IAS 32 Financial Instruments: Presentation—put options written over non-controlling interests
Over several meetings, the Interpretations Committee has discussed aspects of the accounting for put options written on non-controlling interests in the consolidated financial statements of the controlling shareholder (‘NCI puts’). Constituents have expressed concerns about the diversity in accounting for the subsequent measurement of the financial liability that is recognised for NCI puts.
The Committee discussed several possible short-term solutions and, in March 2011, it agreed that excluding NCI puts from IAS 32 through a narrow-scope amendment was a viable solution. The scope exclusion would change the measurement basis of NCI puts to the measurement that is used for other derivative contracts.
In September 2011 the Board decided not to proceed with the Committee’s proposal to amend the scope of IAS 32. However, the Board asked the Committee to consider addressing the diversity in accounting, not by changing the measurement basis of the NCI puts, but by clarifying the accounting for subsequent changes in those liabilities.
In November 2011, the Committee confirmed that it was willing to consider this issue further and decided to take the issue back onto its agenda. It asked the staff to obtain clear guidance from the Board on how the Board would like the Committee to take the issue forward.
At its meeting in November 2011 the IASB voted to ask the Committee to analyse the following two issues:
(a) whether changes in the measurement of the NCI put should be recognised in profit or loss (P&L) or equity; and
(b) whether the clarification described in the bullet point above should be applied to only NCI puts or to both NCI puts and NCI forwards.
In response to the Board’s request, the Committee discussed an analysis of the alternative views on those two issues. Acknowledging that the Board had decided not to pursue the Committee’s preferred solution to exclude NCI puts from the scope of IAS 32, the Committee recommended that the Board should address the diversity in accounting by proposing to amend IAS 27 Consolidated and Separate Financial Statements and IFRS 10 Consolidated Financial Statements to clarify that all changes in the measurement of the NCI put must be recognised in P&L.
The Committee noted that paragraph 30 in IAS 27 and paragraph 23 in IFRS 10 give guidance on the accounting in circumstances when the respective ownership interests of the controlling shareholder and non-controlling interest shareholder change. The Committee also noted that the NCI put is a financial liability and its remeasurement does not change the respective ownership interests of the controlling shareholder or the non-controlling interest shareholder. Consequently, the Committee thinks that these two paragraphs are not relevant to the issues being considered. The Committee further noted that the clarification is consistent with the requirements for other derivatives written on an entity’s own equity instruments.
However, the Committee asked the staff to consider whether its recommendation has any unintended consequences on related aspects of the accounting for NCI puts, including initial recognition of the NCI put or general consolidation mechanics.
The staff will present the analysis of the two issues, along with the Committee’s comments and recommendation, to the Board at a future meeting and will ask the Board how it would like to proceed.
Observer note: Agenda Paper 2 (January 2012)
Meeting Audio: Agenda Paper 2 (January 2012)
IAS 2 Inventories—Long-term prepayments for inventory supply contracts
The Interpretations Committee received a request seeking clarification on the accounting for long-term supply contracts of raw materials when the purchaser of the raw materials agrees to make prepayments to the supplier for the raw materials. The question is whether the purchaser/supplier should accrete interest on long-term prepayments by recognising interest income/expense, resulting in an increase of the cost of inventories/revenue.
The Committee observed that there is mixed practice on the issue submitted, and that current IFRSs do not provide clear guidance on this issue. However, the Committee noted that the exposure draft Revenue from Contracts with Customers published in November 2011 states that:
- in determining the transaction price, an entity should adjust the promised amount of consideration to reflect the time value of money if the contract has a financing component that is significant to the contract; and that
- the objective is to recognise revenue at an amount that reflects what the cash selling price would have been if the customer had paid cash for the promised goods or services at the point that they are transferred to the customer.
Provided that the requirements on the time value of money are not changed in the final standard on revenue, this would apply in the seller’s financial statements when prepayments are made. The Committee observed that considerations regarding accounting for the time value of money in the seller’s financial statements are similar to those in the purchaser’s financial statements.
