United States: On The Horizon For IFRS - April 30, 2013

IFRIC MEETING MARCH 12-13, 2013

Introduction

The IFRS Interpretations Committee (IFRIC or the Committee) has issued the March 2013 IFRIC Update, which summarizes the deliberations during its meeting in London on March 12-13, 2013. This On the Horizon for IFRS provides a brief description of the topics discussed at that meeting. For a more complete description of the issues discussed by the Committee, as well as the results of those discussions, please refer to the March 2013 IFRIC Update.

All decisions reached at Committee meetings are tentative and may be changed or modified at future meetings. Committee decisions become final only after completion of a formal vote on an Interpretation or Draft Interpretation, which is confirmed by the IASB.

Current Agenda

At its March 2013 meeting, the Committee discussed the following items on its current agenda.

Variable payments for separate acquisition of property, plant, and equipment and intangible assets

The Committee was asked to clarify whether certain payments made by an operator in a service concession arrangement within the scope of IFRIC 12, Service Concession Arrangements, should either be included in the measurement of an asset and liability at the start of the concession arrangement, or be treated as executory in nature and recognized as expenses as incurred over the term of the arrangement. This issue is linked to a broader issue regarding contingent payments made by an entity for separate purchases of property, plant, and equipment and of intangible assets outside of a business combination.

During the March 2013 meeting, the Committee recommended that the IASB amend IAS 16, Property, Plant and Equipment, IAS 38, Intangible Assets, IAS 39, Financial Instruments: Recognition and Measurement, and IFRIC 12 as part of a narrow-scope project.

Interpretation on levies

In May 2012, the Committee published a draft Interpretation, Levies Charged by Public Authorities on Entities that Operate in a Specific Market, to address the accounting for levies recognized in accordance with the definition of a "liability" in IAS 37, Provisions, Contingent Liabilities and Contingent Assets.

In March 2013, the Committee discussed a revised draft Interpretation that reflects its tentative decisions reached during the redeliberation process. The Committee then concluded that re-exposure of the Interpretation is unnecessary and agreed to finalize the Interpretation, subject to minor drafting amendments, which will be submitted to the IASB for ratification.

Agenda Decisions

IFRIC agenda decisions are published for information only and do not change existing IFRS requirements. Committee agenda decisions are not Interpretations. Interpretations are determined only after extensive deliberations and due process, including a formal vote. Interpretations become final only when approved by the IASB.

Valuation of biological assets using a residual method

The Committee was asked to clarify whether it is appropriate to use the residual method in paragraph 25 of IAS 41, Agriculture, to arrive at the fair value of biological assets physically attached to land if no market exists for the biological assets but an active market exists for the combined assets. The residual method might result in either a minimal or nil fair value for the biological assets if the highest and best use of land differs from its current use.

During the March 2013 meeting, the Committee reaffirmed its previous decision not to add this issue to its agenda since it is too broad for the Committee to address and instead directed the staff to ask the IASB to clarify the accounting requirements for this issue.

Accounting for reverse acquisitions that do not constitute a business

The Committee was asked to provide guidance on how to account for reverse acquisition transactions when the former shareholders of a non-listed operating entity become the majority shareholders of the combined entity by exchanging their shares for new shares in a listed non-operating entity. In the specific transaction being discussed, the listed non-operating entity, which does not qualify as a business under IFRS 3, Business Combinations, acquires the entire share capital of the non-listed operating entity.

In March 2013, the Committee reaffirmed its previous decision not to add this issue to its agenda in light of the existing IFRS requirements.

Tentative Agenda Decisions

Committee agenda decisions are not Interpretations. Interpretations are determined only after extensive deliberations and due process, including a formal vote. Interpretations become final only when approved by the IASB. Tentative agenda decisions, including the reasons for not adding the issues to the agenda, will be reconsidered at the July 2013 meeting.

Pre-tax or post-tax discount rate for a defined benefit obligation

The Committee was asked to clarify whether the discount rate used to calculate a defined benefit liability should be a pre-tax or post-tax rate. The submission outlined a specific tax regime.

In March 2013, the Committee observed that the discount rate should be a pre-tax rate based on its analysis of IAS 19, Employee Benefits (Revised 2011), and tentatively decided not to add this issue to its agenda.

