March 2006

IFRIC Update is published as a In reaching the above decisions, the

convenience to the IASB’s constituents.
Service Concession IFRIC discussed the nature and
All conclusions reported are tentative Arrangements measurement of a commitment given by
and may be changed or modified at the grantor to ensure a specified amount
future IFRIC meetings. The IFRIC discussed: of return to the operator for services
„ D12 Service Concession provided. The IFRIC noted that the fair
Decisions become final only after the
Arrangements – Determining the value of the commitment would vary
IFRIC has taken a formal vote on an
Accounting Model according to the precise terms and
Interpretation or Exposure Draft, which
circumstances of the contract. However,
is confirmed by the IASB. „ The interaction of D12 with IFRIC 4 such a commitment did not qualify as a
The International Financial Reporting Determining whether an financial guarantee under IAS 39 (which
Interpretations Committee met in Arrangement contains a Lease would have required it to be measured at
London on 2 and 3 March 2006, when it „ An analysis of remaining comments fair value). Rather, it was the means
discussed: received on the exposure drafts D12, whereby the operator obtained a
contractual right to receive cash from, or
„ Service Concession Arrangements D13 Service Concession
at the direction of, the grantor. The
„ IAS 18 Revenue – Sales of Real Arrangements – The Financial Asset
Model and D14 Service Concession entire commitment should therefore be
Estate recognised as a financial asset.
Arrangements – The Intangible Asset
„ IAS 19 Employee Benefits – The Model. The staff agreed to prepare a revised
Effect of a Minimum Funding draft of D12 for consideration at the next
Requirement on the Asset Ceiling Determining the accounting model
IFRIC meeting.
„ IAS 32 Financial Instruments: The staff presented an analysis of the
Presentation – Classification of a circumstances in which an operator's The interaction of D12 with IFRIC 4
Financial Instrument asset would meet the definition of a The IFRIC considered the distinction
„ IFRS 1 First-time Adoption of financial asset contained in IAS 32 between IFRIC 4 and D12 and whether
International Financial Reporting Financial Instruments: Presentation. the ‘significant residual interest’ criterion
Standards – Determination of the In the light of comments received the was a necessary part of the scope
Carrying Amount of the Investment staff proposed amending the criterion requirements in D12. The IFRIC agreed
in a Subsidiary in the Separate contained in paragraphs 10-13 of D12 to a consequential amendment to the scope
Financial Statements of the Parent better reflect the definition of a financial of IFRIC 4 to specifically exclude
„ Customer Loyalty Programmes asset in IAS 32: ie a financial asset exists arrangements falling within the scope of
D12. In addition, it was agreed that the
„ IAS 39 Financial Instruments: when the operator has a contractual right
Basis for Conclusions of IFRIC 4 should
Recognition and Measurement – to receive cash. The IFRIC clarified that
the grantor does not need to pay the cash be amended to explain why the scope
Aspects of Derecognition in the exclusion was required.
Context of Securitisation to the operator directly. With this
„ IAS 39 Financial Instruments: change, the proposed amendment would Paragraph 5b of D12 sets a criterion for a
Recognition and Measurement – better reflect the economic reality of concession arrangement to fall within the
Whether Inflation Risks Qualify as concession arrangements: to the extent scope of D12-14 that the residual interest
Separable Components for Hedging that the operator is remunerated for its in the infrastructure should revert to the
Purposes construction services by obtaining a grantor at the end of the concession and
contractual right to receive cash from, or that the residual interest should be
„ IFRIC Relationship with National at the direction of, the grantor, the significant.
Standard-Setters and National operator would recognise a financial
Interpretative Groups asset and, to the extent that the operator [Contd]
„ IFRIC Agenda Decisions receives only a licence to charge users, it Copyright © IFRIC Update is published
„ Tentative Agenda Decisions would recognise an intangible asset. The after every IFRIC meeting by the
IFRIC agreed that bifurcation of the IASCF, Publications Department,
operator’s right to cash flows into a 30 Cannon Street, London, EC4M 6XH
financial and an intangible asset may be United Kingdom
necessary in certain circumstances and Tel: +44 (0)20 7332 2730
that the Interpretations should reflect Fax: +44 (0)20 7332 2749
this. Some IFRIC members expressed Website: www.iasb.org
concern, that bifurcation of arrangements Email: [email protected]
may create measurement issues. ISSN 1477-206X
The IFRIC agreed that paragraph 5b of D12 should be
amended. The condition that the residual interest should