The Committee decided to ask the Board whether it agrees with the Committee’s observation, and, if so, whether there should be amendments made in the IFRS literature in order to align the purchaser’s accounting with the seller’s accounting. Provided that the Board agrees that the purchaser and the seller should address the time value of money in such contracts similarly and that the Committee should deal with this matter, the Committee would direct the staff to further analyse which standards should be amended if guidance were to be provided. The Committee would also direct the staff to prepare additional illustrative examples on the impact of accretion of interest on long‑term prepayments, both in the purchaser’s financial statements and in the seller’s financial statements, in situations that are more complex than those that were presented at the January meeting.
Observer note: Agenda Paper 11 (January 2012)
Meeting Audio:Agenda Paper 11 (January 2012)
This shows all the active projects the IFRS Interpretations Committee is currently working on. Summaries, agenda papers and audio files from the November 2011 meeting are available to view and download below:
IAS 37 Provisions, Contingent Liabilities and Contingent Assets—Levies charged for participation in a market on a specified date
The Interpretations Committee received a request to clarify whether, under certain circumstances, IFRIC 6 Liabilities arising from participating in a specific market—Waste Electrical and Electronic Equipment should be applied by analogy to identify the event that gives rise to a liability for other levies charged for participation in a market on a specified date. The concern relates to when a liability should be recognised and to the definition of a present obligation in IAS 37.
At the July 2011 meeting, the Committee decided to add this issue to its agenda with the aim of developing guidance.
At the November 2011 meeting, the Committee continued its discussions and noted the following:
- An entity does not have a constructive obligation to pay a levy that arises from operating in a future period, even if the entity is economically compelled to continue operating in that future period.
- The going concern principle does not lead to the recognition of a liability at a reporting date for levies that arise from operating in the future.
- The obligating event in accordance with IAS 37 is the last of the necessary events that is sufficient to create the present obligation. Consequently, for example, the obligating event for a levy that is charged if the entity undertakes discrete activities both in the current and in the previous period is the activity in the latter period as identified by the legislation.
- The obligating event arises progressively if the activity that creates the present obligation occurs over a period of time. For example, a liability is recognised progressively if the obligating event as identified by the legislation is the generation of revenues over a period of time.
- The liability for the obligation to pay a levy gives rise to an expense, unless the levy is an exchange transaction in which the entity that pays the levy receives assets or future services in consideration for the payment of the levy.
The Committee directed the staff to test the principle that the obligating event arises progressively if the activity that creates the present obligation occurs over a period of time. The Committee directed the staff to test this principle against specific examples and to provide the Committee with proposed guidance to consider this issue at a future meeting.
Observer note: Agenda Paper 2-2B (November 2011)
Meeting Audio: Agenda Paper 2 to 2B (November 2011)
IAS 32 Financial Instruments: Presentation—NCI put options
Over several meetings, the Interpretations Committee has discussed aspects of the accounting for put options written over non-controlling interests (‘NCI puts’) in the consolidated financial statements of the controlling shareholder. Constituents have expressed concerns about the diversity in accounting for the subsequent measurement of the financial liability that is recognised for NCI puts.
The Committee discussed several possible short-term solutions and, in March 2011, it agreed that excluding NCI puts from IAS 32 through a narrow-scope amendment was a viable solution. The scope exclusion would change the measurement basis of NCI puts to the measurement that is used for other derivative contracts.
In September 2011 the Board decided not to proceed with the proposed amendment to the scope of IAS 32 that had been recommended by the Committee.
However, the Board asked the Committee to consider addressing the diversity in accounting, not by changing the measurement basis of the NCI puts, but by clarifying the accounting for subsequent changes in those liabilities. The Board asked the staff to obtain feedback from the Committee on whether it wished to be involved in further considering this issue.
At the November 2011 Committee meeting, the Committee confirmed that it is willing to consider this issue further and decided to take the issue back onto its agenda. It asked the staff to obtain clear guidance from the Board on how the Board would like the Committee to take the issue forward.
Observer note: Agenda Paper 3 (November 2011)
Meeting Audio: Agenda Paper 3 (November 2011)
This shows all the active projects the IFRS Interpretations Committee is currently working on. Summaries, agenda papers and audio files from the September 2011 meeting are available to view and dowload below:
IAS 37 Provisions, Contingent Liabilities and Contingent Assets—levies charged for participation in a market on a specified date
The Interpretations Committee received a request to clarify whether, under certain circumstances, IFRIC 6 Liabilities arising from participating in a specific market—Waste Electrical and Electronic Equipment should be applied by analogy to identify the event that gives rise to a liability for other levies charged for participation in a market on a specified date. The concern relates to when a liability should be recognised and to the definition of a present obligation in IAS 37.
