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 IFRIC D20: IAS 18 – Customer Loyalty Programmes
The IFRIC continued redeliberating the proposed Interpretation in light of comments received on Draft IFRIC Interpretation D20 Customer Loyalty Programmes. The meeting considered a revised draft of an Interpretation, in particular changes made as a result of the March 2007 meeting.
Allocation of consideration to award credits
In March 2007, the IFRIC had requested that the Interpretation not be prescriptive about the how the fair value of the consideration received should be allocated between the goods and services delivered and the award credits received by the customer. The staff proposed that the Interpretation should retain the requirement to use the relative fair value method, but to add application guidance (mandatory material) explaining that the fair value of the award credits might provide an acceptable substitute. The IFRIC disagreed and directed the staff to draft the Interpretation on the basis that the consideration allocated to the award credits shall be measured by reference to their fair value – the amount for which they could be sold separately. There was some discussion about how this method could best be explained in the Interpretation and related Basis.
Awards supplied by third parties
In March 2007, the IFRIC decided to amend the Interpretation:
- (a) to highlight that the entity might be collecting the consideration allocated to award credits as an agent for a third party supplying awards; and
- (b) to explain the consequences for measurement and recognition of revenue if this was the case.
The IFRIC discussed revised wording together with a related Illustrative Example, neither of which was reproduced in the Observer Note.
The IFRIC seemed to agree that, when the seller is acting as agent for the supplier, revenue should be recognised on the basis of the consideration received less the amount payable to the supplier of the award. Recognition would be at the time the entity is obliged to pass the consideration to the third party.
The IFRIC agreed that the type of award should not alter the timing of revenue recognition. Thus, if a hotel awards a voucher supplied by a third party (such as a department store), revenue is recognised when the voucher is given to the customer, not when the customer uses the voucher in a transaction at the department store.
Changes in accounting policy
In March 2007, the IFRIC requested that a comment be added to the transition section to stress that entities that had previously accrued the costs of supplying awards would be changing an accounting policy, rather than an estimate, when they first applied the Interpretation. At this meeting, the IFRIC agreed with a staff analysis that this comment was unnecessary as it should be obvious that accruing a liability and deferring revenue are different accounting policies, even if the effect of the change is not significant.
Other matters
IFRIC members raised a concern that the Interpretation as drafted implied that information would have to be assessed on a transaction-by-transaction basis. The staff amended the discussion of the allocation method in the Basis for Conclusions such that this inference was avoided. The highest level of aggregation would, however, be award credits awarded in an annual period.
IFRIC members also discussed the 'credit card example', agreeing that the Interpretation should clarify that award credits can be awarded by one party (the credit card company) as a result of a transaction between the customer and a third party (the retailer accepting payment by credit card). The staff observed that the Interpretation did suggest this, but agreed to clarify this issue.
An IFRIC member expressed concern with the way in which the guidance on onerous customer loyalty programmes was expressed. There appeared to be an inference that an additional liability would be recognised. The staff agreed to work with the IFRIC member to rectify this inference, which was unintended.
The IFRIC did not think that any additional disclosure requirements were necessary. The existing requirements of IAS 1 and IAS 18 were thought sufficient.
Re-exposure
The IFRIC agreed with a staff analysis that re-exposure was not necessary.
Effective date
The IFRIC agreed that the Interpretation should be effective for financial years beginning on or after 1 January 2008. If implementing the Interpretation required a change in accounting policy, IAS 8 would apply.
Approval
The IFRIC Chairman asked whether, based on the draft Interpretation and the discussions today, whether any IFRIC members would not support the Interpretation. None of the IFRIC indicated their dissent.
Next Steps
The staff will present a revised draft Interpretation to the IFRIC as soon as possible, with the intention that it will be presented to the June 2007 meeting of the IASB for their approval, subject to written ballot. Provided that the IASB approves the Interpretation, it should be issued in July 2007.
IAS 18 Revenue – Sales of Real Estate
The IFRIC considered a revised draft of a Draft Interpretation addressing the decisions and suggestions made by the IFRIC at the March 2007 meeting.
Distinguishing between IAS 11 construction contracts and IAS 18 agreements of purchase and sale
The IFRIC discussed the proposed indicators that would help determine whether a sale if real estate is a construction contract within the scope of IAS 11 Construction Contracts or an agreement of purchase and sale within the scope of IAS 18 Revenue.