IAS 18 Revenue – Sales of Real
revert to the grantor would apply only if the residual interest Estate
is significant. The amendment results in 'whole of life'
assets, (ie where an asset is used in a service concession The IFRIC decided to take onto its agenda a project to clarify
arrangement for the whole of its useful life) falling within the the requirements of IAS 18 Revenue for real estate sales in
scope of D12-14, rather than IFRIC 4. which an agreement for sale is reached before construction
of buildings or other facilities is complete. The project was
The IFRIC requested the staff to consider further the triggered by the apparently contradictory guidance set out in
meaning of ‘significant’ in relation to the residual interest, section 9 of the Appendix to IAS 18, which has been
and the perceived inconsistency that the scope of the draft interpreted rather differently from the requirements of IAS
Interpretations excludes pre-existing assets of the operator 18. The IFRIC decided that the objectives of the project
while including pre-existing assets of the grantor. should be to:
Analysis of remaining comments „ clarify the circumstances in which IAS 18 Revenue is
The staff presented an analysis of remaining comments applicable, ie to develop factors in determining whether
received on draft Interpretations D12-14. The IFRIC deferred real estate sales (before construction is complete) should
consideration of two of the issues: be accounted for as a construction contract in accordance
with IAS 11 Construction Contracts or as a sale of goods
„ the different treatments under the intangible asset and (and possibly provision of further services to complete
financial asset models of repairs and maintenance the construction) in accordance with IAS 18 Revenue.
obligations; and
„ reinforce and interpret the revenue recognition criteria in
„ the timing of recognition of an intangible asset, to allow IAS 18. The Interpretation should include guidance on
the staff an opportunity to analyse the issues in the light whether and, if so, when the transaction should be
of the IFRIC’s decision described above to move the regarded as comprising two components:
dividing line between the two models.
(a) a sale of goods (the partially-constructed real estate);
Allocation of contract revenue and
The IFRIC noted the comments received on the proposal in (b) rendering of further services (the remaining
D13 to require allocation of revenue to the different activities construction services required to complete the
of a service concession arrangement by reference to their fair construction).
values. The IFRIC noted that this issue had ramifications
beyond service concessions arrangements and asked the staff „ eliminate potential confusion arising from the application
to give priority to a separate project to analyse IAS 11 and of the guidance set out in Appendix to IAS 18, possibly
IAS 18 to determine whether it is appropriate in an by amending that Appendix (which does not form part of
unsegmented contract to allocate different project margins to the Standard).
the different components. The IFRIC also considered whether the project should
Amortisation of an intangible asset specify how revenue and expenses should be allocated to
contracts for the sale of individual units within a multi-unit
The IFRIC noted that the Basis for Conclusions as currently development. The method would depend on whether the
drafted could result in creating the false impression that the contracts should be combined. Some IFRIC members
IFRIC was prohibiting the use of unit-of-production thought that existing criteria for combining contracts were
amortisation for intangible assets recognised under D14. sufficiently clear and that, as the application would depend
The IFRIC decided to amend the Basis for Conclusions to on the circumstances, little further generic guidance could be
clarify that amortisation methods specified in IAS 38 would given. The IFRIC asked the staff to analyse the issue for
be acceptable for intangible assets recognised under D14, further consideration at a future meeting.
provided that the method used reflected the pattern in which
the asset’s future economic benefits are expected to be The IFRIC noted that the output of this project could be an
consumed by the entity. The IFRIC confirmed its earlier Interpretation and/or amendments to the real estate example
decision that use of interest methods of amortisation is set out in the Appendix to IAS 18. The IFRIC decided to
prohibited under D14. wait until it had reached agreement on the nature and extent
of the consensus before determining the format of its output.
Effective date
The IFRIC asked the staff to research the issues on which the
The IFRIC will consider the effective date of the IFRIC is seeking a consensus and to present them for
Interpretations when it has completed its post-exposure discussion at a future meeting.
deliberations.

