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IAS 17: Accounting for Service Concession Arrangements

Combining and Segmenting Service Concession Contracts

The IFRIC continued its discussions from the previous day on combining or segmenting of service concession arrangements. The IFRIC agreed that the development of a position on combining and segmenting concessions arrangements should use the same language and semantics as in the IFRIC's separate project on Combining and Segmenting Contracts more generally.

Overview Issues

The IFRIC determined that they needed to address in more detail the issues around the nature of the asset held by the concession operator before progressing with the more specific issues. The IFRIC discussed the various implications for the amount and timing of revenue recognised under various models depending on whether the physical asset was recognised by the concession operator, a receivable was recognised by the concession operator or an intangible asset was recognised by the concession operator. The staff agreed to present a paper on the nature of the concession operator's asset in various situations as the June IFRIC meeting.

IAS 27 - Fiduciary Control

The IFRIC discussed whether to add an agenda item to address whether (or when) delegated or operational control should require consolidation. IFRIC members noted this would end up being an interpretation of what "so as to receive economic benefits" means in the definition of control in IAS 27. The IFRIC concluded that this is a broader issue of consolidation that should be addressed by the IASB in its project. The IFRIC will, however, ask the IASB to identify areas IFRIC should address (if any) in conjunction with the IASB project.

IFRS 2 - Consolidation of Share Trusts

The IFRIC discussed consolidation issues related to trusts used to undertake share-based payment transactions in accordance with IFRS 2. The IFRIC was asked and generally concluded in favour of issuing an interpretation to eliminate the scope exemption in SIC 12 for equity compensation benefits. This draft interpretation would be issued shortly. The IFRIC agreed to take on a second phase to address whether guidance should be issued on applying the consolidation model to these trusts. These issues will be discussed further at future IFRIC meetings.

The IFRIC also noted that the scope exemption in SIC 12 should be aligned with the scope of IAS 19.

IFRIC D3: Determining Whether an Arrangement Contains a Lease

The IFRIC was provided with a summary of comment letters on D3. The IFRIC concluded that it should continue with the project, but that field tests should be conducted. Some IFRIC members noted their objection to the general model and would rather have a model based on control of the asset – not control over the output as required in D3. The IFRIC agreed to reconsider this model, noting the requirements in EITF Issue 01-8.

The IFRIC discussed at length the issue of components and proportions of an asset. Some IFRIC members suggested remaining silent on these issues. Other members noted a model based on output is flawed if IFRIC does not answer 'output from what'.

The IFRIC noted that a final interpretation should be effective for 2005 first-time adopters.

IFRIC D4: Decommissioning, Restoration and Environmental Rehabilitation Funds

The IFRIC was presented with a summary of comment letters on D4. The IFRIC decided to reconsider whether a model based on IAS 37 or IAS 39 was appropriate. This analysis will be conducted as a result of comments received on whether the asset cap equal to the liability is appropriate.

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

Scroll down for notes from 4 May 2004.

Recognition and Measurement of Biological Assets in Accordance with IAS 41 Agriculture

The IFRIC agreed to recommend to the IASB proposed improvements to IAS 41 to clarify the application of the fair value measurement objective. The IFRIC discussed certain aspects of the proposed changes:

• The IFRIC discussed whether to add the term "highest and best use" to IAS 41 to clarify that fair value should be the price an economically rational company would choose. For example, if the price for grapes used to make wine is higher than for grapes used as by-product, the entity should assume it would sell its grapes to the wine producers if possible (that is, the grapes are of quality for wine). There was concern about adding this phrase in the text of IAS 41 as it is generally only used for property valuations. However, there was general agreement on the principle.
• The IFRIC then discussed the question of what fair value should be assigned to the unripened grapes when only a market for ripe grapes exists. The IFRIC noted that a value of nil would generally not be appropriate in this case and that the value of the unripe grapes should be determined by reference to the price of ripe grapes. The IFRIC decided to ask the IASB for further assistance in trying to identify the correct market to be used in determining fair value when many markets exist. For example, if there is a market for 2 year old and 10 year old trees, which market should be used to value 1 year old trees – the value in 1 year or the value in 9 years? No conclusions were reached on this issue.

The IFRIC noted that the issues discussed here are similar to the issues being discussed by the IASB in its discussions around "Day 1 profits" under IAS 39.

IAS 32: Members' Shares in Co-operative Entities

The IFRIC was presented with, and voted unanimously in favour of issuing, a draft interpretation on the classification of members' shares in cooperative banks and similar entities under revised IAS 32. The IFRIC noted that redemption amounts may be different depending on the class of shares purchased and noted concern about measuring the liability and equity components when some of shares are liabilities and some shares are equity. The IFRIC concluded that when this is the case, the liability should be measured at the highest amount that could legally be redeemed.

The IFRIC confirmed its earlier decision to allow shares to be reclassified from liability to equity and vice versa as deemed appropriate under IAS 32. There was general concern about the classification change being created by self-imposed restrictions. However, the IFRIC noted that this exists when an entity writes forwards on its own shares. The IFRIC discussed the measurement of the liabilities that have been reclassified and whether they should be discounted. The IFRIC concluded that this was an IAS 37 issue generally, but indicated the shares should be measured at their nominal amount to avoid gains or losses on reclassification.

