IFRIC Interpretation 1

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IFRIC Interpretation 1
Changes in Existing Decommissioning,
Restoration and Similar Liabilities
In May 2004 the International Accounting Standards Board issued IFRIC 1Changes in Existing
Decommissioning, Restoration and Similar Liabilities. It was developed by the Interpretations
Committee.
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CONTENTS
from paragraph
IFRIC INTERPRETATION 1
CHANGES IN EXISTING DECOMMISSIONING, RESTORATION
AND SIMILAR LIABILITIES
REFERENCES
BACKGROUND 1
SCOPE 2
ISSUE 3
CONSENSUS 4
EFFECTIVE DATE 9
TRANSITION 10
APPENDIX
Amendments to IFRS 1First-time Adoption of International Financial
Reporting Standards
FOR  THE  ACCOMPANYING  DOCUMENTS  LISTED  BELOW, SEE  PART  B  OF  THIS
EDITION
ILLUSTRATIVE  EXAMPLES
BASIS  FOR  CONCLUSIONS
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IFRIC Interpretation 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities
(IFRIC 1) is set out in paragraphs 1–10 and the Appendix. IFRIC 1 is accompanied by
illustrative examples and a Basis for Conclusions. The scope and authority of
Interpretations are set out in paragraphs 2 and 7–16 of thePreface to International Financial
Reporting Standards.
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IFRIC Interpretation 1
Changes in Existing Decommissioning, Restoration and
Similar Liabilities
References
● IAS 1Presentation of Financial Statements(as revised in 2007)
● IAS 8Accounting Policies, Changes in Accounting Estimates and Errors
● IAS 16Property, Plant and Equipment(as revised in 2003)
● IAS 23Borrowing Costs
● IAS 36Impairment of Assets (as revised in 2004)
● IAS 37Provisions, Contingent Liabilities and Contingent Assets
Background
1 Many entities have obligations to dismantle, remove and restore items of
property, plant and equipment. In this Interpretation such obligations are
referred to as ‘decommissioning, restoration and similar liabilities’. Under
IAS 16, the cost of an item of property, plant and equipment includes the initial
estimate of the costs of dismantling and removing the item and restoring the
site on which it is located, the obligation for which an entity incurs either when
the item is acquired or as a consequence of having used the item during a
particular period for purposes other than to produce inventories during that
period. IAS 37 contains requirements on how to measure decommissioning,
restoration and similar liabilities. This Interpretation provides guidance on how
to account for the effect of changes in the measurement of existing
decommissioning, restoration and similar liabilities.
Scope
2 This Interpretation applies to changes in the measurement of any existing
decommissioning, restoration or similar liability that is both:
(a) recognised as part of the cost of an item of property, plant and
equipment in accordance with IAS 16; and
(b) recognised as a liability in accordance with IAS 37.
For example, a decommissioning, restoration or similar liability may exist for
decommissioning a plant, rehabilitating environmental damage in extractive
industries, or removing equipment.
Issue
3 This Interpretation addresses how the effect of the following events that change
the measurement of an existing decommissioning, restoration or similar
liability should be accounted for:
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(a) a change in the estimated outflow of resources embodying economic
benefits (eg cash flows) required to settle the obligation;
(b) a change in the current market-based discount rate as defined in
paragraph 47 of IAS 37 (this includes changes in the time value of money
and the risks specific to the liability); and
(c) an increase that reflects the passage of time (also referred to as the
unwinding of the discount).
Consensus
4 Changes in the measurement of an existing decommissioning, restoration and
similar liability that result from changes in the estimated timing or amount of
the outflow of resources embodying economic benefits required to settle the
obligation, or a change in the discount rate, shall be accounted for in
accordance with paragraphs 5–7 below.
5 If the related asset is measured using the cost model:
(a) subject to (b), changes in the liability shall be added to, or deducted
from, the cost of the related asset in the current period.
(b) the amount deducted from the cost of the asset shall not exceed its
carrying amount. If a decrease in the liability exceeds the carrying
amount of the asset, the excess shall be recognised immediately in profit
or loss.
(c) if the adjustment results in an addition to the cost of an asset, the entity
shall consider whether this is an indication that the new carrying
amount of the asset may not be fully recoverable. If it is such an
indication, the entity shall test the asset for impairment by estimating its
recoverable amount, and shall account for any impairment loss, in
accordance with IAS 36.
6 If the related asset is measured using the revaluation model:
(a) changes in the liability alter the revaluation surplus or deficit previously
recognised on that asset, so that:
(i) a decrease in the liability shall (subject to (b)) be recognised in
other comprehensive income and increase the revaluation
surplus within equity, except that it shall be recognised in profit
or loss to the extent that it reverses a revaluation deficit on the
asset that was previously recognised in profit or loss;
(ii) an increase in the liability shall be recognised in profit or loss,
except that it shall be recognised in other comprehensive income
and reduce the revaluation surplus within equity to the extent of
any credit balance existing in the revaluation surplus in respect
of that asset.
(b) in the event that a decrease in the liability exceeds the carrying amount
that would have been recognised had the asset been carried under the
cost model, the excess shall be recognised immediately in profit or loss.
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(c) a change in the liability is an indication that the asset may have to be
revalued in order to ensure that the carrying amount does not differ
materially from that which would be determined using fair value at the
end of the reporting period. Any such revaluation shall be taken into
account in determining the amounts to be recognised in profit or loss or
in other comprehensive income under (a). If a revaluation is necessary,
all assets of that class shall be revalued.
(d) IAS 1 requires disclosure in the statement of comprehensive income of
each component of other comprehensive income or expense.
In complying with this requirement, the change in the revaluation
surplus arising from a change in the liability shall be separately
identified and disclosed as such.
7 The adjusted depreciable amount of the asset is depreciated over its useful life.
Therefore, once the related asset has reached the end of its useful life, all
subsequent changes in the liability shall be recognised in profit or loss as they
occur. This applies under both the cost model and the revaluation model.
8 The periodic unwinding of the discount shall be recognised in profit or loss as a
finance cost as it occurs. Capitalisation under IAS 23 is not permitted.
Effective date
9 An entity shall apply this Interpretation for annual periods beginning on or
after 1 September 2004. Earlier application is encouraged. If an entity applies
the Interpretation for a period beginning before 1 September 2004, it shall
disclose that fact.
9A IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs. In
addition it amended paragraph 6. An entity shall apply those amendments for
annual periods beginning on or after 1 January 2009. If an entity applies IAS 1
(revised 2007) for an earlier period, the amendments shall be applied for that
earlier period.
Transition
10 Changes in accounting policies shall be accounted for according to the
requirements of IAS 8Accounting Policies, Changes in Accounting Estimates and Errors.
1
1 If an entity applies this Interpretation for a period beginning before 1 January 2005, the entity shall
follow the requirements of the previous version of IAS 8, which was entitledNet Profit or Loss for the
Period, Fundamental Errors and Changes in Accounting Policies, unless the entity is applying the revised
version of that Standard for that earlier period.
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Appendix
Amendments to IFRS 1First-time Adoption of International
Financial Reporting Standards
The amendments in this appendix shall be applied for annual periods beginning on or after
1 September 2004. If an entity applies this Interpretation for an earlier period, these amendments
shall be applied for that earlier period.
*****
The amendments contained in this appendix when this Interpretation was issued in 2004 have been
incorporated into IFRS 1 as issued on and after 27 May 2004. In November 2008 a revised version of
IFRS 1 was issued.
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IFRIC Interpretation 2
Members’ Shares in Co-operative Entities
and Similar Instruments
In November 2004 the International Accounting Standards Board issued IFRIC 2 Members’
Shares in Co-operative Entities and Similar Instruments. It was developed by the Interpretations
Committee.
Other Standards have made minor consequential amendments to IFRIC 2. They include
Annual Improvements to IFRSs 2009–2011 Cycle(issued May 2012), IFRS 13 Fair Value Measurement
(issued May 2011), IFRS 9Financial Instruments(Hedge Accounting and amendments to IFRS 9,
IFRS 7 and IAS 39) (issued November 2013) and IFRS 9Financial Instruments(issued July 2014).
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CONTENTS
from paragraph
IFRIC INTERPRETATION 2
MEMBERS’ SHARES IN CO-OPERATIVE ENTITIES AND
SIMILAR INSTRUMENTS
REFERENCES
BACKGROUND 1
SCOPE 3
ISSUE 4
CONSENSUS 5
DISCLOSURE 13
EFFECTIVE DATE 14
APPENDIX
Examples of application of the consensus
FOR  THE  ACCOMPANYING  DOCUMENTS  LISTED  BELOW, SEE  PART  B  OF  THIS
EDITION
BASIS  FOR  CONCLUSIONS
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IFRIC Interpretation 2Members’ Shares in Co-operative Entities and Similar Instruments(IFRIC 2)
is set out in paragraphs 1–19 and the Appendix. IFRIC 2 is accompanied by a Basis for
Conclusions. The scope and authority of Interpretations are set out in paragraphs 2 and
7–16 of thePreface to International Financial Reporting Standards.
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IFRIC Interpretation 2
Members’ Shares in Co-operative Entities and Similar
Instruments
References
● IFRS 9Financial Instruments
● IFRS 13Fair Value Measurement
● IAS 32Financial Instruments: Disclosure and Presentation(as revised in 2003)
1
Background
1 Co-operatives and other similar entities are formed by groups of persons to meet
common economic or social needs. National laws typically define a co-operative
as a society endeavouring to promote its members’ economic advancement by
way of a joint business operation (the principle of self-help). Members’ interests
in a co-operative are often characterised as members’ shares, units or the like,
and are referred to below as ‘members’ shares’.
2 IAS 32 establishes principles for the classification of financial instruments as
financial liabilities or equity. In particular, those principles apply to the
classification of puttable instruments that allow the holder to put those
instruments to the issuer for cash or another financial instrument.
The application of those principles to members’ shares in co-operative entities
and similar instruments is difficult. Some of the International Accounting
Standards Board’s constituents have asked for help in understanding how the
principles in IAS 32 apply to members’ shares and similar instruments that have
certain features, and the circumstances in which those features affect the
classification as liabilities or equity.
Scope
3 This Interpretation applies to financial instruments within the scope of IAS 32,
including financial instruments issued to members of co-operative entities that
evidence the members’ ownership interest in the entity. This Interpretation
does not apply to financial instruments that will or may be settled in the entity’s
own equity instruments.
Issue
4 Many financial instruments, including members’ shares, have characteristics of
equity, including voting rights and rights to participate in dividend
distributions. Some financial instruments give the holder the right to request
1 In August 2005, IAS 32 was amended as IAS 32Financial Instruments: Presentation. In February 2008 the
IASB amended IAS 32 by requiring instruments to be classified as equity if those instruments have
all the features and meet the conditions in paragraphs 16A and 16B or paragraphs 16C and 16D of
IAS 32.
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redemption for cash or another financial asset, but may include or be subject to
limits on whether the financial instruments will be redeemed. How should
those redemption terms be evaluated in determining whether the financial
instruments should be classified as liabilities or equity?
Consensus
5 The contractual right of the holder of a financial instrument (including
members’ shares in co-operative entities) to request redemption does not, in
itself, require that financial instrument to be classified as a financial liability.
Rather, the entity must consider all of the terms and conditions of the financial
instrument in determining its classification as a financial liability or equity.
Those terms and conditions include relevant local laws, regulations and the
entity’s governing charter in effect at the date of classification, but not expected
future amendments to those laws, regulations or charter.
6 Members’ shares that would be classified as equity if the members did not have a
right to request redemption are equity if either of the conditions described in
paragraphs 7 and 8 is present or the members’ shares have all the features and
meet the conditions in paragraphs 16A and 16B or paragraphs 16C and 16D of
IAS 32. Demand deposits, including current accounts, deposit accounts and
similar contracts that arise when members act as customers are financial
liabilities of the entity.
7 Members’ shares are equity if the entity has an unconditional right to refuse
redemption of the members’ shares.
8 Local law, regulation or the entity’s governing charter can impose various types
of prohibitions on the redemption of members’ shares, eg unconditional
prohibitions or prohibitions based on liquidity criteria. If redemption is
unconditionally prohibited by local law, regulation or the entity’s governing
charter, members’ shares are equity. However, provisions in local law,
regulation or the entity’s governing charter that prohibit redemption only if
conditions—such as liquidity constraints—are met (or are not met) do not result
in members’ shares being equity.
9 An unconditional prohibition may be absolute, in that all redemptions are
prohibited. An unconditional prohibition may be partial, in that it prohibits
redemption of members’ shares if redemption would cause the number of
members’ shares or amount of paid-in capital from members’ shares to fall
below a specified level. Members’ shares in excess of the prohibition against
redemption are liabilities, unless the entity has the unconditional right to refuse
redemption as described in paragraph 7 or the members’ shares have all the
features and meet the conditions in paragraphs 16A and 16B or paragraphs 16C
and 16D of IAS 32. In some cases, the number of shares or the amount of paid-in
capital subject to a redemption prohibition may change from time to time.