2 Copyright © 2006 International Accounting Standards Committee Foundation

 The IFRIC also asked that the terminology used make a
IAS 19 Employee Benefits – The clearer distinction between funding issues and accounting
Effect of a Minimum Funding issues.
Requirement on the Asset The IFRIC asked the staff to prepare a revised draft of the
Interpretation for discussion at the next meeting.
Ceiling
The IFRIC continued its consideration of whether a statutory IAS 32 Financial Instruments:
minimum funding requirement (MFR) affects the application
of the asset ceiling requirements under IAS 19. The staff Presentation – Classification of
presented a draft Interpretation at the meeting. a Financial Instrument
The IFRIC reaffirmed the decisions made at previous
In response to a submission for a possible agenda item, the
meetings. In particular, the IFRIC confirmed that, if an
IFRIC discussed the role of contractual and economic
entity has a statutory requirement to pay contributions to a
obligations in the classification of two different financial
plan that would exceed the amount of the defined benefit
instruments under IAS 32.
obligation measured under IAS 19 and the assets derived
from those contributions would not be available to the entity The IFRIC agreed that IAS 32 is clear that a contractual
(either as a refund of surplus or a reduction in future financial obligation was necessary in order that a financial
contributions), that requirement would give rise to an instrument be classified as a liability (ignoring the
additional liability under IAS 19. classification of financial instruments that may or will be
settled in the issuer’s own equity instruments). Such a
An IFRIC member suggested that the scope of the draft
contractual obligation could be explicitly established or
Interpretation should be changed to ‘funding requirements’
could be indirectly established. However, the obligation
instead of ‘statutory minimum funding’ requirements. The
must be established through the terms and conditions of the
IFRIC noted that such a change might extend the scope to
financial instrument.
unrelated issues and therefore agreed that the scope and title
of the draft Interpretation should not be changed. However, It was agreed that IAS 32 is clear that economic compulsion,
the analysis may need to be applied to other circumstances by itself, would not result in a financial instrument being
by analogy. classified as a liability.
The IFRIC was asked to reconsider whether the calculation The IFRIC also discussed the role of ‘substance’ in the
of the asset available as a reduction in future contributions classification of financial instruments. It noted that IAS 32
should take into account, in determining the future restricted the role of ‘substance’ to consideration of the
contribution reduction available, future changes in the size contractual terms of an instrument, and that anything outside
and demographics of the workforce consistent with the the contractual terms was not considered for the purpose of
management’s most recent budgets/forecasts. The staff assessing whether an instrument should be classified as a
noted that the CICA 3461 (the Canadian pensions accounting liability under IAS 32.
standard) states that when an entity has existing plans to
make significant reductions in its workforce, the entity The IFRIC also agreed that an obligation to settle an
reflects these planned reductions in the number of employees instrument arising solely on an uncertain liquidation does
used to compute the expected future benefit amount. not, by itself, result in that instrument being classified as a
liability. Furthermore, the IFRIC agreed that IAS 32 was
The IFRIC noted its previous conclusion that actuarial clear that the relative subordination on liquidation of a
assumptions, including demographic assumptions, used in financial instrument was not relevant to the classification
computing the net plan asset available should be consistent decision under IAS 32.
with the assumptions made to compute the benefit obligation
at the balance sheet date. The IFRIC also noted that, if the It was agreed that the classification of the two instruments
entity makes significant reductions in its workforce, that included in the original submission to the IFRIC was clear
would give rise to a curtailment under IAS 19. Under IAS under IAS 32.
19, the impact of curtailments is not anticipated before they The first instrument included in the submission was an
occur. Therefore, the IFRIC decided that, consistent with irredeemable, callable financial instrument with dividends
other IAS 19 requirements, no allowance should be made for payable only if dividends are paid on the ordinary shares of
future changes in the size and demographics of the the issuer (which themselves are payable at the discretion of
workforce. the issuer). This instrument included a ‘step-up’ dividend
The staff discussed possible transition requirements and clause that would increase the dividend at a pre-determined
agreed to bring a paper to support its proposal to the next date in the future unless the instrument had previously been
meeting. called by the issuer, and it ranked in liquidation before an
instrument classified as a liability. The IFRIC agreed that
The IFRIC suggested changes to the wording of the draft this instrument included no contractual obligation ever to pay
Interpretation in order to make it easier to understand. An the dividends or to call the instrument and that therefore it
IFRIC observer suggested that the deferred tax model might should be classified as equity under IAS 32.
provide a useful analogy to explain that financial statements
present liabilities and assets recognised for accounting The second instrument included in the submission was an
purposes rather than assessments by statutory authorities. irredeemable, callable financial instrument (the ‘base’

