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IFRS Interpretations Committee work in progress


The Interpretations Committee work in progress are discussed as part of the public sessions:


May 2013


  
IFRS 2 Share-based Payment—Accounting for share-based payment transactions in which the manner of settlement is contingent on future events

In the July 2012 meeting, the Interpretations Committee received an update on the issues that have been referred to the IASB and that have not yet been addressed. The Interpretations Committee asked the staff to update the analysis and perform further outreach on an issue regarding the classification of share-based payment transactions in which the manner of settlement is contingent on either:

a. a future event that is outside the control of both the entity and the counterparty; or

b. a future event that is within the control of the counterparty.

The Interpretations Committee noted that paragraph 34 of IFRS 2 indicates a principle that an entity is required to account for a share-based payment transaction, or the components of that transaction, as a cash-settled share based payment transaction if, and to the extent that, the entity has incurred a liability to settle in cash or other assets. The Interpretations Committee noted, however, that IFRS 2 does not provide specific guidance on share-based payment transactions in which the manner of settlement is contingent on a future event that is outside the control of both the entity and the counterparty. Paragraphs 34-43 of IFRS 2 provide guidance only on share-based payment transactions in which the terms of the arrangements provide the counterparty or the entity with a choice of settlement.

In addition, the Interpretations Committee observed that it is unclear which guidance in other Standards and the Conceptual Framework would be the best analogy for the share-based payment transaction in which the manner of settlement is contingent on a future event that is outside the control of both parties.

The Interpretations Committee noted significant diversity in accounting for the share-based payment transaction. The Interpretations Committee therefore asked the staff to explore approaches to providing guidance for the classification of the share-based payment transaction in which the manner of settlement is contingent on a future event that is outside the control of both parties. The Interpretations Committee will discuss whether guidance can be developed for such a share-based payment transaction on the basis of additional analysis in a future meeting.

Observer note: Agenda Paper 13 (May 2013)
Meeting audio: Agenda Paper 13 (May 2013)


IFRS 13 Fair Value Measurement—portfolios

The Interpretations Committee received a request to clarify the interaction between the use of Level 1 inputs and the portfolio exception set out in IFRS 13. The portfolio exception in IFRS 13 permits an entity to measure its net exposure to either market risks or credit risk arising from a group of financial assets and financial liabilities in specified circumstances. The portfolio exception was intended to align the valuation of financial instruments for financial reporting with an entity’s internal risk management practices. In particular, the issue that was discussed by the Interpretations Committee was whether an entity is:

a. permitted to apply the portfolio exception in IFRS 13 to measure the resulting net risk exposure of a portfolio made up solely with identical Level 1 instruments; or

b. required to measure the financial assets and the financial liabilities of such a portfolio on an individual basis, using the corresponding Level 1 prices for each financial instrument.

In its discussions, the Interpretations Committee observed that, in relation to (a) above, the main question that needs to be addressed is whether an entity:

a. would be required to measure such a net risk exposure on the basis of the Level 1 prices for the individual instruments that comprise that net risk exposure; or

b. would be allowed to consider the net risk exposure as a whole and, consequently, consider adjusting it with any appropriate premiums or discounts.

The Interpretations Committee noted that there was insufficient guidance in the Standard for it to be able to answer this question and so it decided that this issue needs to be considered by the IASB. Accordingly it asked the staff to present the Interpretations Committee’s concerns to the IASB.

Observer note: Agenda Paper 18 (May 2013)
Meeting audio: Agenda Paper 18 (May 2013)


IAS 19 Employee Benefits—Actuarial assumptions: discount rate

In October 2012 the Interpretations Committee received a request for guidance on the determination of the rate used to discount post-employment obligations. In particular, the submitter asked the Interpretations Committee whether corporate bonds with an internationally recognised rating lower than ‘AA’ can be considered to be high quality corporate bonds (HQCB).

In its March 2013 meeting, the Interpretations Committee was informed that the majority of the IASB members agreed that:

a. the objective for the determination of the discount rate is paragraph 84 of IAS 19, ie “the discount rate reflects the time value of money but not the actuarial or investment risk. Furthermore, the discount rate does not reflect the entity-specific credit risk borne by the entity's creditors, nor does it reflect the risk that future experience may differ from actuarial assumptions.”;

b. the Interpretations Committee should clarify the sentence “the discount rate reflects the time value of money but not the actuarial or investment risk” and that this sentence does not mean that the discount rate for post-employment benefit obligations should be a risk-free rate;

c. the discount rate should reflect the credit risk of HQCB and that a reasonable interpretation of HQCB could be corporate bonds with minimal or very low credit risk; and

d. the Interpretations Committee should propose amendments to IAS 19 to specify that when government bonds are used to determine the discount rate they should be of high quality.

Consequently, the Interpretations Committee requested the staff to consult appropriate experts, for example actuaries, and to prepare proposals for a narrow-scope amendment to IAS 19 that reflects the IASB’s direction above.