Such a change in the redemption prohibition leads to a transfer between
financial liabilities and equity.
10 At initial recognition, the entity shall measure its financial liability for
redemption at fair value. In the case of members’ shares with a redemption
feature, the entity measures the fair value of the financial liability for
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redemption at no less than the maximum amount payable under the
redemption provisions of its governing charter or applicable law discounted
from the first date that the amount could be required to be paid (see example 3).
11 As required by paragraph 35 of IAS 32, distributions to holders of equity
instruments are recognised directly in equity. Interest, dividends and other
returns relating to financial instruments classified as financial liabilities are
expenses, regardless of whether those amounts paid are legally characterised as
dividends, interest or otherwise.
12 The Appendix, which is an integral part of the consensus, provides examples of
the application of this consensus.
Disclosure
13 When a change in the redemption prohibition leads to a transfer between
financial liabilities and equity, the entity shall disclose separately the amount,
timing and reason for the transfer.
Effective date
14 The effective date and transition requirements of this Interpretation are the
same as those for IAS 32 (as revised in 2003). An entity shall apply this
Interpretation for annual periods beginning on or after 1 January 2005. If an
entity applies this Interpretation for a period beginning before 1 January 2005, it
shall disclose that fact. This Interpretation shall be applied retrospectively.
14A An entity shall apply the amendments in paragraphs 6, 9, A1 and A12 for annual
periods beginning on or after 1 January 2009. If an entity appliesPuttable
Financial Instruments and Obligations Arising on Liquidation(Amendments to IAS 32
and IAS 1), issued in February 2008, for an earlier period, the amendments in
paragraphs 6, 9, A1 and A12 shall be applied for that earlier period.
15 [Deleted]
16 IFRS 13, issued in May 2011, amended paragraph A8. An entity shall apply that
amendment when it applies IFRS 13.
17 Annual Improvements 2009–2011 Cycle, issued in May 2012, amended paragraph 11.
An entity shall apply that amendment retrospectively in accordance with IAS 8
Accounting Policies, Changes in Accounting Estimates and Errorsfor annual periods
beginning on or after 1 January 2013. If an entity applies that amendment to
IAS 32 as a part of theAnnual Improvements 2009–2011 Cycle(issued in May 2012) for
an earlier period, the amendment in paragraph 11 shall be applied for that
earlier period.
18 [Deleted]
19 IFRS 9, as issued in July 2014, amended paragraphs A8 and A10 and deleted
paragraphs 15 and 18. An entity shall apply those amendments when it applies
IFRS 9.
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Appendix
Examples of application of the consensus
This appendix is an integral part of the Interpretation.
A1 This appendix sets out seven examples of the application of the IFRIC consensus.
The examples do not constitute an exhaustive list; other fact patterns are
possible. Each example assumes that there are no conditions other than those
set out in the facts of the example that would require the financial instrument
to be classified as a financial liability and that the financial instrument does not
have all the features or does not meet the conditions in paragraphs 16A and 16B
or paragraphs 16C and 16D of IAS 32.
Unconditional right to refuse redemption (paragraph 7)
Example 1
Facts
A2 The entity’s charter states that redemptions are made at the sole discretion of
the entity. The charter does not provide further elaboration or limitation on
that discretion. In its history, the entity has never refused to redeem members’
shares, although the governing board has the right to do so.
Classification
A3 The entity has the unconditional right to refuse redemption and the members’
shares are equity. IAS 32 establishes principles for classification that are based
on the terms of the financial instrument and notes that a history of, or intention
to make, discretionary payments does not trigger liability classification.
Paragraph AG26 of IAS 32 states:
When preference shares are non-redeemable, the appropriate classification is
determined by the other rights that attach to them. Classification is based on an
assessment of the substance of the contractual arrangements and the definitions of
a financial liability and an equity instrument. When distributions to holders of
the preference shares, whether cumulative or non-cumulative, are at the discretion
of the issuer, the shares are equity instruments. The classification of a preference
share as an equity instrument or a financial liability is not affected by, for
example:
(a) a history of making distributions;
(b) an intention to make distributions in the future;
(c) a possible negative impact on the price of ordinary shares of the issuer if
distributions are not made (because of restrictions on paying dividends on
the ordinary shares if dividends are not paid on the preference shares);
(d) the amount of the issuer’s reserves;
(e) an issuer’s expectation of a profit or loss for a period; or
(f) an ability or inability of the issuer to influence the amount of its profit or
loss for the period.
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Example 2
Facts
A4 The entity’s charter states that redemptions are made at the sole discretion of
the entity. However, the charter further states that approval of a redemption
request is automatic unless the entity is unable to make payments without
violating local regulations regarding liquidity or reserves.
Classification
A5 The entity does not have the unconditional right to refuse redemption and the
members’ shares are a financial liability. The restrictions described above are
based on the entity’s ability to settle its liability. They restrict redemptions only
if the liquidity or reserve requirements are not met and then only until such
time as they are met. Hence, they do not, under the principles established in
IAS 32, result in the classification of the financial instrument as equity.
Paragraph AG25 of IAS 32 states:
Preference shares may be issued with various rights. In determining whether a
preference share is a financial liability or an equity instrument, an issuer assesses
the particular rights attaching to the share to determine whether it exhibits the
fundamental characteristic of a financial liability. For example, a preference share
that provides for redemption on a specific date or at the option of the holder
contains a financial liability because the issuer has an obligation to transfer
financial assets to the holder of the share. The potential inability of an issuer to satisfy
an obligation to redeem a preference share when contractually required to do so, whether
because of a lack of funds, a statutory restriction or insufficient profits or reserves, does not
negate the obligation. [Emphasis added]
Prohibitions against redemption (paragraphs 8 and 9)
Example 3
Facts
A6 A co-operative entity has issued shares to its members at different dates and for
different amounts in the past as follows:
(a) 1 January 20X1 100,000 shares at CU10 each (CU1,000,000);
(b) 1 January 20X2 100,000 shares at CU20 each (a further CU2,000,000, so
that the total for shares issued is CU3,000,000).
Shares are redeemable on demand at the amount for which they were issued.
A7 The entity’s charter states that cumulative redemptions cannot exceed 20 per
cent of the highest number of its members’ shares ever outstanding. At
31 December 20X2 the entity has 200,000 of outstanding shares, which is the
highest number of members’ shares ever outstanding and no shares have been
redeemed in the past. On 1 January 20X3 the entity amends its governing
charter and increases the permitted level of cumulative redemptions to 25 per
cent of the highest number of its members’ shares ever outstanding.
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Classification
Before the governing charter is amended
A8 Members’ shares in excess of the prohibition against redemption are financial
liabilities. The co-operative entity measures this financial liability at fair value
at initial recognition. Because these shares are redeemable on demand, the
co-operative entity measures the fair value of such financial liabilities in
accordance with paragraph 47 of IFRS 13: ‘The fair value of a financial liability
with a demand feature (eg a demand deposit) is not less than the amount
payable on demand …’. Accordingly, the co-operative entity classifies as financial
liabilities the maximum amount payable on demand under the redemption
provisions.
A9 On 1 January 20X1 the maximum amount payable under the redemption
provisions is 20,000 shares at CU10 each and accordingly the entity classifies
CU200,000 as financial liability and CU800,000 as equity. However, on 1 January
20X2 because of the new issue of shares at CU20, the maximum amount payable
under the redemption provisions increases to 40,000 shares at CU20 each.
The issue of additional shares at CU20 creates a new liability that is measured on
initial recognition at fair value. The liability after these shares have been issued
is 20 per cent of the total shares in issue (200,000), measured at CU20, or
CU800,000. This requires recognition of an additional liability of CU600,000. In
this example no gain or loss is recognised. Accordingly the entity now classifies
CU800,000 as financial liabilities and CU2,200,000 as equity. This example
assumes these amounts are not changed between 1 January 20X1 and
31 December 20X2.
After the governing charter is amended
A10 Following the change in its governing charter the co-operative entity can now be
required to redeem a maximum of 25 per cent of its outstanding shares or a
maximum of 50,000 shares at CU20 each. Accordingly, on 1 January 20X3 the
co-operative entity classifies as financial liabilities an amount of CU1,000,000
being the maximum amount payable on demand under the redemption
provisions, as determined in accordance with paragraph 47 of IFRS 13. It
therefore transfers on 1 January 20X3 from equity to financial liabilities an
amount of CU200,000, leaving CU2,000,000 classified as equity. In this example
the entity does not recognise a gain or loss on the transfer.
Example 4
Facts
A11 Local law governing the operations of co-operatives, or the terms of the entity’s
governing charter, prohibit an entity from redeeming members’ shares if, by
redeeming them, it would reduce paid-in capital from members’ shares below
75 per cent of the highest amount of paid-in capital from members’ shares.
The highest amount for a particular co-operative is CU1,000,000. At the end of
the reporting period the balance of paid-in capital is CU900,000.
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Classification
A12 In this case, CU750,000 would be classified as equity and CU150,000 would be
classified as financial liabilities. In addition to the paragraphs already cited,
paragraph 18(b) of IAS 32 states in part:
… a financial instrument that gives the holder the right to put it back to the issuer
for cash or another financial asset (a ‘puttable instrument’) is a financial liability,
except for those instruments classified as equity instruments in accordance with
paragraphs 16A and 16B or paragraphs 16C and 16D. The financial instrument is a
financial liability even when the amount of cash or other financial assets is
determined on the basis of an index or other item that has the potential to
increase or decrease. The existence of an option for the holder to put the
instrument back to the issuer for cash or another financial asset means that the
puttable instrument meets the definition of a financial liability, except for those
instruments classified as equity instruments in accordance with paragraphs 16A
and 16B or paragraphs 16C and 16D.
A13 The redemption prohibition described in this example is different from the
restrictions described in paragraphs 19 and AG25 of IAS 32. Those restrictions
are limitations on the ability of the entity to pay the amount due on a financial
liability, ie they prevent payment of the liability only if specified conditions are
met. In contrast, this example describes an unconditional prohibition on
redemptions beyond a specified amount, regardless of the entity’s ability to
redeem members’ shares (eg given its cash resources, profits or distributable
reserves). In effect, the prohibition against redemption prevents the entity from
incurring any financial liability to redeem more than a specified amount of
paid-in capital. Therefore, the portion of shares subject to the redemption
prohibition is not a financial liability. While each member’s shares may be
redeemable individually, a portion of the total shares outstanding is not
redeemable in any circumstances other than liquidation of the entity.
Example 5
Facts
A14 The facts of this example are as stated in example 4. In addition, at the end of
the reporting period, liquidity requirements imposed in the local jurisdiction
prevent the entity from redeeming any members’ shares unless its holdings of
cash and short-term investments are greater than a specified amount. The effect
of these liquidity requirements at the end of the reporting period is that the
entity cannot pay more than CU50,000 to redeem the members’ shares.
Classification
A15 As in example 4, the entity classifies CU750,000 as equity and CU150,000 as a
financial liability. This is because the amount classified as a liability is based on
the entity’s unconditional right to refuse redemption and not on conditional
restrictions that prevent redemption only if liquidity or other conditions are not
met and then only until such time as they are met. The provisions of
paragraphs 19 and AG25 of IAS 32 apply in this case.
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Example 6
Facts
A16 The entity’s governing charter prohibits it from redeeming members’ shares,
except to the extent of proceeds received from the issue of additional members’
shares to new or existing members during the preceding three years. Proceeds
from issuing members’ shares must be applied to redeem shares for which
members have requested redemption. During the three preceding years, the
proceeds from issuing members’ shares have been CU12,000 and no member’s
shares have been redeemed.
Classification
A17 The entity classifies CU12,000 of the members’ shares as financial liabilities.
Consistently with the conclusions described in example 4, members’ shares
subject to an unconditional prohibition against redemption are not financial
liabilities. Such an unconditional prohibition applies to an amount equal to the
proceeds of shares issued before the preceding three years, and accordingly, this
amount is classified as equity. However, an amount equal to the proceeds from
any shares issued in the preceding three years is not subject to an unconditional
prohibition on redemption. Accordingly, proceeds from the issue of members’
shares in the preceding three years give rise to financial liabilities until they are
no longer available for redemption of members’ shares. As a result the entity
has a financial liability equal to the proceeds of shares issued during the three
preceding years, net of any redemptions during that period.
