We have updated the following summaries of IFRIC agenda projects to reflect deliberations at IFRIC's May 2006 meeting:

• IAS 17 Leases – Recognition of contingent rentals
• IAS 18 Revenue – Customer Loyalty Programmes
• IAS 19 Post-employment Benefits – The effect of a minimum funding requirement on the asset ceiling
• IAS 39 – Securitisations: Derecognition of groups of financial assets
• IFRS 2: Group and Treasury Share Transactions (IFRIC D17)
• Interim Reporting and Impairment (IFRIC D18)
• Service Concession Arrangements (IFRIC D12, D13, D14)

Many considered that the inclusion of the word similar had relevance when determining which assets can be grouped together when applying the derecognition decision tree under IAS 39. If the Board had intended something different when developing IAS 39, many considered this view was not clear from the current words in the standard. If the IFRIC were to pursue this alternative interpretation, IAS 39 would potentially need to be amended through the deletion of the word 'similar'.

The IFRIC decided that the staff should consider the various options available to IFRIC and propose alternatives at a future meeting.

IFRIC D17 - IFRS 2: Group and Treasury Share Transactions

The IFRIC continued its discussion of D17 - Group and Treasury Share Transactions. At IFRIC's November 2005 meeting, the staff had presented an analysis of comments on the draft interpretation. The IFRIC was not able to get to a consensus at that meeting. Some members thought the IFRIC should discontinue the project as the issues in D17 did not address a principle for how group transactions should be accounted for in the separate financial statements of the subsidiary. However, the IFRIC asked the staff to develop a paper exploring accounting under the following issues:

• a. when an entity grants rights to its equity instruments to its employees, and either chooses or is required to buy those instruments from another party;
• b. when and entity's employees are granted rights to equity instruments of the entity, either by the entity itself or by its shareholder, and the shareholder provides the equity instrument;
• c. when a parent entity grants rights to its equity instruments directly to a subsidiary entity's employees; and
• d. when a subsidiary grants rights to equity instruments in its parent to its employees

The issue before the IFRIC at the current meeting is how to continue on D17. (Note that the staff had outlined a rejection note that the IFRIC used in their discussion, which was not available for observers).

The staff had analysed issue (a) and (b) and concluded that the principles set out in IFRS 2 were sufficiently clear to recommend that an interpretation not be issued. The IFRIC did not discuss those two issues but focused its discussion on the accounting treatment for issue (c) and )d), and specifically the accounting treatment in the subsidiary's separate financial statements.

The staff's paper outlined a treatment that would be similar for issues (c) and (d), resulting in equity-settled treatment for both. The IFRIC members were divided in their views. Some disagreed with the staff analysis as they did not think that equity-settlement accounting is appropriate in the separate accounts of the subsidiary under (d). This led to debate on the issue of 'push-down' accounting (that is, if the transactions are accounted as equity-settled share-based payment in consolidation, that accounting should be 'pushed down' to the parent's and the subsidiary's separate accounts).

At the end of the discussion, the IFRIC asked the staff to review the wording in IFRS 2 and to explore whether it possible to read into the current standard how accounting in the separate financial accounts the subsidiary and a parent in at group share-based payment transaction should be accounted for.

The IFRIC decided to postpone the decision on whether to issue an interpretation or whether to discontinue the project until the staff had analysed the wording of IFRS 2.

IFRIC D18 - Interim Reporting and Impairment – Review of responses and staff proposals

The staff presented the IFRIC with an analysis of the comment letters received on D18, along with staff's proposed responses. Staff asked the IFRIC for how to proceed.

Although the majority of respondents agreed with the consensus in the draft interpretation, there was some strong disagreement as well. The IFRIC therefore decided that the Basis for Conclusion should include a paragraph stating that the IFRIC respondents were divided and that the IFRIC had considered their views.

Some respondents believed that the consensus lacked a clear principle or failed to identify such a principle. The IFRIC said that this was the reason that they had chosen to issue a narrow interpretation that will reduce divergence, and that there should be no amendment to the interpretation based on this comment.

Some respondents said the transitional requirements were bit clear and could be read to require retrospective application from a date before the effective date of IAS 36 and IAS 39. The IFRIC decided that the draft interpretation should be amended to clarify that the draft interpretation should apply prospectively from the date when the entity first applies IAS 36 and/or IAS 39.

