IFRIC update October 2003

IFRIC met on 30 September and 1 October 2003 and discussed the following issues, as outlined in its October update .

The next meeting is on 2-3 December 2003.

Decommissioning funds
IFRIC voted on a draft Interpretation on the accounting for decommissioning and environmental rehabilitation funds. The IFRIC voted to issue the draft Interpretation subject to some minor changes.
Decommissioning funds have been set up in certain countries for heavily pollutant industries where clean-up is required at a time in the distant future, e.g. the nuclear industry in Switzerland, where companies are required by law to contribute regular amounts to a central fund that will then reimburse the costs of decommissioning when these are incurred. The draft Interpretation addresses the accounting for contributions made to such funds and the related decommissioning liabilities, and is expected to be exposed for comment before the end of 2003.

Emission rights
IFRIC discussed the comments received on D1 Emission rights. It confirmed some of its earlier decisions, namely that emission rights are intangible assets under IAS 38, and that where these rights are granted at less than fair value by a government, the difference is a government grant. The IFRIC also discussed some of the strange consequences of D1 - emission rights may be revalued through equity under IAS 38, but movements in the related provision go to the income statement - and to solve this problem, are considering asking the IASB to create a special category of intangibles that can be revalued through the income statement. However, given everything else the IASB has on its plate at the moment, it seems likely that D1 will be issued in substantially its present form.

Commencing to apply IAS 29 Financial Reporting in Hyperinflationary Economies
Some initial discussions on fairly technical aspects of IAS 29 - the IFRIC has agreed to take on a project.

IAS 11 Constructions contracts: combining and segmenting contracts
A proposed draft interpretation was presented in September, based on SOP 81-1 (US GAAP). The IFRIC wants to achieve convergence with the FASB on this issue, but is wary of appearing to amend (rather than interpret) IAS 11. Sensitivities to do with IAS 18 Revenue were also discussed. The project will go forwards with another proposed Interpretation.

IAS 19 Employee Benefits: Defined contribution plans with a minimum return guarantee
Progress was made on a draft interpretation on this type of plan. These pension plans - where the employer guarantees a minimum return on the contributions made in what is otherwise a defined contribution scheme - are not used (to my knowledge) in the UK.

IAS 19 Employee Benefits: Multi-employer plans
This Interpretation (which will be voted on at the next IFRIC meeting) will contain some potentially useful guidance for the many UK companies with group multi-employer schemes. As background, IAS 19.34 states that defined benefit plans that pool the assets contributed by various enterprises under common control, for example a parent and its subsidiaries, are not multi-employer plans. Therefore, such plans are treated as defined benefit plans - i.e. the employers under common control cannot take advantage of IAS 19.30 which permits employers to account for some multi-employer defined benefit plans as defined contribution plans. The effect of the current guidance in IAS 19 is that all UK companies preparing accounts under IFRS must separately account for their individual share of the assets and liabilities of any group pension scheme. Since actuaries have been saying for years (and in particular, since the transitional disclosure requirements of FRS 17 came into force) that it is not possible to allocate out the group scheme assets and liabilities between the various employing companies, this will cause some significant problems. The immediate problem is for listed companies that participate in group pension plans, who must prepare their 2005 financial statements under IFRS. But there is a huge problem from 2005 onwards when companies start voluntarily preparing individual statutory accounts under IFRS.

This Interpretation will give some guidance on how to measure an appropriate share of the surplus or deficit in a multi-employer plan - and seems to be narrowing the circumstances in which the plan participants can claim that there is not enough information to account for a multi-employer plan as a defined benefit plan.

IAS 41 Agriculture: Recognition and measurement of Biological Assets
The IFRIC discussed whether to take on some IAS 41 issues.

Rights of use
An exposure draft on Determining whether an Arrangement contains a Lease should be available later in October. Determining whether arrangement contains a lease will become crucially important once the IASB's overall project to recognise all leases on balance sheet comes to fruition - this draft Interpretation will be worth keeping an eye on for those companies entering into e.g. management contracts with some element of a lease. The IFRIC has identified three key elements that are necessary for an arrangement to contain a lease:
(a) fulfillment of the agreement depends on use of a specific item or items
(b) the agreement conveys a right to use the asset for a specific period that allows the purchaser to exclude others from using the assets
(c) the purchaser is obliged to make payments to the supplier for the time that the asset is made available rather than for actual use of the asset.

I will await the DI with interest - these three criteria would seem to bring a very wide range of contracts within the scope of any future leasing standard.

Service concession agreements
The IFRIC discussed various issues in relation to service concession agreements, and agreed to take five issues onto its agenda, including whether the IAS 17 lease accounting model is relevant to the accounting treatment of service concession. The IFRIC decided not to address the treatment of bid and other pre-contract costs, so it does not look like an IAS equivalent of UITF 34 Pre-contract costs will be forthcoming in the near future.