Example 7
Facts
A18 The entity is a co-operative bank. Local law governing the operations of
co-operative banks state that at least 50 per cent of the entity’s total ‘outstanding
liabilities’ (a term defined in the regulations to include members’ share
accounts) has to be in the form of members’ paid-in capital. The effect of the
regulation is that if all of a co-operative’s outstanding liabilities are in the form
of members’ shares, it is able to redeem them all. On 31 December 20X1 the
entity has total outstanding liabilities of CU200,000, of which CU125,000
represent members’ share accounts. The terms of the members’ share accounts
permit the holder to redeem them on demand and there are no limitations on
redemption in the entity’s charter.
Classification
A19 In this example members’ shares are classified as financial liabilities.
The redemption prohibition is similar to the restrictions described in
paragraphs 19 and AG25 of IAS 32. The restriction is a conditional limitation on
the ability of the entity to pay the amount due on a financial liability, ie they
prevent payment of the liability only if specified conditions are met. More
specifically, the entity could be required to redeem the entire amount of
members’ shares (CU125,000) if it repaid all of its other liabilities (CU75,000).
Consequently, the prohibition against redemption does not prevent the entity
from incurring a financial liability to redeem more than a specified number of
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members’ shares or amount of paid-in capital. It allows the entity only to defer
redemption until a condition is met, ie the repayment of other liabilities.
Members’ shares in this example are not subject to an unconditional prohibition
against redemption and are therefore classified as financial liabilities.
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IFRIC Interpretation 4
Determining whether an Arrangement
contains a Lease
In December 2004 the International Accounting Standards Board issued IFRIC 4Determining
whether an Arrangement contains a Lease. It was developed by the Interpretations Committee.
Other Standards have made minor consequential amendments to IFRIC 4, including IFRS 13
Fair Value Measurement(issued May 2011).
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CONTENTS
from paragraph
IFRIC INTERPRETATION 4
DETERMINING WHETHER AN ARRANGEMENT CONTAINS
A LEASE
REFERENCES
BACKGROUND 1
SCOPE 4
ISSUES 5
CONSENSUS 6
EFFECTIVE DATE 16
TRANSITION 17
APPENDIX
Amendments to IFRS 1First-time Adoption of International Financial
Reporting Standards
FOR  THE  ACCOMPANYING  DOCUMENTS  LISTED  BELOW, SEE  PART  B  OF  THIS
EDITION
ILLUSTRATIVE  EXAMPLES
BASIS  FOR  CONCLUSIONS
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IFRIC Interpretation 4Determining whether an Arrangement contains a Lease(IFRIC 4) is set out
in paragraphs 1–17 and the Appendix. IFRIC 4 is accompanied by illustrative examples
and a Basis for Conclusions. The scope and authority of Interpretations are set out in
paragraphs 2 and 7–16 of thePreface to International Financial Reporting Standards.
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IFRIC Interpretation 4
Determining whether an Arrangement contains a Lease
References
● IFRS 13Fair Value Measurement
● IAS 8Accounting Policies, Changes in Accounting Estimates and Errors
● IAS 16Property, Plant and Equipment(as revised in 2003)
● IAS 17Leases(as revised in 2003)
● IAS 38Intangible Assets (as revised in 2004)
● IFRIC 12Service Concession Arrangements
Background
1 An entity may enter into an arrangement, comprising a transaction or a series of
related transactions, that does not take the legal form of a lease but conveys a
right to use an asset (eg an item of property, plant or equipment) in return for a
payment or series of payments. Examples of arrangements in which one entity
(the supplier) may convey such a right to use an asset to another entity
(the purchaser), often together with related services, include:
● outsourcing arrangements (eg the outsourcing of the data processing
functions of an entity).
● arrangements in the telecommunications industry, in which suppliers of
network capacity enter into contracts to provide purchasers with rights
to capacity.
● take-or-pay and similar contracts, in which purchasers must make
specified payments regardless of whether they take delivery of the
contracted products or services (eg a take-or-pay contract to acquire
substantially all of the output of a supplier’s power generator).
2 This Interpretation provides guidance for determining whether such
arrangements are, or contain, leases that should be accounted for in accordance
with IAS 17. It does not provide guidance for determining how such a lease
should be classified under that Standard.
3 In some arrangements, the underlying asset that is the subject of the lease is a
portion of a larger asset. This Interpretation does not address how to determine
when a portion of a larger asset is itself the underlying asset for the purposes of
applying IAS 17. Nevertheless, arrangements in which the underlying asset
would represent a unit of account in either IAS 16 or IAS 38 are within the scope
of this Interpretation.
Scope
4 This Interpretation does not apply to arrangements that:
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(a) are, or contain, leases excluded from the scope of IAS 17; or
(b) are public-to-private service concession arrangements within the scope of
IFRIC 12.
Issues
5 The issues addressed in this Interpretation are:
(a) how to determine whether an arrangement is, or contains, a lease as
defined in IAS 17;
(b) when the assessment or a reassessment of whether an arrangement is, or
contains, a lease should be made; and
(c) if an arrangement is, or contains, a lease, how the payments for the lease
should be separated from payments for any other elements in the
arrangement.
Consensus
Determining whether an arrangement is, or contains, a
lease
6 Determining whether an arrangement is, or contains, a lease shall be based on
the substance of the arrangement and requires an assessment of whether:
(a) fulfilment of the arrangement is dependent on the use of a specific asset
or assets (the asset); and
(b) the arrangement conveys a right to use the asset.
Fulfilment of the arrangement is dependent on the use of a
specific asset
7 Although a specific asset may be explicitly identified in an arrangement, it is not
the subject of a lease if fulfilment of the arrangement is not dependent on the
use of the specified asset. For example, if the supplier is obliged to deliver a
specified quantity of goods or services and has the right and ability to provide
those goods or services using other assets not specified in the arrangement, then
fulfilment of the arrangement is not dependent on the specified asset and the
arrangement does not contain a lease. A warranty obligation that permits or
requires the substitution of the same or similar assets when the specified asset is
not operating properly does not preclude lease treatment. In addition, a
contractual provision (contingent or otherwise) permitting or requiring the
supplier to substitute other assets for any reason on or after a specified date does
not preclude lease treatment before the date of substitution.
8 An asset has been implicitly specified if, for example, the supplier owns or leases
only one asset with which to fulfil the obligation and it is not economically
feasible or practicable for the supplier to perform its obligation through the use
of alternative assets.
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Arrangement conveys a right to use the asset
9 An arrangement conveys the right to use the asset if the arrangement conveys to
the purchaser (lessee) the right to control the use of the underlying asset.
The right to control the use of the underlying asset is conveyed if any one of the
following conditions is met:
(a) The purchaser has the ability or right to operate the asset or direct others
to operate the asset in a manner it determines while obtaining or
controlling more than an insignificant amount of the output or other
utility of the asset.
(b) The purchaser has the ability or right to control physical access to the
underlying asset while obtaining or controlling more than an
insignificant amount of the output or other utility of the asset.
(c) Facts and circumstances indicate that it is remote that one or more
parties other than the purchaser will take more than an insignificant
amount of the output or other utility that will be produced or generated
by the asset during the term of the arrangement, and the price that the
purchaser will pay for the output is neither contractually fixed per unit
of output nor equal to the current market price per unit of output as of
the time of delivery of the output.
Assessing or reassessing whether an arrangement is, or
contains, a lease
10 The assessment of whether an arrangement contains a lease shall be made at the
inception of the arrangement, being the earlier of the date of the arrangement
and the date of commitment by the parties to the principal terms of the
arrangement, on the basis of all of the facts and circumstances. A reassessment
of whether the arrangement contains a lease after the inception of the
arrangement shall be made only if any one of the following conditions is met:
(a) There is a change in the contractual terms, unless the change only
renews or extends the arrangement.
(b) A renewal option is exercised or an extension is agreed to by the parties
to the arrangement, unless the term of the renewal or extension had
initially been included in the lease term in accordance with paragraph 4
of IAS 17. A renewal or extension of the arrangement that does not
include modification of any of the terms in the original arrangement
before the end of the term of the original arrangement shall be evaluated
under paragraphs 6–9 only with respect to the renewal or extension
period.
(c) There is a change in the determination of whether fulfilment is
dependent on a specified asset.
(d) There is a substantial change to the asset, for example a substantial
physical change to property, plant or equipment.
11 A reassessment of an arrangement shall be based on the facts and circumstances
as of the date of reassessment, including the remaining term of the
arrangement. Changes in estimate (for example, the estimated amount of
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output to be delivered to the purchaser or other potential purchasers) would not
trigger a reassessment. If an arrangement is reassessed and is determined to
contain a lease (or not to contain a lease), lease accounting shall be applied (or
cease to apply) from:
(a) in the case of (a), (c) or (d) in paragraph 10, when the change in
circumstances giving rise to the reassessment occurs;
(b) in the case of (b) in paragraph 10, the inception of the renewal or
extension period.
Separating payments for the lease from other payments
12 If an arrangement contains a lease, the parties to the arrangement shall apply
the requirements of IAS 17 to the lease element of the arrangement, unless
exempted from those requirements in accordance with paragraph 2 of IAS 17.
Accordingly, if an arrangement contains a lease, that lease shall be classified as a
finance lease or an operating lease in accordance with paragraphs 7–19 of
IAS 17. Other elements of the arrangement not within the scope of IAS 17 shall
be accounted for in accordance with other Standards.
13 For the purpose of applying the requirements of IAS 17, payments and other
consideration required by the arrangement shall be separated at the inception of
the arrangement or upon a reassessment of the arrangement into those for the
lease and those for other elements on the basis of their relative fair values.
The minimum lease payments as defined in paragraph 4 of IAS 17 include only
payments for the lease (ie the right to use the asset) and exclude payments for
other elements in the arrangement (eg for services and the cost of inputs).
14 In some cases, separating the payments for the lease from payments for other
elements in the arrangement will require the purchaser to use an estimation
technique. For example, a purchaser may estimate the lease payments by
reference to a lease agreement for a comparable asset that contains no other
elements, or by estimating the payments for the other elements in the
arrangement by reference to comparable agreements and then deducting these
payments from the total payments under the arrangement.
15 If a purchaser concludes that it is impracticable to separate the payments
reliably, it shall:
(a) in the case of a finance lease, recognise an asset and a liability at an
amount equal to the fair value
1
of the underlying asset that was
identified in paragraphs 7 and 8 as the subject of the lease. Subsequently
the liability shall be reduced as payments are made and an imputed
finance charge on the liability recognised using the purchaser’s
incremental borrowing rate of interest.
2
1 IAS 17 uses the term ‘fair value’ in a way that differs in some respects from the definition of fair
value in IFRS 13. Therefore, when applying IAS 17 an entity measures fair value in accordance with
IAS 17, not IFRS 13.
2 ie the lessee’s incremental borrowing rate of interest as defined in paragraph 4 of IAS 17.
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(b) in the case of an operating lease, treat all payments under the
arrangement as lease payments for the purposes of complying with the
disclosure requirements of IAS 17, but
(i) disclose those payments separately from minimum lease
payments of other arrangements that do not include payments
for non-lease elements, and
(ii) state that the disclosed payments also include payments for
non-lease elements in the arrangement.
Effective date
16 An entity shall apply this Interpretation for annual periods beginning on or
after 1 January 2006. Earlier application is encouraged. If an entity applies this
Interpretation for a period beginning before 1 January 2006, it shall disclose that
fact.
16A An entity shall apply the amendment in paragraph 4(b) for annual periods
beginning on or after 1 January 2008. If an entity applies IFRIC 12 for an earlier
period, the amendment shall be applied for that earlier period.
Transition
17 IAS 8 specifies how an entity applies a change in accounting policy resulting
from the initial application of an Interpretation. An entity is not required to
comply with those requirements when first applying this Interpretation. If an
entity uses this exemption, it shall apply paragraphs 6–9 of the Interpretation to
arrangements existing at the start of the earliest period for which comparative
information under IFRSs is presented on the basis of facts and circumstances
existing at the start of that period.
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Appendix
Amendments to IFRS 1First-time Adoption of International
Financial Reporting Standards
The amendments in this appendix shall be applied for annual periods beginning on or after
1 September 2004. If an entity applies this Interpretation for an earlier period, these amendments
shall be applied for that earlier period.
*****
The amendments contained in this appendix when this Interpretation was issued in 2004 were
incorporated into IFRS 1 as issued on and after 2 December 2004. In November 2008 a revised
version of IFRS 1 was issued.
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IFRIC Interpretation 5
Rights to Interests arising from
Decommissioning, Restoration and
Environmental Rehabilitation Funds
In December 2004 the International Accounting Standards Board issued IFRIC 5 Rights to
Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds. It was
developed by the Interpretations Committee.
Other Standards have made minor consequential amendments to IFRIC 5. They include
IFRS 10 Consolidated Financial Statements(issued May 2011), IFRS 11 Joint Arrangements (issued
May 2011), IFRS 9Financial Instruments(Hedge Accounting and amendments to IFRS 9, IFRS 7
and IAS 39) (issued November 2013) and IFRS 9Financial Instruments(issued July 2014).