One respondent would include the following statement from BC8 "the draft interpretation applies only to reversals of impairment losses on goodwill and investments in equity instruments and financial assets carried at cost" in the body of the standard rather than in the Basis for Conclusions. The IFRIC stated that this is merely emphasising what is already in the interpretation and decided not to move the wording.

A number of respondents commented that the requirements in IAS 34 were more specific to interim reporting than IAS 36 and IAS 39. They disagreed with the statement in the Basis for Conclusions that IAS 36 and IAS 39 should take precedence over IAS 34 on this matter. The IFRIC agreed to the staff proposal that IAS 36 and IAS 39 is more specific regarding reversal of impairment, and that identifying which standard is more specific is a matter of judgement and central to the consensus reached. No changes will be made.

A number of respondents stated that the argument that IAS 34 was issued before IAS 36 and IAS 39 and could therefore not have considered the implications is weak and could potentially set precedent for other standards. The IFRIC agreed and decided to remove this argument.

One respondent commented that it was not clear whether the interpretation would apply to interim financial statements other than those prepared in compliance with IAS 34. The IFRIC decided that they would not amend the interpretation in this regard as the implications of this had not been considered.

A respondent suggested amending the consensus to more closely reflect the wording in IAS 39. The IFRIC stated that the consensus is sufficiently clear and would not be changed.

The IFRIC decided that the revised draft should be presented to the IASB at the meeting in June as the IFRIC's agreed position.

Review of tentative agenda decisions published in March 2006 IFRIC Update

• IFRS 2 Share-based Payment – Scope of IFRS 2: Share plans with cash alternative at the discretion of the entity As no comments were received, the IFRIC approved the tentative decision not to add this issue to its agenda. The final decision will be published in the next IFRIC Update.
• IFRS 2 Share-based Payment – Share plans with cash alternative at the discretion of the employees: grant date and vesting periods As no comments were received, the IFRIC approved the tentative decision not to add this issue to its agenda. The final decision will be published in the next IFRIC Update.
• IFRS 2 Share-based Payment – Fair value measurement of a post-vesting transfer restriction In deciding tentatively not to add this topic to its agenda, the IFRIC had outlined a two-stage approach where the issue was whether the value of post vesting restrictions could be based on the 'opportunity cost' borne by employees. The IFRIC had received comments asking whether the approach taken in the rejection note was consistent with the requirements of IFRS 2. The staff presented revised wording of the earlier published tentative agenda decision (not handed out to observers). The IFRIC discussed the issue and decided to amend the wording to focus on the market opportunities available to the option holder. It was decided that a revised wording of the issue would be circulated to the IFRIC.

Recommendations by Agenda Committee regarding requests for IFRIC agenda items

• IFRS 2 Share-Based Payment - Employee Benefit Trusts The IFRIC considered a request from the IASB to consider whether any guidance should be issued on accounting for employee benefit trusts relating to share-based payment arrangements. In November 2004, the IFRIC amended the scope of SIC 12 to remove the scope exclusion for equity compensation plans. However, the IFRIC believes that there is need for additional guidance on the separate or individual accounts, because current IFRSs do not specifically deal with accounting for employee benefit trusts relating to share-based payments. Accordingly, the IFRIC agreed take add this issue to its agenda.
• IAS 18 Revenue - Up-front revenue recognition by a fund manager The IFRIC has received three requests for an interpretation on how a fund manager should recognise revenue arising from sale of mutual funds. Views diverge on whether all revenue received up front should be recognised immediately or whether some amount should be deferred and amortised over the investment period. After a brief discussion, the IFRIC agreed that because practice is divergent, it should add the issue to its agenda.
• IAS 32 Financial Instruments: Presentation - Classification of a financial instrument as a liability or equity At its March 2006 meeting, the IFRIC had decided that IAS 32 was clear that a contractual financial obligation was necessary to classify a financial instrument as a liability. It also decided that economic compulsion may affect the manner of settlement but does not affect classification of a financial instrument as a liability or equity. At the current meeting, the IFRIC was presented a draft rejection based on the above for not taking the item on the agenda (not handed out to observers). Some IFRIC members expressed strong reservations about the current draft wording, as well as the decision made, as they did not believe the answer was clear regarding economic compulsion. Due to the strong reservations, the IFRIC decided that the rejection note should rather state that the reason for rejection is that the IFRIC would not be able to resolve the matter on a timely basis.
• IAS 32 Financial Instruments: Presentation - Puts and forwards held by minority interests The IFRIC considered an issue where a parent either writes a put or agrees on a forward purchase to acquire shares in a subsidiary held by a third party. Essentially this issue raised two questions:
  • a. Should the parent entity recognise a liability for the amount potentially payable under the contract?
  • b. Should a minority interest continue to be recognised for the minority's shares that are subject to the agreement?
  The IFRIC agreed that a liability would arise when the parent have a contractual obligation to pay cash even if that is conditional on the option being exercised by the holder. On the second issue the IFRIC acknowledged that there is diversity in practice – some entities derecognise minority while others convey the reclassification through presentation. IFRIC members differed in their view on how to proceed. As the IFRIC could not agree, it decided to issue a rejection note stating that IFRIC could not reach a consensus on a timely basis. The agenda for this meeting included the following potential agenda items that were not discussed due to time constraints. The IFRIC will address these issues at a future meeting.
  • IFRS 3 Business Combinations – Are puts or forwards received by minority interests in a business combination contingent consideration
  • IAS 39 Financial Instruments: Recognition and Measurement – Definition of a derivative: Indexation on own EBITDA or own revenue
  • IAS 32 Financial Instruments: Presentation – Foreign Currency Instruments exchangeable into Equity Instruments of the Parent Entity of the Issuer
  • SIC 12 Consolidation - Special Purpose Entities – Relinquishment of control
  • IAS 11 Construction Contracts/ IAS 18 Revenue – Allocation of profit in unsegmented contracts
  Scroll down for a summary of the first day of the IFRIC meeting.

