IFRS News in Brief - March 2011

IFRS INTERPRETATIONS COMMITTEE

LATEST DECISIONS SUMMARY

The following is a summarised update of the main issues discussed by the Committee at its meeting in London on 10 and 11 March 2011.

For more information: http://media.ifrs.org/IFRICUpdateMar11.html    

Stripping costs in the production phase of a surface mine

Provided they can be measured reliably and relate to a specific component of ore, such stripping costs should be capitalised to the extent that the benefit created by the stripping activity is expected to be realised in a future period (otherwise they are accounted for as current period costs). The asset will then be depreciated/amortised in a rational and systematic manner over the expected useful life of the specific ore component.


Contingent pricing of property, plant and equipment and intangible assets

On the date of purchase of the asset, if the obligation for the contingent price arises from a contractual agreement, the fair value of the contingent payment should be recognised as a financial liability and included in the cost of the asset. Accounting for subsequent changes to the liability (whether in profit or loss or as an adjustment to the cost of the asset) is still to be discussed. 


Put options written over non-controlling interests

NCI puts should be excluded from IAS 32 scope, thus changing their measurement basis to that used for other derivative contracts under IAS 39/IFRS 9 (ie. at fair value through profit or loss). The scope exclusion would apply only to NCI puts in the consolidated financial statements of the controlling shareholder that are not embedded in another contract and that contain an obligation to settle the contract by delivering cash or another financial asset in exchange for the interest in the subsidiary (ie ‘gross physical settled’).  


INTERNATIONAL ACCOUNTING STANDARDS BOARD

LATEST DECISIONS SUMMARY

The following is a summarised update of the main provisional decisions taken by the IASB at its recent meetings in London, including joint meetings with the FASB:

• London, 14-18 March 2011 (http://media.iasb.org/IASBUpdateMarch2011.html)

• Norwalk, 21-23 March 2011 (http://media.iasb.org/IASBUpdate21-23March2011.html)

• London, 29 March 2011 (http://media.iasb.org/IASBUpdate29March2011.html) 

   

Fair value measurement

IFRS 13, expected in April 2011, would be effective on 1 January 2013, with early application permitted.  Entities would thus be given enough time to make any necessary systems changes to meet the new requirements. 


Financial instruments: hedge accounting (final provisions expected in H2/2011)

It appeared from the comment letter summary that there was strong support for the principle-based approach proposed in the exposure draft as it would resolve many of today's practice problems in applying IAS 39.

Financial instruments: impairment (final provisions expected in H2/2011)

• Expected losses should be estimated with the objective of an expected value that identifies possible outcomes, makes an estimate of the likelihood of each outcome and calculates a probability-weighted average (although other appropriate methods could be used).

• Impairment for loans recognised in the 'good book' upon acquisition when analysed at the individual asset level (even if acquired as part of a portfolio) should be accounted for in the same way as for originated loans. Also, interest income for these assets would be recognised on the basis of contractual cash flows.

• For loans recognised in the 'bad book' upon acquisition, interest income recognised should be based on expected collectible cash flows estimated at the date of acquisition. As a result of limiting the recognition of interest income for these credit-deteriorated assets, a separate impairment expense would not be recognised at the date of acquisition.
   

Insurance contracts (final standard expected in H2/2011)

• No practical expedient for determining the discount rate would be provided.

• Cash flows arising from a participating insurance contract that depend wholly or partly on the performance of specific assets should be adjusted using a discount rate that reflects that dependency.

• Insurance contract assets and liabilities should initially be recognised when the coverage period begins. However, any onerous contract liability determined in the pre-coverage period should be recognised in that pre-coverage period.

• A contract does not transfer significant insurance risk if there is no scenario that has commercial substance in which the insurer can suffer a loss (ie. an excess of the present value of net cash outflows over the present value of the premiums).  

• Embedded derivatives that are contained in a host insurance contract that is not closely related should be accounted for separately (unbundled).

• Risk adjustment shall be the compensation the insurer requires to bear the risk that the ultimate cash flows could exceed those expected, reflecting both favourable and unfavourable changes in the amount and timing of fulfilment cash flows.