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CONTENTS
from paragraph
IFRIC INTERPRETATION 5
RIGHTS TO INTERESTS ARISING FROM DECOMMISSIONING,
RESTORATION AND ENVIRONMENTAL REHABILITATION
FUNDS
REFERENCES
BACKGROUND 1
SCOPE 4
ISSUES 6
CONSENSUS 7
Accounting for an interest in a fund 7
Accounting for obligations to make additional contributions 10
Disclosure 11
EFFECTIVE DATE 14
TRANSITION 15
APPENDIX
Amendment to IAS 39Financial Instruments: Recognition and Measurement
FOR  THE  ACCOMPANYING  DOCUMENT  LISTED  BELOW, SEE  PART  B  OF  THIS  EDITION
BASIS  FOR  CONCLUSIONS
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IFRIC Interpretation 5 Rights to Interests arising from Decommissioning, Restoration and
Environmental Rehabilitation Funds(IFRIC 5) is set out in paragraphs 1–15 and the Appendix.
IFRIC 5 is accompanied by a Basis for Conclusions. The scope and authority of
Interpretations are set out in paragraphs 2 and 7–16 of thePreface to International Financial
Reporting Standards.
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IFRIC Interpretation 5
Rights to Interests arising from Decommissioning,
Restoration and Environmental Rehabilitation Funds
References
● IFRS 9Financial Instruments
● IFRS 10Consolidated Financial Statements
● IFRS 11Joint Arrangements
● IAS 8Accounting Policies, Changes in Accounting Estimates and Errors
● IAS 28Investments in Associates and Joint Ventures
● IAS 37Provisions, Contingent Liabilities and Contingent Assets
Background
1 The purpose of decommissioning, restoration and environmental rehabilitation
funds, hereafter referred to as ‘decommissioning funds’ or ‘funds’, is to
segregate assets to fund some or all of the costs of decommissioning plant (such
as a nuclear plant) or certain equipment (such as cars), or in undertaking
environmental rehabilitation (such as rectifying pollution of water or restoring
mined land), together referred to as ‘decommissioning’.
2 Contributions to these funds may be voluntary or required by regulation or law.
The funds may have one of the following structures:
(a) funds that are established by a single contributor to fund its own
decommissioning obligations, whether for a particular site, or for a
number of geographically dispersed sites.
(b) funds that are established with multiple contributors to fund their
individual or joint decommissioning obligations, when contributors are
entitled to reimbursement for decommissioning expenses to the extent
of their contributions plus any actual earnings on those contributions
less their share of the costs of administering the fund. Contributors may
have an obligation to make additional contributions, for example, in the
event of the bankruptcy of another contributor.
(c) funds that are established with multiple contributors to fund their
individual or joint decommissioning obligations when the required level
of contributions is based on the current activity of a contributor and the
benefit obtained by that contributor is based on its past activity. In such
cases there is a potential mismatch in the amount of contributions made
by a contributor (based on current activity) and the value realisable from
the fund (based on past activity).
3 Such funds generally have the following features:
(a) the fund is separately administered by independent trustees.
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(b) entities (contributors) make contributions to the fund, which are
invested in a range of assets that may include both debt and equity
investments, and are available to help pay the contributors’
decommissioning costs. The trustees determine how contributions are
invested, within the constraints set by the fund’s governing documents
and any applicable legislation or other regulations.
(c) the contributors retain the obligation to pay decommissioning costs.
However, contributors are able to obtain reimbursement of
decommissioning costs from the fund up to the lower of the
decommissioning costs incurred and the contributor’s share of assets of
the fund.
(d) the contributors may have restricted access or no access to any surplus of
assets of the fund over those used to meet eligible decommissioning
costs.
Scope
4 This Interpretation applies to accounting in the financial statements of a
contributor for interests arising from decommissioning funds that have both of
the following features:
(a) the assets are administered separately (either by being held in a separate
legal entity or as segregated assets within another entity); and
(b) a contributor’s right to access the assets is restricted.
5 A residual interest in a fund that extends beyond a right to reimbursement, such
as a contractual right to distributions once all the decommissioning has been
completed or on winding up the fund, may be an equity instrument within the
scope of IFRS 9 and is not within the scope of this Interpretation.
Issues
6 The issues addressed in this Interpretation are:
(a) how should a contributor account for its interest in a fund?
(b) when a contributor has an obligation to make additional contributions,
for example, in the event of the bankruptcy of another contributor, how
should that obligation be accounted for?
Consensus
Accounting for an interest in a fund
7 The contributor shall recognise its obligation to pay decommissioning costs as a
liability and recognise its interest in the fund separately unless the contributor
is not liable to pay decommissioning costs even if the fund fails to pay.
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8 The contributor shall determine whether it has control or joint control of, or
significant influence over, the fund by reference to IFRS 10, IFRS 11 and IAS 28.
If it does, the contributor shall account for its interest in the fund in accordance
with those Standards.
9 If a contributor does not have control or joint control of, or significant influence
over, the fund, the contributor shall recognise the right to receive
reimbursement from the fund as a reimbursement in accordance with IAS 37.
This reimbursement shall be measured at the lower of:
(a) the amount of the decommissioning obligation recognised; and
(b) the contributor’s share of the fair value of the net assets of the fund
attributable to contributors.
Changes in the carrying value of the right to receive reimbursement other than
contributions to and payments from the fund shall be recognised in profit or
loss in the period in which these changes occur.
Accounting for obligations to make additional
contributions
10 When a contributor has an obligation to make potential additional
contributions, for example, in the event of the bankruptcy of another
contributor or if the value of the investment assets held by the fund decreases to
an extent that they are insufficient to fulfil the fund’s reimbursement
obligations, this obligation is a contingent liability that is within the scope of
IAS 37. The contributor shall recognise a liability only if it is probable that
additional contributions will be made.
Disclosure
11 A contributor shall disclose the nature of its interest in a fund and any
restrictions on access to the assets in the fund.
12 When a contributor has an obligation to make potential additional
contributions that is not recognised as a liability (see paragraph 10), it shall
make the disclosures required by paragraph 86 of IAS 37.
13 When a contributor accounts for its interest in the fund in accordance with
paragraph 9, it shall make the disclosures required by paragraph 85(c) of IAS 37.
Effective date
14 An entity shall apply this Interpretation for annual periods beginning on or
after 1 January 2006. Earlier application is encouraged. If an entity applies this
Interpretation to a period beginning before 1 January 2006, it shall disclose that
fact.
14A [Deleted]
14B IFRS 10 and IFRS 11, issued in May 2011, amended paragraphs 8 and 9. An entity
shall apply those amendments when it applies IFRS 10 and IFRS 11.
14C [Deleted]
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14D IFRS 9, as issued in July 2014, amended paragraph 5 and deleted paragraphs 14A
and 14C. An entity shall apply those amendments when it applies IFRS 9.
Transition
15 Changes in accounting policies shall be accounted for in accordance with the
requirements of IAS 8.
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Appendix
Amendment to IAS 39Financial Instruments: Recognition
and Measurement
The amendment in this appendix shall be applied for annual periods beginning on or after
1 January 2006. If an entity applies this Interpretation for an earlier period, the amendment shall
be applied for that earlier period.
*****
The amendment contained in this appendix when this Interpretation was issued in 2004 was
incorporated into IAS 39 as issued on and after 16 December 2004.
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IFRIC Interpretation 6
Liabilities arising from Participating in a
Specific Market—Waste Electrical and
Electronic Equipment
In September 2005 the International Accounting Standards Board issued IFRIC 6 Liabilities
arising from Participating in a Specific Market—Waste Electrical and Electronic Equipment. It was
developed by the Interpretations Committee.
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CONTENTS
from paragraph
IFRIC INTERPRETATION 6
LIABILITIES ARISING FROM PARTICIPATING IN A SPECIFIC
MARKET—WASTE ELECTRICAL AND ELECTRONIC
EQUIPMENT
REFERENCES
BACKGROUND 1
SCOPE 6
ISSUE 8
CONSENSUS 9
EFFECTIVE DATE 10
TRANSITION 11
FOR  THE  ACCOMPANYING  DOCUMENT  LISTED  BELOW, SEE  PART  B  OF  THIS  EDITION
BASIS  FOR  CONCLUSIONS
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IFRIC Interpretation 6Liabilities arising from Participating in a Specific Market—Waste Electrical
and Electronic Equipment(IFRIC 6) is set out in paragraphs 1–11. IFRIC 6 is accompanied by
a Basis for Conclusions. The scope and authority of Interpretations are set out in
paragraphs 2 and 7–16 of thePreface to International Financial Reporting Standards.
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IFRIC Interpretation 6
Liabilities arising from Participating in a Specific
Market—Waste Electrical and Electronic Equipment
References
● IAS 8Accounting Policies, Changes in Accounting Estimates and Errors
● IAS 37Provisions, Contingent Liabilities and Contingent Assets
Background
1 Paragraph 17 of IAS 37 specifies that an obligating event is a past event that
leads to a present obligation that an entity has no realistic alternative to settling.
2 Paragraph 19 of IAS 37 states that provisions are recognised only for ‘obligations
arising from past events existing independently of an entity’s future actions’.
3 The European Union’s Directive on Waste Electrical and Electronic Equipment
(WE&EE), which regulates the collection, treatment, recovery and
environmentally sound disposal of waste equipment, has given rise to questions
about when the liability for the decommissioning of WE&EE should be
recognised. The Directive distinguishes between ‘new’ and ‘historical’ waste and
between waste from private households and waste from sources other than
private households. New waste relates to products sold after 13 August 2005. All
household equipment sold before that date is deemed to give rise to historical
waste for the purposes of the Directive.
4 The Directive states that the cost of waste management for historical household
equipment should be borne by producers of that type of equipment that are in
the market during a period to be specified in the applicable legislation of each
Member State (the measurement period). The Directive states that each Member
State shall establish a mechanism to have producers contribute to costs
proportionately ‘e.g. in proportion to their respective share of the market by
type of equipment.’
5 Several terms used in the Interpretation such as ‘market share’ and
‘measurement period’ may be defined very differently in the applicable
legislation of individual Member States. For example, the length of the
measurement period might be a year or only one month. Similarly, the
measurement of market share and the formulae for computing the obligation
may differ in the various national legislations. However, all of these examples
affect only the measurement of the liability, which is not within the scope of the
Interpretation.
Scope
6 This Interpretation provides guidance on the recognition, in the financial
statements of producers, of liabilities for waste management under the
EU Directive on WE&EE in respect of sales of historical household equipment.
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7 The Interpretation addresses neither new waste nor historical waste from
sources other than private households. The liability for such waste management
is adequately covered in IAS 37. However, if, in national legislation, new waste
from private households is treated in a similar manner to historical waste from
private households, the principles of the Interpretation apply by reference to the
hierarchy in paragraphs 10–12 of IAS 8. The IAS 8 hierarchy is also relevant for
other regulations that impose obligations in a way that is similar to the cost
attribution model specified in the EU Directive.
Issue
8 The IFRIC was asked to determine in the context of the decommissioning of
WE&EE what constitutes the obligating event in accordance with
paragraph 14(a) of IAS 37 for the recognition of a provision for waste
management costs:
● the manufacture or sale of the historical household equipment?
● participation in the market during the measurement period?
● the incurrence of costs in the performance of waste management
activities?
Consensus
9 Participation in the market during the measurement period is the obligating
event in accordance with paragraph 14(a) of IAS 37. As a consequence, a liability
for waste management costs for historical household equipment does not arise
as the products are manufactured or sold. Because the obligation for historical
household equipment is linked to participation in the market during the
measurement period, rather than to production or sale of the items to be
disposed of, there is no obligation unless and until a market share exists during
the measurement period. The timing of the obligating event may also be
independent of the particular period in which the activities to perform the
waste management are undertaken and the related costs incurred.
Effective date
10 An entity shall apply this Interpretation for annual periods beginning on or
after 1 December 2005. Earlier application is encouraged. If an entity applies
the Interpretation for a period beginning before 1 December 2005, it shall
disclose that fact.
Transition
11 Changes in accounting policies shall be accounted for in accordance with IAS 8.
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IFRIC Interpretation 7
Applying the Restatement Approach under
IAS 29 Financial Reporting in
Hyperinflationary Economies
In November 2005 the International Accounting Standards Board issued IFRIC 7Applying the
Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies.It was
developed by the Interpretations Committee.