At this meeting, having considered the staff proposals for a narrow-scope amendment, the Interpretations Committee decided that the staff proposals were too broad an amendment to IAS 19. Consequently, the Interpretations Committee requested the staff to refocus its work on an analysis of whether ‘high quality’ is a relative or an absolute concept. Depending on the conclusions of this analysis the Interpretations Committee will consider whether to issue an agenda decision, develop some guidance or recommend some amendments to the Standard. 

Observer note: Agenda Paper 7 (May 2013)
Meeting audio: Agenda Paper 7 (May 2013)


IFRS 5 Non-current Assets Held for Sale and Discontinued Operations—Classification in conjunction with a planned initial public offering (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 with regard to the classification of a disposal group as held for sale, in the case of a disposal plan that is intended to be achieved by means of an IPO, but where the prospectus (ie the legal document with an initial offer) has not yet been approved by the securities regulator:

The submitter requested 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 had a preliminary discussion of this issue and directed the staff to do additional research on the general issues raised during the discussion and present some further analysis including a recommendation at a future Committee meeting. The staff will also bring a summary of the outreach performed by the staff on this issue.

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations—Change in a disposal method from a plan to sell to a plan to distribute a dividend in kind

The Interpretations Committee received a request to clarify the application of the guidance in IFRS 5 regarding the case of a change in a disposal plan from a plan to sell a division by means of an initial public offering to a plan to spin off a division and distribute a dividend in kind to its shareholders.

The submitter requested the Interpretations Committee to clarify whether such a change in a disposal method would qualify as a change to a plan of sale.

The Interpretations Committee had a preliminary discussion of this issue and directed the staff to do some further analysis including a recommendation at a future Committee meeting. The staff will also bring a summary of the outreach performed by the staff on this issue.

Observer note: Agenda Paper 12 (March 2013)
Meeting audio: Agenda Paper 12 (March 2013)

IFRS 7 Financial Instruments: Disclosure—Applicability of the amendments to IFRS 7 Disclosure–Offsetting Financial Assets and Financial Liabilities to condensed interim financial statements

The Interpretations Committee received a request for guidance on the applicability of the amendments to IFRS 7 Disclosure–Offsetting Financial Assets and Financial Liabilities issued in December 2011 (‗amendments to IFRS 7‘) to condensed interim financial statements. In particular, the submitter asked the Interpretations Committee to clarify the meaning of ―interim periods within those annual periods‖ as used in paragraph 44R of IFRS 7. The submitter noted there was uncertainty about whether the disclosures required by paragraphs 13A–13F and B40–B53 of IFRS 7 should be included in condensed interim financial statements that are prepared in accordance with IFRSs and if so, whether these should be presented in every set of condensed interim financial statements or only in those in the first year in which the disclosure requirements are effective or are governed by the principles in IAS 34 Interim Financial Reporting which was not changed as a result of these amendments to IFRS 7.

The Interpretations Committee noted that the current wording of paragraph 44R has the potential to lead to divergent interpretations.

Consequently the Interpretations Committee requested the staff to consult with the IASB in order to determine what the IASB‘s intention was. The staff will report back to the Interpretations Committee at a future meeting.

Observer note: Agenda Paper 16 (March 2013)
Meeting audio: Agenda Paper 16 (March 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 if protective rights become exercisable, typically on the breach of a covenant in a borrowing arrangement that gives rise to a default, or whether protective rights can never affect an assessment of control.

The Interpretations Committee observed that paragraph 8 of the IFRS 10 requires an investor to reassess whether it controls an investee if facts and circumstances change and further observed that if the breach resulted in the protective rights becoming exercisable that did constitute such a change. They noted that the Standard does not include an exemption for protective rights from this need for reassessment. They also discussed the IASB‘s redeliberations on this topic and concluded that the IASB‘s clear intention was that protective rights should be included in a reassessment of control when facts and circumstances change.

The Interpretations Committee concluded that who controlled the investee would need to be reassessed after the breach occurred and after the rights in question became exercisable, but they did not think that they had enough information about the rights of the investor, bank or others to come to a conclusion about the outcome of that control assessment in the submitted example.

The Interpretations Committee tentatively decided that the agenda criteria were not met for this submission and requested that the staff should prepare an agenda decision for discussion at their May meeting.

Observer note: Agenda Paper 11 (March 2013)
Meeting audio: Agenda Paper 11 (March 2013)

IAS 19 Employee Benefits—Actuarial assumptions: discount rate

In October 2012 the Interpretations Committee received a request for guidance on the determination of the rate used to discount post-employment obligations. In particular, the submitter asked the Interpretations Committee whether corporate bonds with an internationally recognised rating lower than ‗AA‘ can be considered to be high quality corporate bonds (HQCB).

In its November 2012 meeting, the Interpretations Committee noted that:

a. the predominant past practice has been to consider corporate bonds to be high quality if they receive
one of the two highest ratings given by an internationally recognised rating agency (ie ‗AAA‘ and ‗AA‘);
b. IAS 19 does not specify how to determine the market yields on HQCB and, in particular, it does not specify what grade of bonds should be designated as high quality;
c. an entity shall apply judgement in determining what the current market yields on HQCB are, taking into account the guidance in paragraphs 84–85 of IAS 19; and
d. an entity‘s policy for determining the discount rate should be applied consistently over time.