After a rather lengthy discussion, the IFRIC agreed that features that, individually or in combination, might indicate that an agreement is for the provision of construction services to the buyer's specifications, rather than the sale of goods (constructed real estate), would include:
- (a) the buyer being able to specify the major elements of the design of the real estate before construction begins and/or alter it while construction is in progress (whether it exercises that ability or not);
- (b) the buyer obtaining the risks and rewards of ownership or control over the work in progress as construction progresses.
There was some discussion of possible sub-indicators of (b), such as whether, in the event of the contractor/developer defaulting on the contract, the buyer had a right to sue for specific performance (suggesting an IAS 11 contract) or a right to monetary damages (indicating an IAS 18 contract). The staff agreed to work with the suggestions made by IFRIC members.
The IFRIC also agreed that the list of indicators should not suggest any form of hierarchy or create any rebuttable presumptions (that is, they are indicative only).
Approval
The IFRIC Chairman asked whether, based on the provisional Draft Interpretation and the discussions today, any IFRIC members would not support the Draft Interpretation. None of the IFRIC members indicated a dissent.
Next Steps
The staff will present a revised Draft Interpretation to the IFRIC as soon as possible, with the intention that it will be passed to the IASB for negative clearance as provided in the IFRIC's Due Process Handbook. Provided that the IASB does not object to its publication, a Draft Interpretation should be published by July 2007.
Scheduling of IAS 19 Issues
The IFRIC staff responsible for employee benefit accounting issues discussed a paper that laid out the possible timetable for existing IAS 19 issues in light of current specialist staffing constraints. Because of the IASB's ongoing Employee Benefits project, the employee benefits team is spending the majority of its time on that project and has only limited time to devote to IFRIC projects.
The IFRIC noted this constraint, but was not particularly happy about it. Some suggestions were made about relative priorities for IFRIC IAS 19 projects, and for ways to alleviate the IASB's staffing constraint.
IFRIC D19: IAS 19 – The Asset Ceiling: Availability of Economic Benefits and Minimum Funding Requirements
The IFRIC discussed a variety of amendments to D19 reflecting the proposals in the comment letters received.
Additional guidance and examples on what is a minimum funding requirement
The staff noted that it had added requirements to the scope of the Interpretation such that:
- the Interpretation only applies to defined benefit plans. Therefore, any requirements to contribute to a defined contribution plan are not minimum funding requirements for the purpose of the Interpretation.
- minimum funding requirements are any requirements that create a legal or constructive obligation for the entity to make contributions to fund a post-employment or other long-term defined benefit plan (emphasis added). Therefore a benefit promise defined in terms of notional contributions is not a minimum funding requirement for the purpose of the Interpretation.
IFRIC members generally supported these scope clarifications, but had concerns about the manner in which the clarifications had been expressed in the Interpretation.
An entity's right to a refund
The IFRIC agreed that an entity should recognise a potential refund as an asset only if the entity has an unconditional right to that refund. The IFRIC agreed that the entity's intentions with respect to the use of the surplus do not affect the existence of the asset. In addition, if the entity's right to a refund depends on the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity, the entity does not have an unconditional right to the refund (and therefore should not recognise an asset).
Assumptions underlying the future service cost used to determine the reduction in future contributions
The IFRIC discussed a wording that would require an entity to determine the maximum economic benefit that is available from refunds, reductions in future contributions or a combination of both. An entity should not recognise economic benefits from a combination of refunds and reductions in future contributions that are mutually exclusive.
IFRIC members expressed concerns that the Interpretation should be based on facts and circumstances existing at the balance sheet date, rather than assumptions about the future. Thus, an entity should assume a stable workforce unless (at the balance sheet date) something had happened that would negate that assertion, for instance, closing a plan to new members. The IFRIC noted that closing an existing plan to new members was not a curtailment; however the act of closing the plan to new members did affect the defined benefit obligation and minimum funding requirements.
Title
The IFRIC agreed that the title of the Interpretation should be the title should be IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction.
Re-exposure
The IFRIC agreed with a staff analysis that re-exposure was not necessary.
Effective date
The IFRIC agreed that the Interpretation should be effective for financial years beginning on or after 1 January 2008.
Approval
The IFRIC Chairman asked whether, based on the draft Interpretation and the discussions today, whether any IFRIC members would not support the Interpretation. None of the IFRIC members indicated a dissent.