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CONTENTS
from paragraph
IFRIC INTERPRETATION 7
APPLYING THE RESTATEMENT APPROACH UNDER IAS 29
FINANCIAL REPORTING IN HYPERINFLATIONARY
ECONOMIES
REFERENCES
BACKGROUND 1
ISSUES 2
CONSENSUS 3
EFFECTIVE DATE 6
FOR  THE  ACCOMPANYING  DOCUMENTS  LISTED  BELOW, SEE  PART  B  OF  THIS
EDITION
ILLUSTRATIVE  EXAMPLE
BASIS  FOR  CONCLUSIONS
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IFRIC Interpretation 7 Applying the Restatement Approach under IAS 29 Financial Reporting in
Hyperinflationary Economies(IFRIC 7) is set out in paragraphs 1–6. IFRIC 7 is accompanied
by an illustrative example and a Basis for Conclusions. The scope and authority of
Interpretations are set out in paragraphs 2 and 7–16 of thePreface to International Financial
Reporting Standards.
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IFRIC Interpretation 7
Applying the Restatement Approach under IAS 29 Financial
Reporting in Hyperinflationary Economies
References
● IAS 12Income Taxes
● IAS 29Financial Reporting in Hyperinflationary Economies
Background
1 This Interpretation provides guidance on how to apply the requirements of
IAS 29 in a reporting period in which an entity identifies
1
the existence of
hyperinflation in the economy of its functional currency, when that economy
was not hyperinflationary in the prior period, and the entity therefore restates
its financial statements in accordance with IAS 29.
Issues
2 The questions addressed in this Interpretation are:
(a) how should the requirement ‘… stated in terms of the measuring unit
current at the end of the reporting period’ in paragraph 8 of IAS 29 be
interpreted when an entity applies the Standard?
(b) how should an entity account for opening deferred tax items in its
restated financial statements?
Consensus
3 In the reporting period in which an entity identifies the existence of
hyperinflation in the economy of its functional currency, not having been
hyperinflationary in the prior period, the entity shall apply the requirements of
IAS 29 as if the economy had always been hyperinflationary. Therefore, in
relation to non-monetary items measured at historical cost, the entity’s opening
statement of financial position at the beginning of the earliest period presented
in the financial statements shall be restated to reflect the effect of inflation from
the date the assets were acquired and the liabilities were incurred or assumed
until the end of the reporting period. For non-monetary items carried in the
opening statement of financial position at amounts current at dates other than
those of acquisition or incurrence, that restatement shall reflect instead the
effect of inflation from the dates those carrying amounts were determined until
the end of the reporting period.
1 The identification of hyperinflation is based on the entity’s judgement of the criteria in paragraph 3
of IAS 29.
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4 At the end of the reporting period, deferred tax items are recognised and
measured in accordance with IAS 12. However, the deferred tax figures in the
opening statement of financial position for the reporting period shall be
determined as follows:
(a) the entity remeasures the deferred tax items in accordance with IAS 12
after it has restated the nominal carrying amounts of its non-monetary
items at the date of the opening statement of financial position of the
reporting period by applying the measuring unit at that date.
(b) the deferred tax items remeasured in accordance with (a) are restated for
the change in the measuring unit from the date of the opening
statement of financial position of the reporting period to the end of that
reporting period.
The entity applies the approach in (a) and (b) in restating the deferred tax items
in the opening statement of financial position of any comparative periods
presented in the restated financial statements for the reporting period in which
the entity applies IAS 29.
5 After an entity has restated its financial statements, all corresponding figures in
the financial statements for a subsequent reporting period, including deferred
tax items, are restated by applying the change in the measuring unit for that
subsequent reporting period only to the restated financial statements for the
previous reporting period.
Effective date
6 An entity shall apply this Interpretation for annual periods beginning on or
after 1 March 2006. Earlier application is encouraged. If an entity applies this
Interpretation to financial statements for a period beginning before 1 March
2006, it shall disclose that fact.
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IFRIC Interpretation 10
Interim Financial Reporting and
Impairment
In July 2006 the International Accounting Standards Board issued IFRIC 10Interim Financial
Reporting and Impairment. It was developed by the Interpretations Committee.
Other Standards have made minor consequential amendments to IFRIC 10. They include
IFRS 9Financial Instruments(Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39)
(issued November 2013) and IFRS 9 Financial Instruments(issued July 2014).
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CONTENTS
from paragraph
IFRIC INTERPRETATION 10
INTERIM FINANCIAL REPORTING AND IMPAIRMENT
REFERENCES
BACKGROUND 1
ISSUE 3
CONSENSUS 8
EFFECTIVE DATE AND TRANSITION 10
FOR  THE  ACCOMPANYING  DOCUMENT  LISTED  BELOW, SEE  PART  B  OF  THIS  EDITION
BASIS  FOR  CONCLUSIONS
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IFRIC Interpretation 10 Interim Financial Reporting and Impairment (IFRIC 10) is set out in
paragraphs 1–14. IFRIC 10 is accompanied by a Basis for Conclusions. The scope and
authority of Interpretations are set out in paragraphs 2 and 7–16 of the Preface to
International Financial Reporting Standards.
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IFRIC Interpretation 10
Interim Financial Reporting and Impairment
References
● IFRS 9Financial Instruments
● IAS 34Interim Financial Reporting
● IAS 36Impairment of Assets
Background
1 An entity is required to assess goodwill for impairment at the end of each
reporting period, and, if required, to recognise an impairment loss at that date
in accordance with IAS 36. However, at the end of a subsequent reporting
period, conditions may have so changed that the impairment loss would have
been reduced or avoided had the impairment assessment been made only at that
date. This Interpretation provides guidance on whether such impairment losses
should ever be reversed.
2 The Interpretation addresses the interaction between the requirements of IAS 34
and the recognition of impairment losses on goodwill in IAS 36, and the effect of
that interaction on subsequent interim and annual financial statements.
Issue
3 IAS 34 paragraph 28 requires an entity to apply the same accounting policies in
its interim financial statements as are applied in its annual financial statements.
It also states that ‘the frequency of an entity’s reporting (annual, half-yearly, or
quarterly) shall not affect the measurement of its annual results. To achieve that
objective, measurements for interim reporting purposes shall be made on a
year-to-date basis.’
4 IAS 36 paragraph 124 states that ‘An impairment loss recognised for goodwill
shall not be reversed in a subsequent period.’
5–
6
[Deleted]
7 The Interpretation addresses the following issue:
Should an entity reverse impairment losses recognised in an interim period
on goodwill if a loss would not have been recognised, or a smaller loss
would have been recognised, had an impairment assessment been made
only at the end of a subsequent reporting period?
Consensus
8 An entity shall not reverse an impairment loss recognised in a previous interim
period in respect of goodwill.
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9 An entity shall not extend this consensus by analogy to other areas of potential
conflict between IAS 34 and other standards.
Effective date and transition
10 An entity shall apply the Interpretation for annual periods beginning on or after
1 November 2006. Earlier application is encouraged. If an entity applies the
Interpretation for a period beginning before 1 November 2006, it shall disclose
that fact. An entity shall apply the Interpretation to goodwill prospectively from
the date at which it first applied IAS 36; it shall apply the Interpretation to
investments in equity instruments or in financial assets carried at cost
prospectively from the date at which it first applied the measurement criteria of
IAS 39.
11–
13
[Deleted]
14 IFRS 9, as issued in July 2014, amended paragraphs 1, 2, 7 and 8 and deleted
paragraphs 5, 6, 11–13. An entity shall apply those amendments when it applies
IFRS 9.
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IFRIC Interpretation 12
Service Concession Arrangements
In November 2006 the International Accounting Standards Board issued IFRIC 12 Service
Concession Arrangements. It was developed by the Interpretations Committee.
Other Standards have made minor consequential amendments to IFRIC 12. They include
IFRS 9Financial Instruments(Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39)
(issued November 2013), IFRS 15 Revenue from Contracts with Customers(issued May 2014) and
IFRS 9Financial Instruments(issued July 2014).
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CONTENTS
from paragraph
IFRIC INTERPRETATION 12
SERVICE CONCESSION ARRANGEMENTS
REFERENCES
BACKGROUND 1
SCOPE 4
ISSUES 10
CONSENSUS 11
EFFECTIVE DATE 28
TRANSITION 29
APPENDICES
A Application guidance
B Amendments to IFRS 1 and to other Interpretations
FOR  THE  ACCOMPANYING  DOCUMENTS  LISTED  BELOW, SEE  PART  B  OF  THIS
EDITION
INFORMATION  NOTES
ILLUSTRATIVE  EXAMPLES
BASIS  FOR  CONCLUSIONS
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IFRIC Interpretation 12 Service Concession Arrangements (IFRIC 12) is set out in
paragraphs 1–30 and Appendices A and B. IFRIC 12 is accompanied by information
notes, illustrative examples and a Basis for Conclusions. The scope and authority of
Interpretations are set out in paragraphs 2 and 7–16 of thePreface to International Financial
Reporting Standards.
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IFRIC Interpretation 12
Service Concession Arrangements
References
● Framework for the Preparation and Presentation of Financial Statements
1
● IFRS 1First-time Adoption of International Financial Reporting Standards
● IFRS 7Financial Instruments: Disclosures
● IFRS 9Financial Instruments
● IFRS 15Revenue from Contracts with Customers
● IAS 8Accounting Policies, Changes in Accounting Estimates and Errors
● IAS 16Property, Plant and Equipment
● IAS 17Leases
● IAS 20Accounting for Government Grants and Disclosure of Government Assistance
● IAS 23Borrowing Costs
● IAS 32Financial Instruments: Presentation
● IAS 36Impairment of Assets
● IAS 37Provisions, Contingent Liabilities and Contingent Assets
● IAS 38Intangible Assets
● IFRIC 4Determining whether an Arrangement contains a Lease
● SIC-29Service Concession Arrangements: Disclosures
2
Background
1 In many countries, infrastructure for public services—such as roads, bridges,
tunnels, prisons, hospitals, airports, water distribution facilities, energy supply
and telecommunication networks—has traditionally been constructed, operated
and maintained by the public sector and financed through public budget
appropriation.
2 In some countries, governments have introduced contractual service
arrangements to attract private sector participation in the development,
financing, operation and maintenance of such infrastructure. The
infrastructure may already exist, or may be constructed during the period of the
service arrangement. An arrangement within the scope of this Interpretation
typically involves a private sector entity (an operator) constructing the
infrastructure used to provide the public service or upgrading it (for example, by
increasing its capacity) and operating and maintaining that infrastructure for a
1 In September 2010 the IASB replaced theFramework with theConceptual Framework for Financial
Reporting.
2 The title of SIC-29, formerlyDisclosure—Service Concession Arrangements, was amended by IFRIC 12.
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specified period of time. The operator is paid for its services over the period of
the arrangement. The arrangement is governed by a contract that sets out
performance standards, mechanisms for adjusting prices, and arrangements for
arbitrating disputes. Such an arrangement is often described as a
‘build-operate-transfer’, a ‘rehabilitate-operate-transfer’ or a ‘public-to-private’
service concession arrangement.
3 A feature of these service arrangements is the public service nature of the
obligation undertaken by the operator. Public policy is for the services related to
the infrastructure to be provided to the public, irrespective of the identity of the
party that operates the services. The service arrangement contractually obliges
the operator to provide the services to the public on behalf of the public sector
entity. Other common features are:
(a) the party that grants the service arrangement (the grantor) is a public
sector entity, including a governmental body, or a private sector entity to
which the responsibility for the service has been devolved.
(b) the operator is responsible for at least some of the management of the
infrastructure and related services and does not merely act as an agent
on behalf of the grantor.
(c) the contract sets the initial prices to be levied by the operator and
regulates price revisions over the period of the service arrangement.
(d) the operator is obliged to hand over the infrastructure to the grantor in a
specified condition at the end of the period of the arrangement, for little
or no incremental consideration, irrespective of which party initially
financed it.
Scope
4 This Interpretation gives guidance on the accounting by operators for
public-to-private service concession arrangements.
5 This Interpretation applies to public-to-private service concession arrangements
if:
(a) the grantor controls or regulates what services the operator must
provide with the infrastructure, to whom it must provide them, and at
what price; and
(b) the grantor controls—through ownership, beneficial entitlement or
otherwise—any significant residual interest in the infrastructure at the
end of the term of the arrangement.
6 Infrastructure used in a public-to-private service concession arrangement for its
entire useful life (whole of life assets) is within the scope of this Interpretation if
the conditions in paragraph 5(a) are met. Paragraphs AG1–AG8 provide
guidance on determining whether, and to what extent, public-to-private service
concession arrangements are within the scope of this Interpretation.
7 This Interpretation applies to both:
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(a) infrastructure that the operator constructs or acquires from a third party
for the purpose of the service arrangement; and
(b) existing infrastructure to which the grantor gives the operator access for
the purpose of the service arrangement.
8 This Interpretation does not specify the accounting for infrastructure that was
held and recognised as property, plant and equipment by the operator before
entering the service arrangement. The derecognition requirements of IFRSs (set
out in IAS 16) apply to such infrastructure.
9 This Interpretation does not specify the accounting by grantors.
Issues
10 This Interpretation sets out general principles on recognising and measuring the
obligations and related rights in service concession arrangements.