In its January 2013 meeting, the Interpretations Committee:

a. expressed support for the June 2005 Interpretations Committee agenda decision that, in determining the discount rate, an entity shall include HQCB issued by entities operating in other countries, provided that they are issued in the currency in which the benefits are to be paid. A consequence of this view is that for a liability expressed in euros, the deepness of the market of HQCB should be assessed at the Eurozone level; and
b. requested the staff to consult the IASB.

At this meeting the Interpretations Committee was informed that the majority of the IASB members agreed that:

a. the objective for the determination of the discount rate is paragraph 84 of IAS 19, ie ―the discount rate reflects the time value of money but not the actuarial or investment risk. Furthermore, the discount rate does not reflect the entity-specific credit risk borne by the entity's creditors, nor does it reflect the risk that future experience may differ from actuarial assumptions.‖;
b. the Interpretations Committee should clarify the sentence ―the discount rate reflects the time value of money but not the actuarial or investment risk‖ and that this sentence does not mean that the discount
rate for post-employment benefit obligations should be a risk-free rate;
c. the discount rate should reflect the credit risk of HQCB and that a reasonable interpretation of HQCB
could be corporate bonds with minimal or very low credit risk; and
d. the Interpretations Committee should propose amendments to IAS 19 to specify that when government bonds are used to determine the discount rate they should be of high quality.

Consequently the Interpretations Committee requested the staff to consult appropriate experts, for example actuaries, and to prepare proposals for a narrow-scope amendment to IAS 19 that reflects the IASB‘s direction above. It provided the staff with some comments to address in drafting the proposals, particularly with respect to (c) and (d) above. In addition, the Interpretations Committee asked that the proposed amendment should also clarify that, in determining the discount rate, an entity shall include high quality corporate bonds issued in other countries, provided that they are issued in the currency in which the benefits are to be paid. The Interpretations Committee will discuss the staff proposals at a future meeting.

Observer note: Agenda Paper 14 (March 2013)
Meeting audio: Agenda Paper 14 (March 2013)

IAS 28 Investments in Associates and Joint Ventures—Elimination of gains arising from a transaction between a joint venturer and its joint venture

The Interpretations Committee received a request to clarify the accounting for a finance lease transaction in which a joint venturer (an entity) leases an item of property, plant and equipment to its joint venture. The request describes a situation in which the amount of the entity‘s share of the gain from the transaction to be eliminated in accordance with paragraph 28 of IAS 28 exceeds the amount of the entity‘s interest in the joint venture. Specifically, the submitter is seeking a clarification on whether:

a. the gain from the transaction should be eliminated only to the extent that it does not exceed the carrying amount of the entity‘s interest in the joint venture, similarly to the requirement in paragraph 39 of IAS 28; or
b. the remaining gain in excess of the carrying amount of the entity‘s interest in the joint venture should also be eliminated and, if so, against what.

In addition, the submitter asked a further question about whether the lease transaction would qualify as a finance lease in a circumstance in which two joint venturers have a 50 per cent ownership interest in the joint venture respectively.

The Interpretations Committee discussed whether the entity should eliminate the whole of its share of the gain from a ‗downstream‘ transaction when the entity‘s share of the gain exceeds the carrying amount of the entity‘s interest in the joint venture. The Interpretations Committee observed that paragraph 28 of IAS 28 states that, referring to ‗downstream‘ and ‗upstream‘ transactions, ―the investor‘s share in the associate‘s or joint venture‘s gains and losses resulting from those transactions is eliminated‖. Consequently, the Interpretations Committee observed that the entity should eliminate all of its share of the gain from the transaction even if the entity‘s share of the gain exceeds the carrying amount of the entity‘s interest in the joint venture. The Interpretations Committee noted that its observations would apply to all ‗downstream‘ transactions and not only to the finance lease example in the submission.

The Interpretations Committee also discussed how to present the corresponding entry for the amount of the eliminated gain that exceeds the carrying amount of the entity‘s interest in the joint venture. The Interpretations Committee, taking into consideration various types of ‗downstream‘ transactions, noted that the accounting may change depending on the details of the ‗downstream‘ transaction. Consequently, the Interpretations Committee requested the staff to bring further analysis and any proposed amendments to IAS 28 to the next meeting so that the Interpretations Committee can consider whether amendments could or should be made.

The Interpretations Committee did not discuss the submitter‘s further question about whether a lease from a joint venturer to a 50 per cent joint venture could qualify as a finance lease at this meeting. This issue will be brought back to the next meeting.

Observer note: Agenda Paper 13 (March 2013)
Meeting audio: Agenda Paper 13 (March 2013)

Interpretations Committee work in progress update

The Interpretations Committee received a report on three new issues and on seven ongoing issues for consideration at future meetings. The report also included two issues that were on hold and that will be considered again at future meetings. With the exception of those issues, all requests received and considered by the staff were discussed at this meeting.