Copyright © 2006 International Accounting Standards Committee Foundation 3

instrument) with dividends that must be paid if interest was made for the cost of supplying the rewards and charged
paid on another (the ‘linked’) instrument. The issuer must as an expense alongside the initial sale; or
pay the interest on the linked instrument. The IFRIC agreed
(c) either (a) or (b) depending on the circumstances.
that the linkage to the linked instrument, on which interest is
contractually obliged to be paid, creates a contractual IFRIC members held different views. Some took the view
obligation to pay dividends on the base instrument. The that the substance was the same whatever the form of the
IFRIC therefore agreed that, under IAS 32, the base rewards. Members favouring approach (a), the multiple-
instrument should be classified as a liability. element sale transaction, argued that loyalty rewards were
similar to ‘buy-one-get-one-free’ offers. Since revenue is
The IFRIC decided that, since the Standard is clear, it would
measured at the fair value of the consideration received or
not expect diversity in practice and would not take this item
receivable, then revenue is allocated to the two separate
onto its agenda. The IFRIC requested the staff to draft
components. Delivery of the first item does not give rise to
reasons for not adding this submission to its agenda.
all the revenue being recognised. However, they cautioned
that the multiple-element approach should not be taken to an
IFRS 1 First-time Adoption of extreme – loyalty rewards should be identified as separate
components only if significant. Members favouring
International Financial approach (b), the future expense, regarded it as simpler and
more reliable and thought that users’ needs would not be
Reporting Standards – served better by approach (a). Members who favoured
Determination of the Carrying approach (c) believed that the choice between (a) and (b)
should depend on the circumstances, eg whether the
Amount of the Investment in a additional goods and services would be provided by the
Subsidiary in the Separate entity or a third party; or whether the additional goods and
services were items that were otherwise sold by the entity.
Financial Statements of the The IFRIC then considered how IAS 18 Revenue would
Parent apply if rewards were accounted for as a separate component
of a multiple-element sales transaction. It decided that:
The staff reported on two issues that had arisen in connection
with the carrying amount of the investments in subsidiaries „ the entity should estimate the fair value of the customer
in the first IFRS separate financial statements of a parent consideration received for the loyalty rewards. Various
entity: factors could be relevant to the estimate: eg the market
selling price for the goods and services offered as
„ how the carrying amount of the investments in rewards; the likelihood that the customer would meet any
subsidiaries should be measured at the time when the further qualifying conditions and claim the rewards; and
parent entity first adopts IFRSs; and any further consideration that the customer would have to
„ how the post acquisition profits of subsidiaries should be pay for the goods or services claimed. The time value of
determined. Post acquisition profits are treated as money would be taken into account if material.
revenue when received subsequently by the parent. „ on the basis of this estimate, the total consideration
The staff recommended that the Board be requested to make receivable from the customer would be divided between
amendments to IFRS 1 to give relief to parent entities in the original goods and services sold and the rights to
measuring the carrying amounts of the investments in loyalty rewards. The revenue recognition criteria in
subsidiaries in their first IFRS separate financial statements. IAS 18 would be applied to each component separately,
The IFRIC supported the staff recommendation. ie the revenue attributed to the loyalty rewards would be
deferred until the rewards had been delivered.
„ the time at which income was recognised, and the way in
Customer Loyalty Programmes which it was classified and presented, might depend on
whether the entity supplied the rewards itself or granted
The IFRIC continued its deliberations on accounting by
the customers rights to claim goods and services from a
vendors for customer loyalty rewards, ie rights to additional
third party supplier. (The definition of ‘revenue’ and
goods or services granted to customers as a reward for past
requirements of IAS 18 needed to be considered further
purchases.
on this point.)
The IFRIC first considered whether the rewards should be
„ when the revenue relating to the loyalty rewards was
treated as:
recognised, any further costs to be incurred in respect of
(a) a separate component of a multiple-element sales the loyalty rewards would also be recognised.
transaction. Some of the sales proceeds received for the
To focus the IFRIC’s discussion at the next meeting, the
past sale would be allocated to the rewards and
Chairman directed the staff to prepare a draft Interpretation
recognised as revenue only when the rewards were
supporting a consensus that all rights to loyalty rewards
delivered; or
should be treated as a separate component of a multiple-
(b) an expense still to be incurred in respect of the past sale. element sales transaction, if material. The Interpretation
All of the sales proceeds would be recognised as revenue should direct readers to the relevant paragraphs of existing
at the point of the initial sale, and provision would be