Requirements for disclosing information about service concession arrangements
are in SIC-29. The issues addressed in this Interpretation are:
(a) treatment of the operator’s rights over the infrastructure;
(b) recognition and measurement of arrangement consideration;
(c) construction or upgrade services;
(d) operation services;
(e) borrowing costs;
(f) subsequent accounting treatment of a financial asset and an intangible
asset; and
(g) items provided to the operator by the grantor.
Consensus
Treatment of the operator’s rights over the infrastructure
11 Infrastructure within the scope of this Interpretation shall not be recognised as
property, plant and equipment of the operator because the contractual service
arrangement does not convey the right to control the use of the public service
infrastructure to the operator. The operator has access to operate the
infrastructure to provide the public service on behalf of the grantor in
accordance with the terms specified in the contract.
Recognition and measurement of arrangement
consideration
12 Under the terms of contractual arrangements within the scope of this
Interpretation, the operator acts as a service provider. The operator constructs
or upgrades infrastructure (construction or upgrade services) used to provide a
public service and operates and maintains that infrastructure (operation
services) for a specified period of time.
13 The operator shall recognise and measure revenue in accordance with IFRS 15
for the services it performs. The nature of the consideration determines its
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subsequent accounting treatment. The subsequent accounting for consideration
received as a financial asset and as an intangible asset is detailed in paragraphs
23–26 below.
Construction or upgrade services
14 The operator shall account for construction or upgrade services in accordance
with IFRS 15.
Consideration given by the grantor to the operator
15 If the operator provides construction or upgrade services the consideration
received or receivable by the operator shall be recognised in accordance with
IFRS 15. The consideration may be rights to:
(a) a financial asset, or
(b) an intangible asset.
16 The operator shall recognise a financial asset to the extent that it has an
unconditional contractual right to receive cash or another financial asset from
or at the direction of the grantor for the construction services; the grantor has
little, if any, discretion to avoid payment, usually because the agreement is
enforceable by law. The operator has an unconditional right to receive cash if
the grantor contractually guarantees to pay the operator (a) specified or
determinable amounts or (b) the shortfall, if any, between amounts received
from users of the public service and specified or determinable amounts, even if
payment is contingent on the operator ensuring that the infrastructure meets
specified quality or efficiency requirements.
17 The operator shall recognise an intangible asset to the extent that it receives a
right (a licence) to charge users of the public service. A right to charge users of
the public service is not an unconditional right to receive cash because the
amounts are contingent on the extent that the public uses the service.
18 If the operator is paid for the construction services partly by a financial asset and
partly by an intangible asset it is necessary to account separately for each
component of the operator’s consideration. The consideration received or
receivable for both components shall be recognised initially in accordance with
IFRS 15.
19 The nature of the consideration given by the grantor to the operator shall be
determined by reference to the contract terms and, when it exists, relevant
contract law. The nature of the consideration determines the subsequent
accounting as described in paragraphs 23–26. However, both types of
consideration are classified as a contract asset during the construction or
upgrade period in accordance with IFRS 15.
Operation services
20 The operator shall account for operation services in accordance with IFRS 15.
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Contractual obligations to restore the infrastructure to a specified
level of serviceability
21 The operator may have contractual obligations it must fulfil as a condition of its
licence (a) to maintain the infrastructure to a specified level of serviceability or
(b) to restore the infrastructure to a specified condition before it is handed over
to the grantor at the end of the service arrangement. These contractual
obligations to maintain or restore infrastructure, except for any upgrade
element (see paragraph 14), shall be recognised and measured in accordance
with IAS 37, ie at the best estimate of the expenditure that would be required to
settle the present obligation at the end of the reporting period.
Borrowing costs incurred by the operator
22 In accordance with IAS 23, borrowing costs attributable to the arrangement
shall be recognised as an expense in the period in which they are incurred
unless the operator has a contractual right to receive an intangible asset (a right
to charge users of the public service). In this case borrowing costs attributable to
the arrangement shall be capitalised during the construction phase of the
arrangement in accordance with that Standard.
Financial asset
23 IAS 32 and IFRSs 7 and 9 apply to the financial asset recognised under
paragraphs 16 and 18.
24 The amount due from or at the direction of the grantor is accounted for in
accordance with IFRS 9 as measured at:
(a) amortised cost; or
(b) fair value through other comprehensive income; or
(c) fair value through profit or loss.
25 If the amount due from the grantor is measured at amortised cost or fair value
through other comprehensive income, IFRS 9 requires interest calculated using
the effective interest method to be recognised in profit or loss.
Intangible asset
26 IAS 38 applies to the intangible asset recognised in accordance with
paragraphs 17 and 18. Paragraphs 45–47 of IAS 38 provide guidance on
measuring intangible assets acquired in exchange for a non-monetary asset or
assets or a combination of monetary and non-monetary assets.
Items provided to the operator by the grantor
27 In accordance with paragraph 11, infrastructure items to which the operator is
given access by the grantor for the purposes of the service arrangement are not
recognised as property, plant and equipment of the operator. The grantor may
also provide other items to the operator that the operator can keep or deal with
as it wishes. If such assets form part of the consideration payable by the grantor
for the services, they are not government grants as defined in IAS 20. Instead,
they are accounted for as part of the transaction price as defined in IFRS 15.
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Effective date
28 An entity shall apply this Interpretation for annual periods beginning on or
after 1 January 2008. Earlier application is permitted. If an entity applies this
Interpretation for a period beginning before 1 January 2008, it shall disclose that
fact.
28A–
28C
[Deleted]
28D IFRS 15Revenue from Contracts with Customers, issued in May 2014, amended the
‘References’ section and paragraphs 13–15, 18–20 and 27. An entity shall apply
those amendments when it applies IFRS 15.
28E IFRS 9, as issued in July 2014, amended paragraphs 23–25 and deleted
paragraphs 28A–28C. An entity shall apply those amendments when it applies
IFRS 9.
Transition
29 Subject to paragraph 30, changes in accounting policies are accounted for in
accordance with IAS 8, ie retrospectively.
30 If, for any particular service arrangement, it is impracticable for an operator to
apply this Interpretation retrospectively at the start of the earliest period
presented, it shall:
(a) recognise financial assets and intangible assets that existed at the start of
the earliest period presented;
(b) use the previous carrying amounts of those financial and intangible
assets (however previously classified) as their carrying amounts as at that
date; and
(c) test financial and intangible assets recognised at that date for
impairment, unless this is not practicable, in which case the amounts
shall be tested for impairment as at the start of the current period.
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Appendix A
Application guidance
This appendix is an integral part of the Interpretation.
Scope (paragraph 5)
AG1 Paragraph 5 of this Interpretation specifies that infrastructure is within the
scope of the Interpretation when the following conditions apply:
(a) the grantor controls or regulates what services the operator must
provide with the infrastructure, to whom it must provide them, and at
what price; and
(b) the grantor controls—through ownership, beneficial entitlement or
otherwise—any significant residual interest in the infrastructure at the
end of the term of the arrangement.
AG2 The control or regulation referred to in condition (a) could be by contract or
otherwise (such as through a regulator), and includes circumstances in which
the grantor buys all of the output as well as those in which some or all of the
output is bought by other users. In applying this condition, the grantor and any
related parties shall be considered together. If the grantor is a public sector
entity, the public sector as a whole, together with any regulators acting in the
public interest, shall be regarded as related to the grantor for the purposes of
this Interpretation.
AG3 For the purpose of condition (a), the grantor does not need to have complete
control of the price: it is sufficient for the price to be regulated by the grantor,
contract or regulator, for example by a capping mechanism. However, the
condition shall be applied to the substance of the agreement. Non-substantive
features, such as a cap that will apply only in remote circumstances, shall be
ignored. Conversely, if for example, a contract purports to give the operator
freedom to set prices, but any excess profit is returned to the grantor, the
operator’s return is capped and the price element of the control test is met.
AG4 For the purpose of condition (b), the grantor’s control over any significant
residual interest should both restrict the operator’s practical ability to sell or
pledge the infrastructure and give the grantor a continuing right of use
throughout the period of the arrangement. The residual interest in the
infrastructure is the estimated current value of the infrastructure as if it were
already of the age and in the condition expected at the end of the period of the
arrangement.
AG5 Control should be distinguished from management. If the grantor retains both
the degree of control described in paragraph 5(a) and any significant residual
interest in the infrastructure, the operator is only managing the infrastructure
on the grantor’s behalf—even though, in many cases, it may have wide
managerial discretion.
AG6 Conditions (a) and (b) together identify when the infrastructure, including any
replacements required (see paragraph 21), is controlled by the grantor for the
whole of its economic life. For example, if the operator has to replace part of an
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item of infrastructure during the period of the arrangement (eg the top layer of
a road or the roof of a building), the item of infrastructure shall be considered as
a whole. Thus condition (b) is met for the whole of the infrastructure, including
the part that is replaced, if the grantor controls any significant residual interest
in the final replacement of that part.
AG7 Sometimes the use of infrastructure is partly regulated in the manner described
in paragraph 5(a) and partly unregulated. However, these arrangements take a
variety of forms:
(a) any infrastructure that is physically separable and capable of being
operated independently and meets the definition of a cash-generating
unit as defined in IAS 36 shall be analysed separately if it is used wholly
for unregulated purposes. For example, this might apply to a private
wing of a hospital, where the remainder of the hospital is used by the
grantor to treat public patients.
(b) when purely ancillary activities (such as a hospital shop) are
unregulated, the control tests shall be applied as if those services did not
exist, because in cases in which the grantor controls the services in the
manner described in paragraph 5, the existence of ancillary activities
does not detract from the grantor’s control of the infrastructure.
AG8 The operator may have a right to use the separable infrastructure described in
paragraph AG7(a), or the facilities used to provide ancillary unregulated services
described in paragraph AG7(b). In either case, there may in substance be a lease
from the grantor to the operator; if so, it shall be accounted for in accordance
with IAS 17.
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Appendix B
Amendments to IFRS 1 and to other Interpretations
The amendments in this appendix shall be applied for annual periods beginning on or after
1 January 2008. If an entity applies this Interpretation for an earlier period, these amendments
shall be applied for that earlier period.
*****
The amendments contained in this appendix when this Interpretation was issued in 2006 have been
incorporated into the text of IFRS 1, IFRIC 4 and SIC-29 as issued on or after 30 November 2006. In
November 2008 a revised version of IFRS 1 was issued.
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IFRIC Interpretation 14
IAS 19—The Limit on a Defined Benefit
Asset, Minimum Funding Requirements
and their Interaction
In July 2007 the International Accounting Standards Board issued IFRIC 14IAS 19—The Limit
on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. It was developed
by the Interpretations Committee.
In November 2009 IFRIC 14 was amended to address prepayments of future minimum
funding requirement contributions.
Other Standards have made minor consequential amendments to IFRIC 14. They include
IFRS 13 Fair Value Measurement(issued May 2011) and IAS 19 Employee Benefits(issued June
2011).
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CONTENTS
from paragraph
IFRIC INTERPRETATION 14
IAS 19—THE LIMIT ON A DEFINED BENEFIT ASSET,
MINIMUM FUNDING REQUIREMENTS AND THEIR
INTERACTION
REFERENCES
BACKGROUND 1
SCOPE 4
ISSUES 6
CONSENSUS 7
Availability of a refund or reduction in future contributions 7
The effect of a minimum funding requirement on the economic benefit
available as a reduction in future contributions 18
When a minimum funding requirement may give rise to a liability 23
EFFECTIVE DATE 27
TRANSITION 28
FOR  THE  ACCOMPANYING  DOCUMENTS  LISTED  BELOW, SEE  PART  B  OF  THIS
EDITION
APPROVAL  BY  THE  BOARD  OF  PREPAYMENTS  OF  A  MINIMUM  FUNDING
REQUIREMENT  ISSUED  IN  NOVEMBER  2009
ILLUSTRATIVE  EXAMPLES
BASIS  FOR  CONCLUSIONS
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IFRIC Interpretation 14 IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction(IFRIC 14) is set out in paragraphs 1–29. IFRIC 14 is
accompanied by illustrative examples and a Basis for Conclusions. The scope and
authority of Interpretations are set out in paragraphs 2 and 7–16 of the Preface to
International Financial Reporting Standards.
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IFRIC Interpretation 14
IAS 19—The Limit on a Defined Benefit Asset, Minimum
Funding Requirements and their Interaction
References
● IAS 1Presentation of Financial Statements
● IAS 8Accounting Policies, Changes in Accounting Estimates and Errors
● IAS 19Employee Benefits(as amended in 2011)
● IAS 37Provisions, Contingent Liabilities and Contingent Assets
Background
1 Paragraph 64 of IAS 19 limits the measurement of a net defined benefit asset to
the lower of the surplus in the defined benefit plan and the asset ceiling.