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

Our overall view:

Whilst we support much of the Board's strategy on convergence between IFRS and US GAAP, we do not believe that the tactic on converging the requirements on segmental reporting is necessary at this time, and share many of the concerns of the three dissenting Board members. We believe that convergence should be to the superior standard and, as discussed further below, do not believe that a sufficient case has been made that moving to the approach required by SFAS 131 Disclosures about Segments of an Enterprise and Related Information would result in enhanced segmental disclosures. In 1997, when IAS 14 and SFAS 131 were being developed, the IASC deliberately chose not to take a purely management approach to segmental reporting. We do not believe that convergence alone is justification for the proposed changes. Segmental reporting is solely a disclosure requirement and so does not affect reconciliations between IFRS and US GAAP. The convergence project should focus on items reported in the primary financial statements. If the two Boards believe that IAS 14 needs improving, they should do so by considering the advantages and disadvantages of both it and SFAS 131, rather than converge to a single standard that has not proved to be superior and we believe to be inferior.

Proposed amendment would provide relief from the requirement to restate cost in accordance with IAS 27 on first time adoption. Friday 26 May 2006 (morning only)

• Amendments to IAS 37 - redeliberation of the ED
• Accounting Standards for Small and Medium-sized Entities - review of a revised draft ED

The issue arises from an alleged conflict between the definition of contingent rent in IAS 17 paragraph 4 and the requirements in IAS 17 paragraphs 33 (lessee accounting) and 50 (lessor accounting). The issue is whether contingent rentals (as defined) are included in the estimate of total lease payments/income to be recognised on a straight-line basis over the life of the lease.

The IFRIC decided that, notwithstanding the fact that a close reading of IAS 17 could suggest an alternate treatment, there was no evidence of diversity in practice, which was to exclude contingent rent from the estimate of total lease payments/ income. Consequently, the IFRIC declined to take this issue to its agenda.

Customer Loyalty Programmes

The IFRIC discussed the first draft of a Draft Interpretation on customer loyalty programmes. In March, the IFRIC Chairman had directed the IFRIC staff to develop the draft on the basis of recognising a separate component of the initial sales transaction in which the award credits are granted as representing the unperformed performance obligation. Under this approach, some of the consideration received for each initial sale would be allocated to the award credits.

The IFRIC spent a considerable amount of time discussing the tension between IAS 18 paragraphs 13 and 19, and several IFIRC members were not satisfied that the Draft Interpretation explained adequately the approach inferred by IAS 18 paragraph 13 should be used to the exclusion of that in paragraph 19. The debate was concluded by the Chairman, who asked whether there was sufficient support for the approach in the Draft Interpretation. Two IFRIC members would oppose the document. On this basis, the Chairman directed the staff to proceed with the approach as adopted, but to work with those who were opposed to the approach to ensure that their concerns were reflected adequately in the Basis for Conclusions.