4 Copyright © 2006 International Accounting Standards Committee Foundation

IFRSs and not try to provide exhaustive guidance on
accounting for customer loyalty programmes.
IAS 39 Financial Instruments:
The IFRIC members requested that the staff ensure that the Recognition and Measurement
analysis of the requirements of IAS 18 addressed both sales
of goods and rendering of services; and consider further the
– Whether Inflation Risks
implications of customer loyalty programmes that gave Qualify as Separable
customers rights to claim goods and services from a third
party supplier. Components for Hedging
Purposes
IAS 39 Financial Instruments: The IFRIC discussed whether inflation qualifies as a risk
Recognition and Measurement associated with a portion of the fair value or cash flows of an
interest bearing financial asset or an interest bearing financial
– Aspects of Derecognition in liability in accordance with paragraph 81 of IAS 39.
the Context of Securitisation In analysing this issue a key question is whether the guidance
about portions of non-financial assets set out in AG 100 of
The IFRIC discussed two related issues that had been IAS 39 is relevant to the identification of portions in
submitted in connection with the derecognition requirements financial assets and financial liabilities. AG 100 states that
of IAS 39. The issues address how best to make operational changes in the price of a portion of a non-financial asset
the requirements of IAS 39 (summarized in the flowchart in generally do not have a predictable, separately measurable
IAS 39 AG 36). Analysis of the issues will be discussed at economic effect on the price of the overall non-financial
future meetings. asset or non-financial liability in a manner which is
comparable to the effect of a change in market interest rates
The first issue was how the derecognition provisions of IAS
on the price of a bond.
39 should be applied to groups of financial assets. The staff
noted that, in practice, entities may transfer groups of While the IFRIC agreed that the guidance in IAS 39 AG 100
financial assets which comprise non-derivative financial may be relevant to the identification of portions in financial
assets and derivatives. The staff noted that the key issue in assets and liabilities, there was debate as to whether or not
this question was whether one derecognition test should be this paragraph permitted the designation of inflation risk as a
applied to such groups of financial assets, or whether hedgeable portion of the fair value or cash flows of an
separate derecognition tests should be applied (even though interest bearing financial asset or liability.
economically such groups of financial assets may be viewed The IFRIC members noted that the IFRIC received a number
as a single unit and cash flows from the financial instruments of submissions in a short period of time in connection with
are grouped together). the meaning of ‘portion’ set out in IAS 39. The IFRIC,
therefore, asked the staff to perform analysis to identify
The second issue was whether certain transfers of financial
under what circumstances portions could or could not qualify
assets, as detailed below, should fall within paragraph 18(a)
for hedging purposes in accordance with IAS 39, based on
or paragraph 18(b) of IAS 39. IAS 39 differentiates two
the current requirements of IAS 39.
types of transfers: transfers of contractual rights to cash
flows are set out in paragraph 18(a); and transfers in which
the entity retains the contractual rights to cash flows and IFRIC Relationship with
assumes a contractual obligation to pay cash flows to a
recipient are set out in paragraph 18(b). If the transfer falls National Standard-Setters and
within paragraph 18(b), all of the ‘pass through’ conditions
set out in paragraph 19 must be met. The transfers at issue
National Interpretative Groups
include those where an entity can contractually agree to pass The Director of Technical Activities presented a paper on
on cash flows without notifying the debtor; and those in IFRIC’s relationship with national standard setters (NSSs)
which an entity may transfer contractual rights to cash flows and national interpretative groups (NIGs). She explained
subject to certain conditions, eg (i) conditions relating to the that the IASB and the IFRIC could not prevent NSSs or
existence and legal status of the asset at the time of the NIGs from issuing their own interpretations, as long as they
transfer, (ii) conditions relating to the performance of the considered it was appropriate to do so.
asset after the time of transfer, and (iii) offset agreements.
The question arose whether, in these cases, the ‘pass She said that there were a number of resources through
through’ provisions set out in paragraph 19 should be which requests could be raised with the IFRIC for
applied. Interpretations. According to the Draft Statement of Best
Practice, NSSs are encouraged to request the IFRIC to
The IFRIC noted that there was divergence in practice and address issues that require Interpretations. In addition, in
that the issues were related. Consequently, it concluded that accordance with the Preface to International Financial
the issues should be addressed in one Interpretation. Reporting Interpretations, IFRIC members and observers
have the primary responsibility for identifying issues to be
considered by the IFRIC and drawing the staff’s attention to
any situations where they find that a proposed interpretation
by an NSS or NIG is potentially divergent.