Paragraph 8 of IAS 19 defines the asset ceiling as ‘the present value of any
economic benefits available in the form of refunds from the plan or reductions
in future contributions to the plan’. Questions have arisen about when refunds
or reductions in future contributions should be regarded as available,
particularly when a minimum funding requirement exists.
2 Minimum funding requirements exist in many countries to improve the security
of the post-employment benefit promise made to members of an employee
benefit plan. Such requirements normally stipulate a minimum amount or
level of contributions that must be made to a plan over a given period.
Therefore, a minimum funding requirement may limit the ability of the entity
to reduce future contributions.
3 Further, the limit on the measurement of a defined benefit asset may cause a
minimum funding requirement to be onerous. Normally, a requirement to
make contributions to a plan would not affect the measurement of the defined
benefit asset or liability. This is because the contributions, once paid, will
become plan assets and so the additional net liability is nil. However, a
minimum funding requirement may give rise to a liability if the required
contributions will not be available to the entity once they have been paid.
3A In November 2009 the International Accounting Standards Board amended
IFRIC 14 to remove an unintended consequence arising from the treatment of
prepayments of future contributions in some circumstances when there is a
minimum funding requirement.
Scope
4 This Interpretation applies to all post-employment defined benefits and other
long-term employee defined benefits.
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5 For the purpose of this Interpretation, minimum funding requirements are any
requirements to fund a post-employment or other long-term defined benefit
plan.
Issues
6 The issues addressed in this Interpretation are:
(a) when refunds or reductions in future contributions should be regarded
as available in accordance with the definition of the asset ceiling in
paragraph 8 of IAS 19.
(b) how a minimum funding requirement might affect the availability of
reductions in future contributions.
(c) when a minimum funding requirement might give rise to a liability.
Consensus
Availability of a refund or reduction in future
contributions
7 An entity shall determine the availability of a refund or a reduction in future
contributions in accordance with the terms and conditions of the plan and any
statutory requirements in the jurisdiction of the plan.
8 An economic benefit, in the form of a refund or a reduction in future
contributions, is available if the entity can realise it at some point during the life
of the plan or when the plan liabilities are settled. In particular, such an
economic benefit may be available even if it is not realisable immediately at the
end of the reporting period.
9 The economic benefit available does not depend on how the entity intends to use
the surplus. An entity shall determine the maximum economic benefit that is
available from refunds, reductions in future contributions or a combination of
both. An entity shall not recognise economic benefits from a combination of
refunds and reductions in future contributions based on assumptions that are
mutually exclusive.
10 In accordance with IAS 1, the entity shall disclose information about the key
sources of estimation uncertainty at the end of the reporting period that have a
significant risk of causing a material adjustment to the carrying amount of the
net asset or liability recognised in the statement of financial position. This
might include disclosure of any restrictions on the current realisability of the
surplus or disclosure of the basis used to determine the amount of the economic
benefit available.
The economic benefit available as a refund
The right to a refund
11 A refund is available to an entity only if the entity has an unconditional right to
a refund:
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(a) during the life of the plan, without assuming that the plan liabilities
must be settled in order to obtain the refund (eg in some jurisdictions,
the entity may have a right to a refund during the life of the plan,
irrespective of whether the plan liabilities are settled); or
(b) assuming the gradual settlement of the plan liabilities over time until all
members have left the plan; or
(c) assuming the full settlement of the plan liabilities in a single event (ie as
a plan wind-up).
An unconditional right to a refund can exist whatever the funding level of a
plan at the end of the reporting period.
12 If the entity’s right to a refund of a surplus depends on the occurrence or
non-occurrence of one or more uncertain future events not wholly within its
control, the entity does not have an unconditional right and shall not recognise
an asset.
Measurement of the economic benefit
13 An entity shall measure the economic benefit available as a refund as the
amount of the surplus at the end of the reporting period (being the fair value of
the plan assets less the present value of the defined benefit obligation) that the
entity has a right to receive as a refund, less any associated costs. For instance, if
a refund would be subject to a tax other than income tax, an entity shall
measure the amount of the refund net of the tax.
14 In measuring the amount of a refund available when the plan is wound up
(paragraph 11(c)), an entity shall include the costs to the plan of settling the plan
liabilities and making the refund. For example, an entity shall deduct
professional fees if these are paid by the plan rather than the entity, and the
costs of any insurance premiums that may be required to secure the liability on
wind-up.
15 If the amount of a refund is determined as the full amount or a proportion of
the surplus, rather than a fixed amount, an entity shall make no adjustment for
the time value of money, even if the refund is realisable only at a future date.
The economic benefit available as a contribution reduction
16 If there is no minimum funding requirement for contributions relating to
future service, the economic benefit available as a reduction in future
contributions is the future service cost to the entity for each period over the
shorter of the expected life of the plan and the expected life of the entity. The
future service cost to the entity excludes amounts that will be borne by
employees.
17 An entity shall determine the future service costs using assumptions consistent
with those used to determine the defined benefit obligation and with the
situation that exists at the end of the reporting period as determined by IAS 19.
Therefore, an entity shall assume no change to the benefits to be provided by a
plan in the future until the plan is amended and shall assume a stable workforce
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in the future unless the entity makes a reduction in the number of employees
covered by the plan. In the latter case, the assumption about the future
workforce shall include the reduction.
The effect of a minimum funding requirement on the
economic benefit available as a reduction in future
contributions
18 An entity shall analyse any minimum funding requirement at a given date into
contributions that are required to cover (a) any existing shortfall for past service
on the minimum funding basis and (b) future service.
19 Contributions to cover any existing shortfall on the minimum funding basis in
respect of services already received do not affect future contributions for future
service. They may give rise to a liability in accordance with paragraphs 23–26.
20 If there is a minimum funding requirement for contributions relating to future
service, the economic benefit available as a reduction in future contributions is
the sum of:
(a) any amount that reduces future minimum funding requirement
contributions for future service because the entity made a prepayment
(ie paid the amount before being required to do so); and
(b) the estimated future service cost in each period in accordance with
paragraphs 16 and 17, less the estimated minimum funding
requirement contributions that would be required for future service in
those periods if there were no prepayment as described in (a).
21 An entity shall estimate the future minimum funding requirement
contributions for future service taking into account the effect of any existing
surplus determined using the minimum funding basis but excluding the
prepayment described in paragraph 20(a). An entity shall use assumptions
consistent with the minimum funding basis and, for any factors not specified by
that basis, assumptions consistent with those used to determine the defined
benefit obligation and with the situation that exists at the end of the reporting
period as determined by IAS 19. The estimate shall include any changes
expected as a result of the entity paying the minimum contributions when they
are due. However, the estimate shall not include the effect of expected changes
in the terms and conditions of the minimum funding basis that are not
substantively enacted or contractually agreed at the end of the reporting period.
22 When an entity determines the amount described in paragraph 20(b), if the
future minimum funding requirement contributions for future service exceed
the future IAS 19 service cost in any given period, that excess reduces the
amount of the economic benefit available as a reduction in future contributions.
However, the amount described in paragraph 20(b) can never be less than zero.
When a minimum funding requirement may give rise to a
liability
23 If an entity has an obligation under a minimum funding requirement to pay
contributions to cover an existing shortfall on the minimum funding basis in
respect of services already received, the entity shall determine whether the
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contributions payable will be available as a refund or reduction in future
contributions after they are paid into the plan.
24 To the extent that the contributions payable will not be available after they are
paid into the plan, the entity shall recognise a liability when the obligation
arises. The liability shall reduce the net defined benefit asset or increase the net
defined benefit liability so that no gain or loss is expected to result from
applying paragraph 64 of IAS 19 when the contributions are paid.
25–
26
[Deleted]
Effective date
27 An entity shall apply this Interpretation for annual periods beginning on or
after 1 January 2008. Earlier application is permitted.
27A IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs. In
addition it amended paragraph 26. An entity shall apply those amendments for
annual periods beginning on or after 1 January 2009. If an entity applies IAS 1
(revised 2007) for an earlier period, the amendments shall be applied for that
earlier period.
27B Prepayments of a Minimum Funding Requirementadded paragraph 3A and amended
paragraphs 16–18 and 20–22. An entity shall apply those amendments for
annual periods beginning on or after 1 January 2011. Earlier application is
permitted. If an entity applies the amendments for an earlier period, it shall
disclose that fact.
27C IAS 19 (as amended in 2011) amended paragraphs 1, 6, 17 and 24 and deleted
paragraphs 25 and 26. An entity shall apply those amendments when it applies
IAS 19 (as amended in 2011).
Transition
28 An entity shall apply this Interpretation from the beginning of the first period
presented in the first financial statements to which the Interpretation applies.
An entity shall recognise any initial adjustment arising from the application of
this Interpretation in retained earnings at the beginning of that period.
29 An entity shall apply the amendments in paragraphs 3A, 16–18 and 20–22 from
the beginning of the earliest comparative period presented in the first financial
statements in which the entity applies this Interpretation. If the entity had
previously applied this Interpretation before it applies the amendments, it shall
recognise the adjustment resulting from the application of the amendments in
retained earnings at the beginning of the earliest comparative period presented.
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IFRIC Interpretation 16
Hedges of a Net Investment in a Foreign
Operation
In July 2008 the International Accounting Standards Board issued IFRIC 16 Hedges of a Net
Investment in a Foreign Operation. It was developed by the Interpretations Committee.
Other Standards have made minor consequential amendments to IFRIC 16. They include
IFRS 11 Joint Arrangements (issued May 2011), IFRS 9 Financial Instruments(Hedge Accounting
and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013) and IFRS 9Financial
Instruments (issued July 2014).
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CONTENTS
from paragraph
IFRIC INTERPRETATION 16
HEDGES OF A NET INVESTMENT IN A FOREIGN OPERATION
REFERENCES
BACKGROUND 1
SCOPE 7
ISSUES 9
CONSENSUS 10
Nature of the hedged risk and amount of the hedged item for which a
hedging relationship may be designated 10
Where the hedging instrument can be held 14
Disposal of a hedged foreign operation 16
EFFECTIVE DATE 18
TRANSITION 19
APPENDIX
Application guidance
FOR  THE  ACCOMPANYING  DOCUMENTS  LISTED  BELOW, SEE  PART  B  OF  THIS
EDITION
ILLUSTRATIVE  EXAMPLE
BASIS  FOR  CONCLUSIONS
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IFRIC Interpretation 16Hedges of a Net Investment in a Foreign Operation(IFRIC 16) is set out
in paragraphs 1–19 and the Appendix. IFRIC 16 is accompanied by an illustrative
example and a Basis for Conclusions. The scope and authority of Interpretations are set
out in paragraphs 2 and 7–16 of thePreface to International Financial Reporting Standards.
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IFRIC Interpretation 16
Hedges of a Net Investment in a Foreign Operation
References
● IFRS 9Financial Instruments
● IAS 8Accounting Policies, Changes in Accounting Estimates and Errors
● IAS 21The Effects of Changes in Foreign Exchange Rates
Background
1 Many reporting entities have investments in foreign operations (as defined in
IAS 21 paragraph 8). Such foreign operations may be subsidiaries, associates,
joint ventures or branches. IAS 21 requires an entity to determine the
functional currency of each of its foreign operations as the currency of the
primary economic environment of that operation. When translating the results
and financial position of a foreign operation into a presentation currency, the
entity is required to recognise foreign exchange differences in other
comprehensive income until it disposes of the foreign operation.
2 Hedge accounting of the foreign currency risk arising from a net investment in a
foreign operation will apply only when the net assets of that foreign operation
are included in the financial statements.
1
The item being hedged with respect to
the foreign currency risk arising from the net investment in a foreign operation
may be an amount of net assets equal to or less than the carrying amount of the
net assets of the foreign operation.
3 IFRS 9 requires the designation of an eligible hedged item and eligible hedging
instruments in a hedge accounting relationship. If there is a designated hedging
relationship, in the case of a net investment hedge, the gain or loss on the
hedging instrument that is determined to be an effective hedge of the net
investment is recognised in other comprehensive income and is included with
the foreign exchange differences arising on translation of the results and
financial position of the foreign operation.
4 An entity with many foreign operations may be exposed to a number of foreign
currency risks. This Interpretation provides guidance on identifying the foreign
currency risks that qualify as a hedged risk in the hedge of a net investment in a
foreign operation.
5 IFRS 9 allows an entity to designate either a derivative or a non-derivative
financial instrument (or a combination of derivative and non-derivative
financial instruments) as hedging instruments for foreign currency risk. This
1 This will be the case for consolidated financial statements, financial statements in which
investments such as associates or joint ventures are accounted for using the equity method and
financial statements that include a branch or a joint operation as defined in IFRS 11 Joint
Arrangements.