At the July 2011 meeting, the Committee discussed whether the obligating event is the participation in the market on a specified date specified by the legislation, or whether other factors create an earlier obligation. The Committee decided to add this issue to its agenda with the aim of developing guidance.
The Committee also tentatively concluded that IFRIC 6 is not directly applicable, but because IFRIC 6 is an interpretation of IAS 37, any conclusions drawn on the application of IAS 37 to the levies should be consistent with the conclusions drawn in IFRIC 6.
At the September 2011 meeting, the Committee continued its discussions and noted the following:
- Any guidance developed on this matter should only address levies charged by public authorities. The guidance should not address payments related to private contractual arrangements.
- Economic compulsion to participate in the market in the next period does not create a constructive obligation and does not cause the recognition of a liability in IAS 37. The Committee will consider whether any guidance developed could or should also clarify this point.
The obligation to pay a levy does not automatically create an asset.
The Committee directed the staff to further analyse:
- Whether the obligating event arises at a point in time or whether in certain circumstances the obligating event arises progressively over time. The Committee also asked the staff to clearly distinguish recognition of the liability from measurement of the liability.
- Circumstances in which the obligation is associated with an activity in multiple periods; the staff were asked to identify the obligating event that creates the present obligation in accordance with IAS 37.
- With regard to the question of the ‘debit’ side of the liability, the Committee noted that the obligation to pay a levy may be associated with an expense or with an asset, depending on the characteristics of each levy. The Committee directed the staff to further analyse in which circumstances the obligation to pay a levy might be associated with an expense or an asset. In particular, the Committee asked the staff to distinguish between exchange and non-exchange transactions with public authorities.
- Whether a distinction can be made between payments that are analogous to taxes and those that are analogous to licences.
- Whether the principles in IAS 12 applicable to income taxes may be relevant to the analysis of the accounting treatment applicable to the levies.
Observer note: Agenda papers 2 - 2C (September 2011)
Meeting audio: Agenda Paper 2 - 2C (September 2011)
IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IFRIC 6 Liabilities arising from Participating in a Specific Market—Waste Electrical and Electronic Equipment —use of IFRIC 6 by analogy
The Interpretations Committee received a request to clarify whether, under certain circumstances, IFRIC 6 should be applied by analogy to other levies charged for participation in a market on a specified date (the activity date/period) to identify the event that gives rise to a liability. The concern relates to when a liability should be recognised: should it be recognised on the activity date/period or on the calculation date/period, being the date/period of the financial (or other) data used to calculate (measure) the amount of the liability?
At this meeting, the Committee reviewed a summary of views received from national standard‑setters and noted that the issue is widespread.
Based on views received, the Committee discussed in turn the two following issues:
- whether the obligating event is the participation in an activity on the date specified by the legislation, or whether other factors create an earlier obligation; and
- whether a liability should be recognised in an interim reporting period in situations where the activity date/period and the calculation date/period fall in the same annual financial reporting period.
Having assessed the issues against the agenda criteria, the Committee decided to add the first issue onto its agenda with a view to developing guidance, after which the Committee will consider whether such guidance would address the second issue and, if not, whether the second issue should be added to the agenda.
Observer note: Agenda Paper 5-5B (July 2011)
Meeting audio: Agenda Paper 5-5B (July 2011)
IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets: contingent pricing of PPE and intangible assets
The Interpretations Committee took this issue onto its agenda in January 2011.
At the March 2011 meeting, the staff presented the main characteristics of contingent prices with the aim of outlining the scope of the project. At that meeting, the Committee also noted that the core issue is the accounting for the remeasurement of any liability recognised for the contingent price and whether that remeasurement should be recognised in profit or loss, or included as an adjustment to the cost of the asset.
At the May 2011 meeting, the Committee reviewed advantages and drawbacks of developing guidance by analogy to IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities and IFRS 3 Business Combinations. They also discussed the consequences for this project of the Board’s recent decisions on the leases and revenue recognition projects.