Copyright © 2006 International Accounting Standards Committee Foundation 5

Due to the widespread adoption of IFRSs worldwide, the control is transitory. It was suggested to the IFRIC that,
staff thinks that it would not be feasible to monitor the work because control of the new entity is transitory, a combination
of every NSS or NIG. Instead, the staff recommended that involving that newly formed entity would be within the
IFRIC continue to support NSSs or NIGs bringing issues to scope of IFRS 3.
the IFRIC for consideration in the usual manner through the
IFRS 3.22 states that when an entity is formed to issue equity
IFRIC due process. In addition, IFRIC members and
instruments to effect a business combination, one of the
observers would be encouraged to bring to its attention
combining entities that existed before the combination must
issues where there appears to be inappropriate interpretation
be identified as the acquirer on the basis of the evidence
developing in a national jurisdiction or where a proposed
available. The IFRIC noted that, to be consistent, the
EITF interpretation or FASB Staff Position (FSP) of a
question of whether the entities or businesses are under
converged standard is divergent. The IFRIC should not
common control applies to the combining entities that
‘endorse’ or ‘frank’ interpretations issued by others. The
existed before the combination, excluding the newly formed
IFRIC Due Process Handbook should deal with the
entity. Accordingly, the IFRIC decided not to add this topic
relationship with NSSs and NIGs.
to its agenda.
Some IFRIC members expressed concern that, if the IFRIC
The IFRIC also considered a request for guidance on how to
did not monitor the interpretations issued by NSSs or NIGs,
apply IFRS 3 to reorganisations in which control remains
local interpretations would emerge that were inconsistent
within the original group. The IFRIC decided not to add this
with IFRSs. They pointed out that not all interpretations
topic to the agenda, since it was unlikely that it would reach
issued by NSSs or NIGs were confined to domestic issues.
agreement in a reasonable period, in the light of existing
On the other hand, some IFRIC members commented that
diversity in practice and the explicit exclusion of common
the staff would face an overwhelming workload if required
control transactions from the scope of IFRS 3.
to undertake comprehensive monitoring of interpretations by
NSSs or NIGs. The IFRIC agreed that it would be difficult Leases of Land that do not transfer Title to the
to endorse interpretations issued by NSSs or NIGs Lessee
worldwide.
The IFRIC considered a comment letter that it had received
in response to the publication of its draft reasons for not
IFRIC Agenda Decisions taking this issue on its agenda. The correspondent argued
that a finance lease treatment should be afforded to leases
The following explanation is published for information only exceeding 500 years. The IFRIC rejected this approach
and does not change existing IFRS requirements. based on the current text of the standard. However, in
Interpretations of the IFRIC are determined only after response to comments from a number of IFRIC members, the
extensive deliberation and due process, including a formal IFRIC agreed to recommend to the IASB that the special
vote. IFRIC Interpretations become final only when provisions related to the transfer of title on a lease of land
approved by nine of the fourteen members of the IASB. should be deleted from IAS 17. The IFRIC confirmed the
following text, previously published, of its reasons for not
Whether a New Entity that pays Cash can be taking this item onto its agenda.
identified as the Acquirer
The IFRIC considered whether long leases of land would
The IFRIC considered an issue regarding whether a new represent a situation when a lease of land would not normally
entity formed to effect a business combination in which it be classified as an operating lease even though title does not
pays cash as consideration for the business acquired could be transfer to the lessee. IAS 17 states at paragraph 14 that a
identified as the acquirer. characteristic of land is that it normally has an indefinite
IFRS 3.22 states that when a new entity is formed to issue economic life. If title is not expected to pass to the lessee by
equity instruments to effect a business combination, one of the end of the lease term, then the lessee normally does not
the combining entities that existed before the combination receive substantially all of the risks and rewards incidental to
shall be identified as the acquirer on the basis of the evidence ownership, in which case the lease will be an operating lease.
available. Even when the land has an indefinite economic life,
paragraph 15 states that ‘the land element is normally
The IFRIC decided that, as it is clear that IFRS 3.22 does not classified as an operating lease unless title is expected to pass
prohibit a newly formed entity that pays cash to effect a to the lessee by the end of the lease term……’ [emphasis
business combination from being identified as the acquirer, it added].
would not expect diversity in practice and would not take
this item onto its agenda. The IFRIC noted that leases of land with an indefinite
economic life, under which title is not expected to pass to the
‘Transitory’ Common Control lessee by the end of the lease term, were classified as
The IFRIC considered an issue regarding whether a operating leases before an amendment to IAS 17 was made
reorganisation involving the formation of a new entity to in respect of IAS 40 Investment Properties. Specifically,
facilitate the sale of part of an organisation is a business IAS 17 was amended to state that in leases of land that do
combination within the scope of IFRS 3. not transfer title, lessees normally do not receive
substantially all the risks and rewards incidental to
IFRS 3 does not apply to business combinations in which all ownership.
the combining entities or businesses are under common
control both before and after the combination, unless that

