a specified amount, then the operator has a financial asset (IAS 32; IAS 39 and IFRS 7 will apply).
If the operator has no unconditional right to receive cash when payments are conditional on usage, the consideration is in the form of an intangible asset.
If the operator and the grantor share the demand risk (i.e. the operator is paid for its services in part by a financial asset and in part by a licence to charge users), the consideration should be bifurcated and each component accounted for separately.
Borrowing costs
The IFRIC discussed a proposal that would prohibit capitalisation of borrowing costs on all service concession arrangements within the scope of the Interpretation. IFRIC members expressed concern with this, not only because of the current IASB Exposure Draft that proposes to mandate capitalising interest incurred on qualifying assets but because IAS 11 suggests that a construction asset might be a qualifying asset. The IFRIC agreed that the capitalisation of borrowing costs into an intangible asset was possible.
Timing of the recognition of the intangible asset
The IFRIC discussed whether the Interpretation should specify when an operator should recognise an intangible asset. The IFRIC agreed that to the extent that the contracts are executory, no asset should be recognised and that an asset should be recognised for the operator's right to be paid as the services are rendered.
The IFRIC was concerned that their decisions in this area should be consistent with those taken with respect to borrowing costs. It was noted that the 'right to receive an intangible asset' was not the same as the receipt of the intangible asset. There was a need to distinguish between the financial asset model (in which it might be necessary to accrete interest on the receivable) from the intangible asset model (in which the intangible asset might meet the definition of a qualifying asset for the purposes of IAS 23 Borrowing Costs).
On a related matter, the IFRIC agreed that the Basis for Conclusions should explain why the 'rights and obligations' (control) model has been applied in the Interpretation in preference to the 'risks and rewards' model. The IFRIC was concerned about control of the infrastructure but found an analysis of rights and obligations created by service concession arrangements useful in determining the appropriate accounting treatment.
Effective date
The IFRIC concurred with a suggestion from the Chairman that the effective date for the Interpretation should be decided by the IASB when it deliberates the Interpretation. However, the Chairman noted that it the effective date would not be before financial years beginning on or after 1 January 2008. It was possible that the Board would consider the Interpretation so significant as to be captured by the Board's '2009 Announcement.'
Approval
The Chairman asked whether any IFRIC Members opposed issuing the Interpretation (subject to drafting). One IFRIC Member was opposed. The Interpretation was approved.
Re-exposure
The IFRIC considered whether re-exposure was necessary. An IFRIC member expressed three areas of concern:
- The inclusion of 'whole of life assets' in the scope of the Interpretation
- The revision of the dividing line between the Financial Asset model and the Intangible Asset model
- The requirement to bifurcate service concession arrangements in certain circumstances
Another IFRIC Member noted that the IFRIC's decisions on all these issues were inherent in the basis for conclusions on D12-D14.
The IFRIC Chairman undertook to bring the member's concerns to the attention of the IASB when the Board deliberated the Interpretation.
Next steps
The IFRIC staff was asked to investigate whether service concession arrangements could be classified as 'loans and receivables' in accordance with IAS 39.9 due to the uncertain timing of amounts received and receivable and the risk of non-recovery due to events other than deterioration in credit rating.
IFRIC members were asked to submit drafting comments to the staff, after which the staff will prepare a revised draft for the IFRIC to review in time to submit the Interpretation to the IASB for consideration at Board's October 2006 meeting. The date of issue of the Interpretation would depend on the Board's review of the document.
IAS 18 Revenue – Real Estate Sales
At its March 2006 meeting the IFRIC agreed to undertake a project to clarify the requirements of IAS 18 Revenue for real estate sales in which contracts are agreed before construction is complete. At its September 2006 meeting the IFRIC discussed several issues to be addressed in the draft interpretation, essentially to ensure that the scope of the project is defined appropriately.
Applicable standards
The IFRIC discussed which IFRS were applicable to real estate sales. The IFRIC agreed that an agreement for the sale of real estate is within the scope of IAS 11 only if it meets the IAS 11 definition of a construction contract, i.e. if it is a contract specifically negotiated for the construction of an asset to the buyer's specification; customer choices among pre-defined alternatives would not meet the definition of 'specific negotiation.' Otherwise the contract is an agreement for the sale of goods within the scope of IAS 18.
Applying IAS 18
The IFRIC noted that, when IAS 18 is applied to sales of real estate, revenue should be recognised only when all of the conditions set out in IAS 18 paragraph 14 have been met. The Draft Interpretation should include guidance particularly highlighting the need for effective control to have passed to the buyer, noting that effective control often transfers to the buyer only when the sale is completed, with the buyer obtaining possession of his unit and identifying circumstances that might prevent full revenue recognition at that time.
Incomplete performance
The IFRIC discussed the conditions for recognising revenue from the sale of real estate before the developer had completed construction. It noted that the Draft Interpretation should clarify the revenue recognition requirements in such circumstances and that these requirements need to be consistent with the IFRIC's conclusions in Draft Interpretation D20 Customer Loyalty Programmes.
Allocation of costs and revenues
The IFRIC confirmed its decision in March 2006 that it would not address the allocation of cost as this is an area of judgement based on facts and circumstances.