The Committee decided to defer further work on this project until the Board concludes its discussions on the accounting for the liability for variable payments as part of the leases project.
Observer note: Agenda Paper 3 (May 2011)
Meeting audio: Agenda Paper 3 (May 2011)
IAS 32 Financial Instruments: Presentation - Put options written over non-controlling interests
Over recent meetings, the Interpretations Committee has discussed aspects of the accounting for put options written over non-controlling interests (NCI puts) in the consolidated financial statements of the controlling shareholder. Constituents have expressed concern about the diversity in accounting for the subsequent measurement of the financial liability recognised for NCI puts.
In January 2011 the Committee discussed possible paths forward including consideration of a scope exclusion from IAS 32. The Committee asked the staff to consider whether excluding NCI puts from the scope of IAS 32 was a viable short-term solution.
At the March 2011 Committee meeting, the Committee continued to discuss a possible scope exclusion. The scope exclusion would change the measurement basis of NCI puts to that used for other derivative contracts. Specifically IAS 32, including the requirements in paragraph 23 to recognise a financial liability at the present value of the option exercise price, would not apply to NCI puts. Instead the requirements in IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9 Financial Instruments for derivative contracts would apply.
The scope exclusion would apply only to the consolidated financial statements of the controlling shareholder. In addition, the scope exclusion would apply only to NCI puts with the following features:
- The NCI put is not embedded in another contract.
- The NCI put contains an obligation for an entity in the consolidated group to settle the contract by delivering cash or another financial asset in exchange for the interest in the subsidiary.
The Committee agreed that a scope exclusion from IAS 32 for NCI puts is a viable short-term solution. The Committee asked the staff to consider whether consequential amendments would be necessary to IAS 27 and IAS 39/IFRS 9 if NCI puts were to be excluded from the scope of IAS 32. The Committee recommended that the Board should consider making an amendment to the scope of IAS 32. The staff will present the Committee’s recommendation to the Board at a future IASB meeting.
Observer Note: Agenda Paper 3 (March 2011)
Meeting Audio: Agenda Paper 3 (March 2011)
IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets: contingent pricing of PPE and intangible assets
The Interpretations Committee took this issue onto its agenda in January 2011.
At the March 2011 meeting, the staff presented the main characteristics of contingent prices identified through outreach activities with a view to outlining the scope of the project. The Interpretations Committee discussed indicators that are common to contingent prices and that have an effect on the cost of the original asset purchased. The Committee expressed concern over developing an interpretation based on too narrow a scope. The focus should be defining what the cost of the item purchased is.
The Committee noted that, where the obligation for the contingent price arises from a contractual agreement, the requirements in IAS 32/IAS 39/IFRS 9 Financial Instruments would apply. The contract would establish an obligation for the contingent price and IAS 32/IAS 39/IFRS 9 would lead to recognising a financial liability on the date of purchase of the asset for the fair value of the contingent payment. The definition of cost in IAS 16 similarly requires that the cost of the asset on the date of purchase should include the fair value of the consideration given (if a reliable estimate can be made), such as an obligation to pay a contingent price.
The Committee noted that the initial accounting for contingent prices arising from the purchase of a single asset is consistent with the initial accounting for contingent consideration arising from a business combination under IFRS 3 (2008).
The Committee also noted that the core issue is the accounting for the remeasurement of the liability and whether that remeasurement should be recognised in profit or loss, or included as an adjustment to the cost of the asset. The Committee noted that an initial analysis of IAS 39/IFRS 9 would suggest that the remeasurement should be recognised in profit or loss. However, the Committee expressed concern about whether this was a reasonable depiction of the transaction, noting that IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities had addressed a similar issue in the context of decommissioning, restoration and similar liabilities and had required an adjustment to the cost of the asset.
Accordingly, the Committee directed the staff to present further analysis on how to account for subsequent changes to the liability at the meeting in May 2011 and to consider whether there are circumstances in which the remeasurement of the liability for the contingent price should be included in the cost of the asset.
Observer Note: Agenda Paper 4 (March 2011)
Meeting Audio: Agenda Paper 4 (March 2011)