• A contract renewal should be treated as a new contract when either the insurer is no longer required to provide coverage, or the existing contract does not confer any substantive rights on the policyholder (ie. when the insurer has the right or the practical ability to set a price that fully reflects that risk).

• All renewal rights should be considered in determining the contract boundary whether arising from a contract, from law or from regulation.
  

  The measurement of an insurance contract would reflect all cash flows arising within the boundary of that contract. Conversely, cash flows arising beyond the boundary of existing contracts would be treated as arising from a future contract.

Leases (final standard expected in H2/2011)

• The final standard would not include guidance for distinguishing a lease from a purchase/sale of an underlying asset. Instead, leases will be clearly defined and if an arrangement does not contain a lease, it should be accounted for in accordance with other applicable standards (PPE or revenue).

• If a lessee has a significant economic incentive to exercise a purchase option, the exercise price of the purchase option should be included in the measurement of the lessee's liability to make lease payments and the lessor's right to receive lease payments. The right-of-use asset recognised by the lessee should then be amortised over the economic life of the underlying asset, rather than over the lease term.

• For all short-term leases (ie. leases with, at the date of commencement, a maximum possible term of 12 months, including any options to renew), lessees and lessors may elect not to recognise lease assets/liabilities and to recognise lease payments in profit or loss on a straight-line basis over the lease term (unless another systematic and rational basis is more representative of the time pattern in which use is derived from the underlying asset).

• Lease assets and lease liabilities should be recognised and initially measured at the date of commencement of the lease, using a discount rate calculated at that date. All lease incentives would be deducted by the lessee from the initial measurement of the right-of-use asset.

• Until the date of commencement, onerous lease contracts would be in the scope of IAS 37.

• Lessees and lessors should capitalise initial direct costs (in the carrying amount of the right-of-use asset and the right to receive lease payments respectively), being those costs that are directly attributable to negotiating and arranging a lease that would not have been incurred had the lease transaction not been made.

• To initially measure lease payments at present value:

  • the lessor would use the discount rate he is charging the lessee, which  could be the lessee's incremental borrowing rate, the yield on the property or the rate implicit in the lease; the latter should be used in case of more than one indicator of the rate charged

  • the lessee would use the rate charged by the lessor when available, otherwise the lessee would use its incremental borrowing rate.

• The lease and the non-lease components of a contract should be separately accounted for. In allocating payments in a contract between the two identified components, whereas the lessor should refer to the guidance on revenue recognition, lessee’s accounting would depend on the availability of observable purchase prices of the components.  

• A transaction will be accounted for as a sale and then a leaseback when a sale has occurred (based on the control criteria of the revenue recognition project), otherwise it will be accounted for as a financing. In a sale and leaseback, gains and losses should be recognised when the sale occurs if the consideration is at fair value, otherwise the assets, liabilities, gains and losses should be adjusted to reflect current market rentals. The seller/lessee sells the entire underlying asset and leases back a right-of-use asset relating to part of the underlying asset (the 'whole asset' approach).

  
  

Revenue recognition (final standard expected in H2/2011)

• Unless the period between payment by the customer and transfer of the promised goods/services is one year or less, the promised amount of consideration should be adjusted to reflect the time value of money if the contract includes a financing component that is significant to that contract (ie. the amount of customer consideration would be substantially different if the customer paid in cash at the time of transfer of the goods/services, there is a significant timing difference between transfer of the promised goods/services to the customer and payment by the customer, and the interest rate that is explicit or implicit within the contract is significant).
  

• Revenue would be recognised at the stated contract price, without reflecting the customer's credit risk.  Thus, assessment of the customer's ability to pay the promised amount of consideration would not be a revenue recognition criterion. Any expected impairment loss from contracts with customers should be recognised as an allowance presented in profit or loss as a separate line item adjacent to the revenue line item (as contra revenue).

Post-employment benefits

The forthcoming amendments of IAS 19 would be effective from 1 January 2013.


Other comprehensive income

The forthcoming amendments of IAS 1 would be effective from 1 January 2012.


UPCOMING COMMENT DEADLINES

 

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