Next Steps
The staff will present a revised draft Interpretation to the IFRIC as soon as possible, with the intention that it will be presented to the June 2007 meeting of the IASB for their approval, subject to written ballot. Provided that the IASB approves the Interpretation, it should be issued in July 2007.
IAS 21 Foreign Exchange: Hedging a Net Investment in a Foreign Operation
The IFRIC discussed some 'sweep issues' related to a proposed Draft Interpretation on the accounting for a hedge of a net investment in a foreign operation.
Translation to a presentation currency
After considerable debate, the IFRIC agreed that IAS 39 Implementation Guidance issue F2.14 is applicable to the hedge of a net investment, and there is no requirement to use internal hedging instruments. In other words, the translation gain or loss can be used as part of the hedging instrument.
This approach would permit an entity to hold a hedging instrument anywhere within the consolidated group. However to obtain a qualifying instrument that would be effective both prospectively and retrospectively, the amounts included in the foreign currency translation reserve must be considered when testing effectiveness. If the foreign currency translation reserve is not included in the effectiveness tests the instrument may not be deemed eligible.
What exposure arises from the net investment?
The IFRIC agreed that an entity can hedge up to the full extent of its carrying amount in a net investment regardless of whether that net investment has investments in other foreign operations, because IAS 39 does not require a risk reduction notion when using hedge accounting.
Effective date and transition
The IFRIC agreed that the Draft Interpretation should propose prospective application of the [draft] Interpretation. IFRIC members noted that it was probably impracticable to require retrospective application given the documentation requirements for hedge accounting.
Approval
The IFRIC Chairman asked whether, based on the provisional Draft Interpretation and the discussions today, any IFRIC members would not support the Draft Interpretation. None of the IFRIC members indicated a dissent. However, some IFRIC members wanted to see the next revision of the Draft Interpretation before making a definitive determination about whether further discussion by the IFRIC is necessary.
Next Steps
The staff will present a revised Draft Interpretation to the IFRIC as soon as possible, with the intention that it will be passed to the IASB for negative clearance as provided in the IFRIC's Due Process Handbook. Provided that the IASB does not object to its publication, a Draft Interpretation should be published by July 2007.
IAS 18 – Guidance on Identifying Agency Relationships
The IFRIC discussed a request for guidance from the staff about how best to proceed with this project.
Some IFRIC members were in favour of developing an Interpretation on this pervasive accounting issue. There is existing guidance in some jurisdictions (for example, the UK and US) that is not inconsistent with IAS 18. An Interpretation would reduce a perceived diversity in practice. Other IFRIC members saw the issue as one that could potentially lead to a rule-based interpretation. Identifying agency relationships is often difficult in practice and this would not change as a result of anything that IFRIC could hope to achieve. However, to the extent that there is useful guidance that might command the support of a majority of IFRIC, some guidance might be worthwhile.
The IFRIC members agreed to share any existing guidance of which they are aware (including internal guidance) with the staff. If the staff determined that there is a high degree of consistency around that guidance, it might indicate that either (a) no Interpretation is necessary; or (b) an Interpretation could be developed quite quickly. If the staff concluded that there is little consistency, an Interpretation project might be necessary.
The IFRIC will return to this issue at a subsequent meeting.
Potential Agenda Item: In-Specie Distributions
The issue is how to account for non-cash ('in-specie') distributions to owners. The IFRIC began an assessment of this potential agenda item against its agenda criteria. In doing so, it agreed that the issue is widespread and that there is known diversity in practice. Some IFRIC members suggested that even reducing the number of allowed alternative treatments might be useful.
The staff noted that at least three alternative treatments are known to be in use:
- Distributions recorded at the carrying amounts.
- Distributions recorded at the fair values, with any difference between the fair values and the carrying amounts being recognised in profit or loss.
- Distributions recorded at the fair values, with any difference between the fair values and the carrying amounts being recognised in equity.
IFRIC members noted that in-specie distributions interacted with a number of areas: non-monetary transactions with owners, company law, and securities regulation. As such, the scope of any Interpretation would need to be determined very carefully. The IFRIC seemed to agree that a useful starting point would be to limit the scope to in-specie distributions (of any asset) to owners acting in their capacity as owners. This would usually be pro-rata distributions (that is, all owners would receive a pro-rata share of the asset), but would not preclude distributions in which some shareholders received a cash alternative (for example, because of legal restrictions in a particular jurisdiction).
The IFRIC was unable to conclude whether the project satisfied all of its agenda criteria and will continue its discussions at the July 2007 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.
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