IFRIC D17: IFRS 2 – Group and Treasury Share Transactions
The IFRIC discussed staff proposals on:
- Share-based payment arrangements involving equity instruments of the parent (or another entity in the same group);
- Transfers of employees between group entities; and
- Whether the Interpretation should include guidance that the Interpretation might not be applicable automatically to intragroup transactions in general
Share-based payment arrangements involving equity instruments of the parent (or another entity in the same group)
A parent grants rights to its equity instruments to the employees of its subsidiary and the subsidiary does not have an obligation to the employees
After considerable discussion, the IFRIC concluded that in these circumstances, if the transaction was an equity-settled share-based payment transaction in the parent/ group financial statements, it would also be equity-settled in the subsidiary's financial statements. The subsidiary would recognise a contribution from an equity participant for the fair value of the amount of services attributed. The IFRIC noted that this was an application of the general principle of attribution in IFRS 2.3 transfers of an entity's equity instruments by its shareholders to parties that have supplied goods or services to the entity (including employees) are share-based payment transactions. This also applies to transfers of equity instruments of the entity's parent, or equity instruments of another entity in the same group as the entity, to parties that have supplied goods or services to the entity.
A subsidiary grants rights to equity instruments of its parent (another entity in the same group) to its employees, and the subsidiary has an obligation to the employees
The IFRIC reconsidered its decision taken at the July 2006 meeting not provide guidance in this area. The IFRIC considered three alternatives: (i) to require such arrangements to be treated as cash-settled share-based payment transactions in the financial statements of the subsidiary (irrespective of the treatment in the parent); (ii) to require equity-settled treatment, if the transaction was an equity-settled share-based payment arrangement in the parent/ group financial statements; or (iii) provide no guidance in the Interpretation, but add a discussion in the Basis for Conclusions noting that different treatments are possible.
The IFRIC noted that, in the subsidiary's financial statements, IFRS 2 required that such arrangements be treated as cash-settled because the instruments used to settle the subsidiary's obligation to its employees were not its own equity instruments. Thus, it was not possible to apply the principle of attribution in IFRS 2.3. The transaction was a share-based payment, but it did not meet the definition of an equity-settled share-based payment transaction. Thus, it had to be accounted for as a cash-settled transaction.
Transfers of employees between group entities
The IFRIC agreed that the transfer of employees between group entities would not be considered as a failure to satisfy a non-market vesting condition in the financial statements of the subsidiary from which the employees transfer employment.
The IFRIC also agreed that if an employee leaves the group during the vesting period (i.e. fails to satisfy a non-market vesting condition), each individual subsidiary should reverse the charge previously recognised in respect of the services from that employee during the past vesting period.
Whether the Interpretation should include guidance that the Interpretation might not be applicable automatically to intragroup transactions in general.
The IFRIC agreed that because of its decisions made at this meeting, the staff proposal to include guidance that the Interpretation might not be applicable automatically to intragroup transactions generally was unnecessary and should be deleted.
Approval
The IFRIC Chairman asked whether, on the basis of the decisions taken at this meeting, any IFRIC Members would oppose the consensus in the Interpretation (subject to drafting). No IFRIC Members indicated their opposition, and the Interpretation was approved.
Next steps
IFRIC members were asked to submit drafting comments to the staff, after which the staff will prepare a revised draft for the IFRIC to review in time to submit the Interpretation to the IASB for consideration at Board's October 2006 meeting. The date of issue of the Interpretation would depend on the Board's review of the document.
IFRS 2 Share-based Payment – Employee benefit trusts in the individual or separate financial statements of the sponsor
The IFRIC continued its discussion of a potential agenda topic relating to accounting for an employee benefit trust established by a sponsoring entity specifically to facilitate the transfer of its equity instruments to its employees under a share-based payment arrangement. In particular, the IFRIC considered whether it would be possible to draw an analogy between an employee benefit trust and a share nominee company. (A share nominee company holds legal title to the shares registered in its name but acts on those shares only to the order of the beneficial owners. The shares are in the possession of the nominee company but not under its control.)
IFRIC Members expressed concern about whether it was possible to develop an Interpretation on this basis. Other possible approaches were examined, but none was seen as resolving satisfactorily the issues of control and the nature of the sponsor's investment in the trust for the purposes of reporting in separate financial statements. IFRIC Members noted that different approaches had been adopted in various jurisdictions, including the sponsor treating the trust as an investment in its separate financial statements.
The IFRIC noted that there were several problems related to reporting using IFRS in separate financial statements and that developing a narrow Interpretation on one aspect was not an appropriate approach to a more pervasive problem. In addition, IFIRC Members were concerned that in the issue under discussion, it might be difficult to avoid a form-driven answer.
Consequently, the IFRIC decided not to add this topic to its agenda. An Agenda Decision would be drafted noting the current IASB project on Control (including Special Purpose Entities). In addition, it was evident from the discussion that the IFRIC was unlikely to be able to reach consensus within a reasonable time because of diversity in practice and the variety of legal structures that any Interpretation would have to address and accommodate.
This summary is based on notes taken by observers at the IFRIC meeting and should not be regarded as an official or final summary.