6 Copyright © 2006 International Accounting Standards Committee Foundation

Some have understood the introduction of the word Subscriber Acquisition Costs in the
‘normally’ as implying that a long lease of land in which title Telecommunications Industry
would not transfer to the lessee would henceforth be treated
The IFRIC considered how a provider of
as a finance lease, since the time value of money would
telecommunications services should account for telephone
reduce the residual value to a negligible amount. The IFRIC
handsets it provides free of charge or at a reduced price to
noted that, as summarised in paragraph BC 8, the Board
customers who subscribe to service contracts. The question
considered but rejected that approach in relation to the
was whether:
classification of leases of land and buildings, because ‘it
would conflict with the criteria for lease classification in the „ the contracts should be treated as comprising two
Standard, which are based on the extent to which the risks separately identifiable components, i.e. the sale of a
and rewards incidental to ownership of a leased asset lie with telephone and the rendering of telecommunication
the lessor or the lessee’. The Board also made clear that it services, as discussed in paragraph 13 of IAS 18
had not made any fundamental changes to the Standard. Revenue. Revenue would be attributed to each
component; or
The IFRIC noted that one example of a lease classification
affected by the introduction of the word ‘normally’ was a „ the telephones should be treated as a cost of acquiring the
lease of land in which the lessor had agreed to pay the lessee new customer, with no revenue being attributed to them.
the fair value of the property at the end of the lease period.
In such circumstances, significant risks and rewards The IFRIC acknowledged that the question is of widespread
associated with the land at the end of the lease term would relevance, both across the telecommunications industry and,
have been transferred to the lessee despite there being no more generally, in other sectors. IAS 18 does not give
transfer of title. Consequently a lease of land, irrespective of guidance on what it means by ‘separately identifiable
the lease term, is classified as an operating lease unless title components’ and practices diverge.
is expected to pass to the lessee or significant risks and However, the IFRIC noted that the terms of subscriber
rewards associated with the land at the end of the lease term contracts vary widely. Any guidance on accounting for
pass to the lessee. discounted handsets would need to be principles-based to
The IFRIC decided not to add this item to its agenda as, accommodate the diverse range of contract terms that arise in
although leases of land that do not transfer title are practice. The IASB is at present developing principles for
widespread, the IFRIC has not observed, and does not identifying separable components within revenue contracts.
expect, significant diversity in practice. In these circumstances, the IFRIC does not believe it could
reach a consensus on a timely basis. The IFRIC, therefore,
IAS 12 Income Taxes – Scope decided not to take the topic onto its agenda.
The IFRIC considered whether to give guidance on which IAS 27 Consolidated and Separate Financial
taxes are within the scope of IAS 12. The IFRIC noted that Statements – Separate financial statements issued
IAS 12 applies to income taxes, which are defined as taxes before consolidated financial statements
that are based on taxable profit. That implies that (i) not all
taxes are within the scope of IAS 12 but (ii) because taxable The IFRIC considered a comment letter that had been
profit is not the same as accounting profit, taxes do not need received objecting to the draft reasons for not taking this
to be based on a figure that is exactly accounting profit to be onto IFRIC’s agenda. The comment letter argued that it is
within the scope. The latter point is also implied by the possible to interpret IAS 27 as permitting separate accounts
requirement in IAS 12 to disclose an explanation of the to be published when there is a reasonable expectation that
relationship between tax expense and accounting profit. The consolidated accounts will be published shortly. IFRIC
IFRIC further noted that the term ‘taxable profit’ implies a members rejected this approach based on the current text of
notion of a net rather than gross amount. Finally, the IFRIC the standard and reaffirmed the following text, previously
observed that any taxes that are not in the scope of IAS 12 published, of its reasons for not taking the item onto its
are in the scope of IAS 37 Provisions, Contingent Liabilities agenda.
and Contingent Assets. The IFRIC considered whether separate financial statements
However, the IFRIC also noted the variety of taxes that exist issued before consolidated financial statements could be
world-wide and the need for judgement in determining considered to comply with IFRSs.
whether some taxes are income taxes. The IFRIC therefore The IFRIC noted that IAS 27 requires that separate financial
believed that guidance beyond the observations noted above statements should identify the financial statements prepared
could not be developed in a reasonable period of time and in accordance with paragraph 9 of IAS 27 to which they
decided not to take a project on this issue onto its agenda. relate (the consolidated financial statements), unless one of
the exemptions provided by paragraph 10 is applicable.
The IFRIC decided that, since the Standard is clear, it would
not expect diversity in practice and would not take this item
onto its agenda.