Scope

The IFRIC agreed with a staff proposal that the scope of the Draft Interpretation need not be defined rigorously and should not specify scope exclusions.

Awards supplied by third-party providers

The IFRIC held an inconclusive discussion on how to account for awards supplied by third parties. The IFRIC was concerned that the Draft Interpretation should not confuse agency relationships with sub-contracting: that is, who is providing the service. The IFRIC discussed a staff example, which demonstrated that the measurement of these awards is also problematic. The IFRIC will continue its discussions of this topic at a later meeting.

Separate component approach

The IFRIC discussed the justification for the separate component approach in the draft Basis for Conclusions (not available to Observers). However, it was apparent that part of the justification was based on SIC 15, an Interpretation of IAS 17. IFRIC members criticised the prominence awarded to an interpretation of a leasing standard in an Interpretation of IAS 18.

Next steps

At its next meeting, the IFRIC will discuss an amended version of the Draft Interpretation.

Larry Smith, Chairman of the FASB's Emerging Issues Task Force, attended the meeting. He noted that the EITF had attempted to issue an Abstract on this issue and had been unable to reach consensus.

It should also be noted that three IFRIC Members who did not object to the Draft Interpretation were attending their last meeting. How their successors vote could be critical to the future of the direction of this issue.

IAS 19 Post-employment Benefits – The effect of a minimum funding requirement on the asset ceiling

The IFRIC continued its discussion of how the additional liability resulting from a minimum funding contribution requirement should be presented in the financial statements. The staff noted that this additional liability arises only because of the limit on the measurement of the balance sheet asset in IAS 19.58.

Presentation of results

The staff noted that IAS 19.58 governs the presentation of the net balance sheet position in the pension plan rather than the gross liability. The staff proposed that the adjustment which results from the impact of the limit in that paragraph should be recognised and presented in the financial statement on a net basis. There was general agreement with the staff proposals.

Treatment of future minimum funding contributions payable

The IFRIC discussed a staff recommendation that the additional liability to be recognised in respect of such a minimum funding requirement was equal to the present value, using IAS 19 assumptions, of the contributions payable in accordance with the minimum funding requirement. In addition, in some circumstances, a minimum funding requirement may also stipulate a schedule of future minimum contributions payable in order to cover the future accrual of benefits over the period during which the contributions are payable. In this case, the staff noted that the contributions payable in respect of future accrual did not generate an additional liability at the balance sheet date as they represented a future rather than a present obligation.

The staff suggested that the future minimum funding contribution requirements, in respect of future accrual, reduce the extent to which the entity can take a future contribution reduction. Therefore the available asset from a contribution reduction should be calculated as the present value of the IAS 19 service cost less the future minimum funding contribution requirement in respect of future accrual in each year. The IFRIC agreed with the staff's analysis and conclusion.

Other statutory funding requirements

The IFRIC agreed that the Interpretation need not address other statutory funding requirements.

Transition

The IFRIC generally agreed with the staff proposals for transition. However, it was evident from the discussion of the proposed Basis (not available to Observers) that individual members had concerns with how the Basis was drafted and suggested different matters of emphasis.

Next steps

The IFRIC Chairman asked for an indication of which IFRIC members would object to the Interpretation along the lines discussed. None indicated an intention to object.

The staff would was directed to prepare a revised draft Draft Interpretation and Basis for Conclusions with the intention that this would be approved formally at the July 2006 meeting. The staff will hold a public Education Session with the IASB during its June 2006 meeting.

Service Concession Arrangements

The IFRIC discussed a draft Interpretation based on D12 Service Concession Arrangements – Determining the accounting model. In summary, the IFRIC agreed:

• Not to address sale and leaseback accounting in this Interpretation.
• To include in the Interpretation an explanation of the reasons for the scope limitations and the reasons for the control approach adopted by the IFRIC. The IFRIC agreed to include additional implementation guidance (an appendix) explaining how other IFRSs might apply to concession arrangements for private sector performance of public services and for determining whether existing infrastructure of the operator was within the scope of the Interpretation.
• To amend the scope of the Interpretation to include 'whole of life infrastructure' (infrastructure used in a service concession arrangement for the whole of its useful life).
• To amend the approach in D12 to require that an entity should recognise a financial asset to the extent that the operator has a contractual right to receive cash from or at the direction of the grantor. A right other than a contractual right to receive cash does not meet the definition of a financial asset and is within the scope of IAS 38 Intangible Assets. This implies that some concession arrangements will be bifurcated – containing both a financial asset and an intangible asset.
• To make a consequential amendment to IFRIC 4 to make explicit the boundary between IFRIC 4 and this Interpretation.
• To adopt a new title for the Interpretation along the lines of Private Sector Participation in the Provision of Public Services. IFRIC members did not like the term 'participation' but agreed with the general idea (for example, 'Private Sector Operation of Public Services').
• The accounting issues identified in Draft Interpretations D13 and D14 would be incorporated in D12 and issued as a single Interpretation.

