Tentative agenda decisions available for comment
Tentative agenda decisions from May 2013
The Interpretations Committee reviewed the following matters and tentatively decided that they should not be added to the Interpretations Committee’s agenda. These tentative decisions, including recommended reasons for not adding the items to the Interpretations Committee’s agenda, will be reconsidered at the Interpretations Committee meeting in September 2013. Interested parties who disagree with the proposed reasons, or believe that the explanations may contribute to divergent practices, are encouraged to email those concerns by 29 July 2013 to ifric@ifrs.org. Correspondence will be placed on the public record unless the writer requests confidentiality, supported by good reason, such as commercial confidence.
IAS 32 Financial Instruments: Presentation—Classification of financial instruments that give the issuer the contractual right to choose the form of settlement
The IFRS Interpretations Committee received a request to clarify how an issuer would classify three financial instruments in accordance with IAS 32 Financial Instruments: Presentation. None of the financial instruments had a maturity date but each gave the holder the contractual right to redeem at any time. The holder’s redemption right was described differently for each of the three financial instruments; however if the holder exercised its redemption right, in each case the issuer had the contractual right to choose to settle the instrument in cash or a fixed number of its own equity instruments.
The Interpretations Committee noted that paragraph 15 of IAS 32 requires the issuer of a financial instrument to classify the instrument in accordance with the substance of the contractual arrangement. Consequently, if the contractual substance of financial instruments is the same, the issuer cannot achieve different classification results simply by describing those contractual arrangements differently.
Paragraph 11 in IAS 32 sets out the definitions of both a financial liability and an equity instrument. Paragraph 16 describes in more detail the circumstances in which a financial instrument meets the definition of an equity instrument.
The Interpretations Committee noted that if the issuer has the contractual right to choose to settle a non-derivative financial instrument in cash or a fixed number of its own equity instruments, that financial instrument would meet the definition of an equity instrument in IAS 32 as long as the instrument does not establish an obligation to deliver cash (or another financial asset) indirectly through its terms and conditions. (For example, paragraph 20 of IAS 32 states that such an indirect contractual obligation would be established if the value of the fixed number of the issuer’s own equity instruments exceeds substantially the value of the cash.)
The Interpretations Committee noted that if the issuer has a contractual obligation to deliver cash, that obligation meets the definition of a financial liability.
The Interpretations Committee considered that in the light of its analysis of the existing IFRS requirements, an interpretation was not necessary and consequently [decided] not to add the issue to its agenda.
Observer note: Agenda Paper 16 (May 2013)
Meeting audio: Agenda Paper 16 (May 2013)
IFRS 10 Consolidated Financial Statements—Effect of protective rights on an assessment of control
The Interpretations Committee received a request for clarification about IFRS 10. The query relates to protective rights and the effect of those rights on the power over the investee. More specifically, the submitter asked whether the control assessment should be reassessed when facts and circumstances change such that rights, previously determined to be protective, change (for example upon the breach of a covenant in a borrowing arrangement that causes the borrower to be in default) or whether, instead, such rights are never included in the reassessment of control upon a change in facts and circumstances.
The Interpretations Committee observed that paragraph 8 of IFRS 10 requires an investor to reassess all rights to establish whether it controls an investee whenever facts and circumstances change. The Interpretations Committee also observed that if the breach of a covenant resulted in the rights becoming exercisable, that did constitute such a change. It noted that the Standard does not include an exemption for any rights from this need for reassessment. The Interpretations Committee also discussed the IASB’s redeliberations of this topic during the development of IFRS 10 and concluded that the IASB’s intention was that protective rights should be included in a reassessment of control when facts and circumstances change. Accordingly, the Interpretations Committee noted that the conclusion about who controlled the investee would need to be reassessed after the breach occurred.
The Interpretations Committee also concluded that it did not expect significant diversity in practice to develop following the implementation of the Standard. Consequently, the Interpretations Committee [decided] not to add this issue to its agenda.
Observer note: Agenda Paper 19 (May 2013)
Meeting audio: Agenda Paper 19 (May 2013)
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations—classification in conjunction with a planned IPO, but where the prospectus has not been approved by the securities regulator
The Interpretations Committee received a request to clarify the application of the guidance in IFRS 5 regarding the classification of a non-current asset (or disposal group) as held for sale, in the case of a disposal plan that is intended to be achieved by means of an initial public offering (IPO), but where the prospectus (ie legal document with an initial offer) has not been approved by the securities regulator. The submitter requests the Interpretations Committee to clarify whether the disposal group would qualify as held for sale before the prospectus is approved by the securities regulator, assuming that all of the other criteria in IFRS 5 have been fulfilled.
The Interpretations Committee noted that an entity should apply the guidance in paragraphs 6–9 to assess whether the sale of a disposal group by means of an IPO is highly probable.
The Interpretations Committee observed that the following criteria in paragraph 8 of IFRS 5 represent events that have occurred:
a. the appropriate level of management must be committed to a plan to sell the asset (or disposal group);
b. an active programme to locate a buyer and complete the plan must have been initiated; and
c. the asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value.
The Interpretations Committee noted that the following criteria would be assessed based on expectations of the future, and their probability of occurrence would be included in the assessment of whether a sale is highly probable:
d. the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification (except as permitted by paragraph 9);
e. actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn; and
f. the probability of shareholders’ approval (if required in the jurisdiction) should be considered as part of the assessment of whether the sale is highly probable.
On the basis of the analysis above, the Interpretations Committee determined that, in the light of the existing IFRS requirements, sufficient guidance exists and that neither an Interpretation nor an amendment to a Standard was necessary and consequently [decided] not to add this issue to its agenda.
Observer note: Agenda Paper 20A (May 2013)
Observer note: Agenda Paper 20B (May 2013)
Observer note: Agenda Paper 20C (May 2013)
Meeting audio: Agenda Paper 20A, 20B, 20C (May 2013)