Copyright © 2006 International Accounting Standards Committee Foundation 7

 IFRS 2 Share-based Payment – Share plans with
Tentative Agenda Decisions cash alternatives at the discretion of employees:
The IFRIC reviewed the following matters, which the Agenda grant date and vesting periods
Committee had recommended should not be taken onto the The IFRIC considered an employee share plan in which
IFRIC agenda. These tentative decisions, including where employees were provided a choice to have cash at one date
appropriate recommended reasons for not adding it to the or shares at a later date. At the date the transactions were
IFRIC agenda, will be re-discussed at the May 2006 IFRIC entered into, the parties involved understood the terms and
meeting. Constituents who disagree with the proposed conditions of the plans including the formula that would be
reasons, or believe that the explanations may contribute to used to determine the amount of cash to be paid to each
divergent practices, are welcome to communicate those individual employee (or the number of shares to be delivered
concerns by 24 April 2006, preferably by email to: to each individual employee) but the exact amount of cash or
[email protected] or by post to: number of shares would only be known at a future date. The
International Financial Reporting Interpretations Committee IFRIC was asked to confirm the grant date and vesting
First Floor, 30 Cannon Street period for such share plans.
London EC4M 6XH The IFRIC noted that IFRS 2 defines grant date as the date
United Kingdom when there is a shared understanding of the terms and
Communications will be placed on the public record unless conditions. Moreover, IFRS 2 does not require grant date to
confidentiality is requested by the writer. be the date when the exact amount of cash to be paid (or the
exact number of shares to be delivered) is known to the
IFRS 2 Share-based Payment – Scope of IFRS 2: parties involved.
Share plans with cash alternatives at the discretion
of the entity The IFRIC further noted that share-based payment
transactions with cash alternatives at the discretion of the
The IFRIC considered whether an employee share plan in counterparty are addressed in paragraphs 34 - 40 of IFRS 2.
which the employer had the choice of settlement in cash or in Paragraph 35 of IFRS 2 states that, if an entity has granted
shares, and the amount of the settlement did not vary with the counterparty the right to choose whether a share-based
changes in the share price of the entity should be treated as a payment transaction is settled in cash or by issuing equity
share-based payment transaction within the scope of IFRS 2 instruments, the entity has granted a compound financial
Share-based Payment. instrument, which includes a debt component (ie the
The IFRIC noted that IFRS 2 defines a share-based payment counterparty’s right to demand cash payment) and an equity
transaction as a transaction in which the entity receives component (ie the counterparty’s right to demand settlement
goods or services as consideration for equity instruments of in equity instruments). Paragraph 38 of IFRS 2 states that
the entity or amounts that are based on the price of equity the entity shall account separately for goods or services
instruments of the entity. received or acquired in respect of each component of the
compound financial instrument. [The IFRIC, therefore,
IFRIC further noted that the definition of a share-based believed] that the vesting period of the equity component and
payment transaction does not require the exposure of the that of the debt component should be determined separately
entity to be linked to movements in the share price of the and the vesting period of each component may be different.
entity. Moreover, it is clear that IFRS 2 contemplates share-
based payment transactions in which the terms of the [The IFRIC believed] that, since “grant date” is defined in
arrangement provide the entity with a choice of settlement, IFRS 2 and the requirements set out in paragraphs 34 - 40 of
since they are specifically addressed in paragraphs 41 – 43 of IFRS 2 are clear, the issues are not expected to create
IFRS 2. [The IFRIC, therefore, believed] that, although the significant divergence in practice. [The IFRIC, therefore,
amount of the settlement did not vary with changes in the decided] that the issues should not be taken onto the agenda.
share price of the entity, such share plans are share-based IFRS 2 Share-based Payment – Fair value
payment transactions in accordance with IFRS 2 since the measurement of a post-vesting transfer restriction
consideration may be equity instruments of the entity.
The IFRIC received a request in connection with employee
[The IFRIC also believed] that, even in the extreme share purchase plans in which employees can buy shares of
circumstances in which the entity was given a choice of the employing entity at a discount to the market price but are
settlement and the value of the shares that would be not permitted to sell those shares for a certain period beyond
delivered was a fixed monetary amount, those share plans vesting date. The issue was whether the value of such post-
were still within the scope of IFRS 2. vesting restrictions could be based on the “opportunity cost”
[The IFRIC believed] that, since the requirements of IFRS 2 borne by employees, determined based on a two-stage
are clear, the issue is not expected to create significant approach which assumed that employees would (1) sell
divergence in practice. [The IFRIC, therefore, decided] not forward the shares that cannot be disposed of within the
to take the issue onto the agenda. restriction period and (2) buy the same number of freely
traded shares with a personal unsecured loan. The value of
the forward sale (step 1) would reflect a market participant’s
perspective, while the cost of the loan (step 2) would reflect
an employee specific rate. The IFRIC was asked whether
this approach is consistent with the requirements under
IFRS 2.

8 Copyright © 2006 International Accounting Standards Committee Foundation

The IFRIC noted the requirements in paragraph B3 of
Appendix B to IFRS 2, which states that, “if the shares are
subject to restrictions on transfer after vesting date, that
factor shall be taken into account, but only to the extent that
the post-vesting restrictions affect the price that a
knowledgeable, willing market participant would pay for that
share. For example, if the shares are actively traded in a
deep and liquid market, post-vesting transfer restrictions may
have little, if any, effect on the price that a knowledgeable,
willing market participant would pay for those shares.”
Entity-specific and employee-specific assumptions are not
relevant in determining the value of such post-vesting
transfer restrictions. Therefore, [the IFRIC did not believe
that] the approach mentioned in the request was consistent
with the requirements under IFRS 2.
[The IFRIC believed] that, since the requirements of IFRS 2
are clear, the issue was not expected to create significant
divergence in practice. [The IFRIC therefore decided] not to
take the issue onto the agenda.

Future IFRIC meetings

The IFRIC’s meetings are expected to take place in London,
UK, as follows:
2006
• 11 and 12 May
• 6 and 7 July
• 7 and 8 September
• 2 and 3 November
Meeting dates, tentative agendas and additional details
about the next meeting will also be posted to the IASB
Website at www.iasb.org before the meeting. Instructions
for submitting requests for Interpretations are given on the
IASB Website at www.iasb.org/about/ifric.asp

Copyright © 2006 International Accounting Standards Committee Foundation 9