The IFRIC discussed these issues in some detail. Unusually, the Observers were provided with the draft Basis for Conclusions (but not the draft Interpretation). IFRIC Members made detailed comments on the proposed Basis, and it is likely to be redrafted significantly before the individual IFRIC members are happy with it.

Significant residual value

The IFRIC agreed with a staff recommendation that Application Guidance should be added to specify the meaning of the term residual interest. The residual interest is the estimated value of the infrastructure at the end of the term of the concession, if the infrastructure were already of the age and in the condition expected at the end of the term of the concession. The staff had drafted a detailed rationale, but the IFRIC seemed to prefer a statement of the principle rather than providing the detailed explanation of how the IFRIC reached its conclusion (for fear of the rationale being applied to situations to which such a conclusion might not be appropriate).

Next steps

The IFRIC will continue its discussions of D13 and D14 at a later meeting.

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

ED 8 The proposed IFRS would replace IAS 14 Segment Reporting and align segment reporting with the requirements of FASB's SFAS 131 Disclosures about Segments of an Enterprise and Related Information.

Discussion Paper: Bases for Financial Reporting - Measurement on Initial Recognition The Paper analyses possible bases for measuring assets and liabilities on initial recognition.

ED 8 and the Discussion Paper may be downloaded from the IASB's Website.

GAO suggests that this may have been one factor in the reduced number of IPOs, increased number of companies 'going private', and shift among small companies from use of the largest audit firms, to mid-size and smaller audit firms. Examples cited in the report include:

• Of the companies that reported implementing section 404, public companies with market capitalisation of $75 million or less paid a median $1.14 in audit fees for every $100 of revenues compared to $0.13 in audit fees for public companies with market capitalisation greater than $1 billion.
• 81% of the small public companies that responded to the GAO survey had hired a separate accounting firm or consultant to assist them in meeting Section 404 requirements. Services provided included assistance with developing methodologies to comply with section 404, documenting and testing internal controls, and helping management assess the effectiveness of internal controls and remediate identified internal control weaknesses. These small companies reported paying fees to external consultants for the period leading up to their first section 404 report that ranged from $3,000 to more than $1.4 million.
• The number of public companies that went private has increased significantly from 143 in 2001 to 245 in 2004, with the greatest increase occurring in 2003.

The report includes recommendations for both SEC and PCAOB consideration, and comments from both of those organisations. Click to (PDF 1,012k), which is titled Sarbanes-Oxley Act: Consideration of Key Principles Needed in Addressing Implementation for Smaller Public Companies.

The roundtable will be held at the SEC's Washington, DC, headquarters on 12 June 2006. Particular emphasis will be placed on disclosures by mutual funds. Interactive data permits Internet users to search for and use individual items of information from financial reports, such as net income, executive compensation, or mutual fund expenses. Topics to be considered at the forum include:

• What investors and analysts are looking for in the new world of interactive data.
• How to accelerate the use of new software that permits the dissemination of interactive financial data.
• How best to design the SEC's requirements for company disclosures to take maximum advantage of the potential of interactive data.

Click for (PDF 34k).

ECOFIN noted that "the growing number of cross-border financial groups and the increasing international and cross-sector interlinkages in the financial markets call for further progress in the convergence of supervisory practices and cross-border cooperation among supervisory authorities in the EU. The Council underlines that supervisory convergence needs to be intensified to fully benefit from the FSAP [Financial Services Action Plan] and related measures and thus, to reap the benefits of an integrated financial market." ECOFIN asked the Committee of European Securities Regulators (CESR), the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), and the Committee of European Banking Supervisors (CEBS) to further strengthen their co-operation and day-to-day working arrangements. Click for:

• (PDF 236k).
• (PDF 68k).

You can find other comparisons of local GAAP and IFRSs Here.