Issues Considered For Annual Improvements

The Committee assists the IASB in Annual Improvements by reviewing proposed improvements to IFRS and making recommendations to the IASB. Specifically, the Committee's involvement includes reviewing and deliberating issues for their inclusion in future exposure drafts of proposed Annual Improvements to IFRS and deliberating the comments received on the exposure drafts. When the Committee has reached consensus on an issue included in Annual Improvements, the recommendation (including finalization of the proposed amendment or removal from Annual Improvements) will be presented to the IASB for discussion, in a public meeting, before being finalized. Approved Annual Improvements to IFRS (including exposure drafts and final standards) are issued by the IASB.

Annual Improvements 2010–2012 cycle

At the March 2013 meeting, the Committee deliberated the comments received on the following proposed amendments included in the May 2012 Exposure Draft, Annual Improvements to IFRSs 2010–2012 Cycle (Exposure Draft).

Accounting for contingent consideration in a business combination

The Exposure Draft proposed amending IFRS 3, Business Combinations, to clarify the classification and subsequent measurement requirements for contingent consideration in a business combination.

In March 2013, the Committee recommended that the IASB proceed with this amendment, including the decision that all contingent consideration that is a liability would be subsequently measured at fair value through profit or loss.

Classification of interest paid that is capitalized on the statement of cash flows

The Exposure Draft proposed amending IAS 7, Statement of Cash Flows, to clarify the classification in the statement of cash flows of interest paid that is capitalized into the cost of property, plant, and equipment.

At the March 2013 meeting, the Committee recommended that the IASB not proceed with the proposed amendment to IAS 7 because of concerns raised about the implementation of the amendment.

Annual Improvements 2012–2014 cycle

The Committee considered whether to include the following issues in the Annual Improvements 2012-2014 cycle.

Classification of expenditures in the statement of cash flows

The Committee considered whether the guidance on classifying expenditures as investing activities in paragraph 16 of IAS 7, Statement of Cash Flows, could be made clearer.

At the March 2013 meeting, the Committee proposed that the IASB delete the guidance in paragraph 16 of IAS 7 that states "only expenditures that result in a recognised asset in the statement of financial position are eligible for classification as investing activities" to avoid misinterpretations.

Definitions of operating, investing, and financing activities in the statement of cash flows

The Committee considered whether clarifying the definitions of operating, investing, and financing cash flows in IAS 7, Statement of Cash Flows, would achieve a more consistent application of the primary principle for classifying cash flows in IAS 7.

In March 2013, the Committee decided, for various reasons, not to propose that the IASB clarify the application of the primary principle for the classification of cash flows any further.

Mandatory purchases of noncontrolling interests in business combinations

The Committee was asked to address the accounting for the mandatory purchase of noncontrolling interests in a sequence of transactions that begins with the acquirer gaining control over another entity. Shortly thereafter, the acquirer purchases an additional ownership interest as a result of a regulatory requirement to offer to purchase the additional interest. The two issues are:

  • Should the initial acquisition of the controlling interest and the subsequent mandatory tender offer be treated as separate transactions or as a single acquisition?
  • Should a liability be recognized for the mandatory tender offer at the date the acquirer obtains control of the acquiree?

In November 2012, the Committee tentatively agreed that the initial acquisition of the controlling interest and the subsequent mandatory tender offer would be treated as a single acquisition. At the March 2013 meeting, the Committee continued to discuss whether a liability should be recognized for the mandatory tender offer at the date the acquirer obtains control of the acquiree. At that meeting, the Committee noted that the IASB could address this issue as part of its post-implementation review of IFRS 3, Business Combinations, and asked the staff to report its views on whether a liability should be recognized for the mandatory tender offer to the Board.

Issues recommended for narrow–scope amendments to IFRS

During the March 2013 meeting, the Committee recommended the following issues for narrow-scope amendments to IFRS.

Share-based payments awards settled net of tax withholding

The Committee considered the classification of a share-based payment transaction in which the entity withholds a specified portion of equity instruments that would otherwise be issued to the counterparty upon exercise (or vesting) of the share-based payment award in order to settle the counterparty's tax obligation.