The IFRIC discussed a fact pattern in which 5% of the shares could be redeemed in any given year. The IFRIC noted that if 5% were redeemed each year, in 20 years nearly all the shares would be redeemed. Therefore, the IFRIC concluded that in this fact pattern, all shares would be considered liabilities. That is, if the concern is not whether the shares will be exercised, but when, then the shares should be classified as liabilities since the passage of time is a certainty.

The IFRIC noted that the effective date should be the same for as an entity applying IAS 32. Therefore, the exception from applying IAS 32 retrospectively for first-time adopters would also apply here. The IFRIC discussed further editorial comments and requested the staff finalise a draft for final IFRIC review and approval.

IAS 17: Accounting for Service Concession Arrangements

The IFRIC was presented with a comprehensive set of papers addressing the following issues in accounting for service concessions:

• Recognition
• Combining or segmenting construction and services contracts
• Treatment of finance costs in construction and services contracts
• Obligations in construction and services contracts
• Accounting if the Concession Operator recognises the physical asset as its own

These papers were presented together with an overview paper. The overview paper notes that the following two issues also require consideration at a future meeting:

• Consideration received - what is the concession operator's asset in a construction and services contract?
• Rights of use - which party has the right of use of the physical asset?

The IFRIC considered a flow chart depicting the framework within which they propose to develop interpretations on the above issues. The framework started by considering which entity recognises the physical asset, and then whether (a) whether IAS 16 Property, Plant and Equipment should be applied to the asset or (b) IAS 11 Construction Contracts and IAS 18 Revenue should be applied to the contract. The IFRIC agreed that the flow chart will be reproduced in the next IFRIC update to give an indication to the public of the parameters within which this project is currently being conducted.

The IFRIC debated the merits of applying the risks and rewards approach required by IAS 17 Leases and IAS 18 Revenue to determine whether an asset should be accounted for in accordance with IAS 16. (That is, if substantially all the risks and rewards of an asset are held by a particular entity that entity should account for the asset as its own in accordance with IAS 16). The IFRIC agreed that the social rewards to governments from having a particular concession contract in existence (for example, a road) should not be considered in determining whether the government or the concession operator have substantially all the risks and rewards. The IFRIC agreed that while some members questioned the validity of the risks and rewards approach to recognising an asset in accordance with IAS 16, IFRIC would continue its discussions at this time based on using those criteria.

The IFRIC discussed the impact of the sale and leaseback requirements of IAS 17 and agreed to draw to the IASB's attention the apparent discrepancy between the treatment of a sale that fails the recognition criteria in IAS 18 and a sale and lease back under IAS 17. The IFRIC agreed that if a sale transaction exists together with a repurchase option, the transactions should be considered together as a whole. The IFRIC agreed to return to further debate of this issue once the concessions project is more advanced.

The IFRIC discussed whether, if an entity builds property on land that is recognised as an asset of another entity, that property should be recognised as an asset of the entity that holds the land. A number of IFRIC members dissented from this proposition for a variety of reasons. Staff agreed to reconsider this issue and present an alternative means of achieving the intended objective at a future meeting.

Combining and Segmenting Service Concession Contracts

The IFRIC discussed the difficulties of appropriately segmenting a service concession contract into is component construction and services parts. The IFRIC agreed that where different components of a concession arrangement have substantially different margins (particularly construction components and services components) they should be accounted for in a manner that reflects those margins. The IFRIC considered a proposition that one could arrive at this answer without needing to segment the contract under IAS 11 and IAS 18, but did not reach consensus on whether this was possible.

Administrative Matters

Following consideration of the importance of the concessions project, the IFRIC agreed to further discuss accounting for service concessions on the second day of the meeting. At the close of the first day it appears likely that IFRIC will discuss the following agenda items on the second day:

• Service Concessions
• IFRS 2 - Accounting for Employee Share Ownership Plans
• IAS 27 - Applying IAS 27 to Agents and Delegates

It appears likely that the following items on the agenda for the May meeting will be deferred to a future meeting:

• Analysis of comment letters on IFRIC D3: Determining Whether an Arrangement Contains a Lease
• Analysis of comment letters on IFRIC D4: Decommissioning, Restoration and Environmental Rehabilitation Funds

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

EC Survey on Member States' Use of Options in Accounting Regulation 18 Current EU and EEA Members: Virtually all of the 18 current EU and EEA members are going to permit, though not require, IFRSs for the consolidated statements of unlisted companies. Only 4 will permit IFRS for the parent company separate statements, 11 will not permit, and 3 are undecided. Regarding the 2007 deferral for debt-only listed companies, 6 have decided to delay, 5 probably will delay, and 7 will not delay. Two countries will permit companies to delay IFRSs to 2007 if their current primary GAAP is a non-EU GAAP, and several other countries probably will do so. 10 New EU Members: Two of the 10 new EU members, Cyprus and Malta, already require IFRSs for all companies. Of the 8 other new members, 6 will either require or permit at least some unlisted companies to use IFRSs, and 5 will require or permit IFRSs in the parent company separate statements.