In March 2013, the Committee recommended to the IASB that it amend IFRS 2, Share-based Payment, in a narrow-scope amendment project to address limited types of share-based payment transactions with a net settlement feature.

Modification of a share-based payment from cash-settled to equity-settled

The Committee was asked to clarify how to measure and account for a share-based payment when a cash-settled award is cancelled and then replaced by a new equity-settled award that has a higher fair value than the original award.

In March 2013, the Committee recommended to the IASB that it amend IFRS 2, Share-based Payment, in a narrow-scope amendment project in a manner consistent with its specific recommendations on this issue noted at the March 2013 meeting.

Work in progress

Classification of a disposal group as held for sale in a planned IPO

The Committee was asked to clarify the guidance in IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, on the classification of a disposal group held for sale when the disposal plan will be achieved via an initial public offering (IPO) that has not yet been approved by the securities regulator.

During the March 2013 meeting, the Committee had a preliminary discussion on this issue and asked the staff to perform additional research on the issues discussed by the Committee and to present further analysis and a recommendation at a future meeting.

Change in a disposal plan

The Committee was asked to clarify the guidance in IFRS 5 for when a disposal plan is changed from selling a division by means of an IPO to spinning off a division and distributing a dividend in kind to its shareholders.

During the March 2013 meeting, the Committee had a preliminary discussion on this issue and asked the staff to perform additional research on the issues discussed by the Committee and to present further analysis and a recommendation at a future meeting.

Applicability of IFRS 7 amendments to condensed interim financial statements

The Committee was asked for guidance on whether the disclosures in the amendments to IFRS 7, Disclosures-Offsetting Financial Assets and Financial Liabilities, should be included in condensed interim financial statements and, if so, about the frequency of those disclosures.

In March 2013, the Committee noted that the current wording relating to interim periods in paragraph 44R of IFRS 7, which was added as part of the amendments to IFRS 7, could lead to divergent interpretations. Consequently, the Committee asked the staff to consult with the IASB on the intent of paragraph 44R.

Effect of protective rights on control assessment

The Committee was asked whether the control assessment in IFRS 10, Consolidated Financial Statements, should be reassessed if protective rights become exercisable (for example, on the breach of a loan covenant that gives rise to a default).

At the March 2013 meeting, the Committee observed that paragraph 8 of IFRS 10 requires an investor to reassess whether it controls an investee if facts and circumstances change and that a breach which results in protective rights becoming exercisable does constitute such a change. The Committee tentatively decided that the agenda criteria were not met and asked the staff to prepare an agenda decision for discussion in May 2013.

Discount rate for post-employment obligations

In October 2012, the Committee was asked to provide guidance on determining the rate used to discount post-employment benefit obligations under the guidance in IAS 19, Employee Benefits (Revised 2011), specifically whether corporate bonds with a rating lower than "AA" can be considered high quality corporate bonds.

At the March 2013 meeting, the staff reported that a majority of IASB members agreed with the Committee's observations on determining the discount rate. Consequently, the Committee asked the staff to consult with experts (for example, actuaries) and to prepare proposals for a narrow-scope amendment to IAS 19.

Elimination of gains from a transaction between a joint venturer and its joint venture

The Committee was asked to clarify the accounting for a finance lease transaction in which a joint venturer leases an item of property, plant, and equipment to its joint venture. In the scenario submitted the amount of the joint venturer's share of the gain from the transaction that would be eliminated under paragraph 28 of IAS 28, Investments in Associates and Joint Ventures (Revised 2011), exceeds the carrying amount of the joint venturer's interest in the joint venture.

In March 2013, the Committee observed that under paragraph 28 of IAS 28, the entity should eliminate its entire share of the gain from the transactions. The Committee also discussed how to present the corresponding entry for the amount of the gain in excess of the carrying amount of the joint venturer's interest in the joint venture, but did not reach any tentative conclusions. The Committee asked the staff to bring a further analysis of this issue and any proposed amendments to IAS 28 to the next meeting for the Committee's consideration.

Outstanding issues update

The Committee was updated on three new issues and seven ongoing issues for consideration at a future meeting. Another two issues are on hold and will also be considered at a future meeting. All other requests received and considered by the staff were discussed at this meeting.

The next Committee meeting will be held on May 14-15, 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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