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Interpretation provides guidance on where, within a group, hedging
instruments that are hedges of a net investment in a foreign operation can be
held to qualify for hedge accounting.
6 IAS 21 and IFRS 9 require cumulative amounts recognised in other
comprehensive income relating to both the foreign exchange differences arising
on translation of the results and financial position of the foreign operation and
the gain or loss on the hedging instrument that is determined to be an effective
hedge of the net investment to be reclassified from equity to profit or loss as a
reclassification adjustment when the parent disposes of the foreign operation.
This Interpretation provides guidance on how an entity should determine the
amounts to be reclassified from equity to profit or loss for both the hedging
instrument and the hedged item.
Scope
7 This Interpretation applies to an entity that hedges the foreign currency risk
arising from its net investments in foreign operations and wishes to qualify for
hedge accounting in accordance with IFRS 9. For convenience this
Interpretation refers to such an entity as a parent entity and to the financial
statements in which the net assets of foreign operations are included as
consolidated financial statements. All references to a parent entity apply
equally to an entity that has a net investment in a foreign operation that is a
joint venture, an associate or a branch.
8 This Interpretation applies only to hedges of net investments in foreign
operations; it should not be applied by analogy to other types of hedge
accounting.
Issues
9 Investments in foreign operations may be held directly by a parent entity or
indirectly by its subsidiary or subsidiaries. The issues addressed in this
Interpretation are:
(a) the nature of the hedged risk and the amount of the hedged item for which a
hedging relationship may be designated:
(i) whether the parent entity may designate as a hedged risk only
the foreign exchange differences arising from a difference
between the functional currencies of the parent entity and its
foreign operation, or whether it may also designate as the hedged
risk the foreign exchange differences arising from the difference
between the presentation currency of the parent entity’s
consolidated financial statements and the functional currency of
the foreign operation;
(ii) if the parent entity holds the foreign operation indirectly,
whether the hedged risk may include only the foreign exchange
differences arising from differences in functional currencies
between the foreign operation and its immediate parent entity,
or whether the hedged risk may also include any foreign
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exchange differences between the functional currency of the
foreign operation and any intermediate or ultimate parent entity
(ie whether the fact that the net investment in the foreign
operation is held through an intermediate parent affects the
economic risk to the ultimate parent).
(b) where in a group the hedging instrument can be held:
(i) whether a qualifying hedge accounting relationship can be
established only if the entity hedging its net investment is a party
to the hedging instrument or whether any entity in the group,
regardless of its functional currency, can hold the hedging
instrument;
(ii) whether the nature of the hedging instrument (derivative or
non-derivative) or the method of consolidation affects the
assessment of hedge effectiveness.
(c) what amounts should be reclassified from equity to profit or loss as reclassification
adjustments on disposal of the foreign operation:
(i) when a foreign operation that was hedged is disposed of, what
amounts from the parent entity’s foreign currency translation
reserve in respect of the hedging instrument and in respect of
that foreign operation should be reclassified from equity to profit
or loss in the parent entity’s consolidated financial statements;
(ii) whether the method of consolidation affects the determination
of the amounts to be reclassified from equity to profit or loss.
Consensus
Nature of the hedged risk and amount of the hedged
item for which a hedging relationship may be designated
10 Hedge accounting may be applied only to the foreign exchange differences
arising between the functional currency of the foreign operation and the parent
entity’s functional currency.
11 In a hedge of the foreign currency risks arising from a net investment in a
foreign operation, the hedged item can be an amount of net assets equal to or
less than the carrying amount of the net assets of the foreign operation in the
consolidated financial statements of the parent entity. The carrying amount of
the net assets of a foreign operation that may be designated as the hedged item
in the consolidated financial statements of a parent depends on whether any
lower level parent of the foreign operation has applied hedge accounting for all
or part of the net assets of that foreign operation and that accounting has been
maintained in the parent’s consolidated financial statements.
12 The hedged risk may be designated as the foreign currency exposure arising
between the functional currency of the foreign operation and the functional
currency of any parent entity (the immediate, intermediate or ultimate parent
entity) of that foreign operation. The fact that the net investment is held
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through an intermediate parent does not affect the nature of the economic risk
arising from the foreign currency exposure to the ultimate parent entity.
13 An exposure to foreign currency risk arising from a net investment in a foreign
operation may qualify for hedge accounting only once in the consolidated
financial statements. Therefore, if the same net assets of a foreign operation are
hedged by more than one parent entity within the group (for example, both a
direct and an indirect parent entity) for the same risk, only one hedging
relationship will qualify for hedge accounting in the consolidated financial
statements of the ultimate parent. A hedging relationship designated by one
parent entity in its consolidated financial statements need not be maintained by
another higher level parent entity. However, if it is not maintained by the
higher level parent entity, the hedge accounting applied by the lower level
parent must be reversed before the higher level parent’s hedge accounting is
recognised.
Where the hedging instrument can be held
14 A derivative or a non-derivative instrument (or a combination of derivative and
non-derivative instruments) may be designated as a hedging instrument in a
hedge of a net investment in a foreign operation. The hedging instrument(s)
may be held by any entity or entities within the group, as long as the
designation, documentation and effectiveness requirements of IFRS 9
paragraph 6.4.1 that relate to a net investment hedge are satisfied. In particular,
the hedging strategy of the group should be clearly documented because of the
possibility of different designations at different levels of the group.
15 For the purpose of assessing effectiveness, the change in value of the hedging
instrument in respect of foreign exchange risk is computed by reference to the
functional currency of the parent entity against whose functional currency the
hedged risk is measured, in accordance with the hedge accounting
documentation. Depending on where the hedging instrument is held, in the
absence of hedge accounting the total change in value might be recognised in
profit or loss, in other comprehensive income, or both. However, the assessment
of effectiveness is not affected by whether the change in value of the hedging
instrument is recognised in profit or loss or in other comprehensive income. As
part of the application of hedge accounting, the total effective portion of the
change is included in other comprehensive income. The assessment of
effectiveness is not affected by whether the hedging instrument is a derivative or
a non-derivative instrument or by the method of consolidation.
Disposal of a hedged foreign operation
16 When a foreign operation that was hedged is disposed of, the amount
reclassified to profit or loss as a reclassification adjustment from the foreign
currency translation reserve in the consolidated financial statements of the
parent in respect of the hedging instrument is the amount that IFRS 9
paragraph 6.5.14 requires to be identified. That amount is the cumulative gain
or loss on the hedging instrument that was determined to be an effective hedge.
17 The amount reclassified to profit or loss from the foreign currency translation
reserve in the consolidated financial statements of a parent in respect of the net
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investment in that foreign operation in accordance with IAS 21 paragraph 48 is
the amount included in that parent’s foreign currency translation reserve in
respect of that foreign operation. In the ultimate parent’s consolidated financial
statements, the aggregate net amount recognised in the foreign currency
translation reserve in respect of all foreign operations is not affected by the
consolidation method. However, whether the ultimate parent uses the direct or
the step-by-step method of consolidation
2
may affect the amount included in its
foreign currency translation reserve in respect of an individual foreign
operation. The use of the step-by-step method of consolidation may result in the
reclassification to profit or loss of an amount different from that used to
determine hedge effectiveness. This difference may be eliminated by
determining the amount relating to that foreign operation that would have
arisen if the direct method of consolidation had been used. Making this
adjustment is not required by IAS 21. However, it is an accounting policy choice
that should be followed consistently for all net investments.
Effective date
18 An entity shall apply this Interpretation for annual periods beginning on or
after 1 October 2008. An entity shall apply the amendment to paragraph 14
made byImprovements to IFRSs issued in April 2009 for annual periods beginning
on or after 1 July 2009. Earlier application of both is permitted. If an entity
applies this Interpretation for a period beginning before 1 October 2008, or the
amendment to paragraph 14 before 1 July 2009, it shall disclose that fact.
18A [Deleted]
18B IFRS 9, as issued in July 2014, amended paragraphs 3, 5–7, 14, 16, AG1 and AG8
and deleted paragraph 18A. An entity shall apply those amendments when it
applies IFRS 9.
Transition
19 IAS 8 specifies how an entity applies a change in accounting policy resulting
from the initial application of an Interpretation. An entity is not required to
comply with those requirements when first applying the Interpretation. If an
entity had designated a hedging instrument as a hedge of a net investment but
the hedge does not meet the conditions for hedge accounting in this
Interpretation, the entity shall apply IAS 39 to discontinue that hedge
accounting prospectively.
2 The direct method is the method of consolidation in which the financial statements of the foreign
operation are translated directly into the functional currency of the ultimate parent. The
step-by-step method is the method of consolidation in which the financial statements of the foreign
operation are first translated into the functional currency of any intermediate parent(s) and then
translated into the functional currency of the ultimate parent (or the presentation currency if
different).
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Appendix
Application guidance
This appendix is an integral part of the Interpretation.
AG1 This appendix illustrates the application of the Interpretation using the
corporate structure illustrated below. In all cases the hedging relationships
described would be tested for effectiveness in accordance with IFRS 9, although
this testing is not discussed in this appendix. Parent, being the ultimate parent
entity, presents its consolidated financial statements in its functional currency
of euro (EUR). Each of the subsidiaries is wholly owned. Parent’s £500 million
net investment in Subsidiary B (functional currency pounds sterling (GBP))
includes the £159 million equivalent of Subsidiary B’s US$300 million net
investment in Subsidiary C (functional currency US dollars (USD)). In other
words, Subsidiary B’s net assets other than its investment in Subsidiary C are
£341 million.
Nature of hedged risk for which a hedging relationship
may be designated (paragraphs 10–13)
AG2 Parent can hedge its net investment in each of Subsidiaries A, B and C for the
foreign exchange risk between their respective functional currencies (Japanese
yen (JPY), pounds sterling and US dollars) and euro. In addition, Parent can
hedge the USD/GBP foreign exchange risk between the functional currencies of
Subsidiary B and Subsidiary C. In its consolidated financial statements,
Subsidiary B can hedge its net investment in Subsidiary C for the foreign
exchange risk between their functional currencies of US dollars and pounds
sterling. In the following examples the designated risk is the spot foreign
exchange risk because the hedging instruments are not derivatives. If the
hedging instruments were forward contracts, Parent could designate the
forward foreign exchange risk.
Parent
functional currency EUR
Subsidiary A
functional currency JPY
¥ 400,000 million
Subsidiary B
functional currency GBP
Subsidiary C
functional currency USD
£500 million
US$300 million
(£159 million equivalent)
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Amount of hedged item for which a hedging relationship
may be designated (paragraphs 10–13)
AG3 Parent wishes to hedge the foreign exchange risk from its net investment in
Subsidiary C. Assume that Subsidiary A has an external borrowing of
US$300 million. The net assets of Subsidiary A at the start of the reporting
period are ¥400,000 million including the proceeds of the external borrowing of
US$300 million.
AG4 The hedged item can be an amount of net assets equal to or less than the
carrying amount of Parent’s net investment in Subsidiary C (US$300 million) in
its consolidated financial statements. In its consolidated financial statements
Parent can designate the US$300 million external borrowing in Subsidiary A as a
hedge of the EUR/USD spot foreign exchange risk associated with its net
investment in the US$300 million net assets of Subsidiary C. In this case, both
the EUR/USD foreign exchange difference on the US$300 million external
borrowing in Subsidiary A and the EUR/USD foreign exchange difference on the
US$300 million net investment in Subsidiary C are included in the foreign
currency translation reserve in Parent’s consolidated financial statements after
the application of hedge accounting.
AG5 In the absence of hedge accounting, the total USD/EUR foreign exchange
difference on the US$300 million external borrowing in Subsidiary A would be
recognised in Parent’s consolidated financial statements as follows:
● USD/JPY spot foreign exchange rate change, translated to euro, in profit
or loss, and
● JPY/EUR spot foreign exchange rate change in other comprehensive
income.
Instead of the designation in paragraph AG4, in its consolidated financial
statements Parent can designate the US$300 million external borrowing in
Subsidiary A as a hedge of the GBP/USD spot foreign exchange risk between
Subsidiary C and Subsidiary B. In this case, the total USD/EUR foreign exchange
difference on the US$300 million external borrowing in Subsidiary A would
instead be recognised in Parent’s consolidated financial statements as follows:
● the GBP/USD spot foreign exchange rate change in the foreign currency
translation reserve relating to Subsidiary C,
● GBP/JPY spot foreign exchange rate change, translated to euro, in profit
or loss, and
● JPY/EUR spot foreign exchange rate change in other comprehensive
income.
AG6 Parent cannot designate the US$300 million external borrowing in Subsidiary A
as a hedge of both the EUR/USD spot foreign exchange risk and the GBP/USD spot
foreign exchange risk in its consolidated financial statements. A single hedging
instrument can hedge the same designated risk only once. Subsidiary B cannot
apply hedge accounting in its consolidated financial statements because the
hedging instrument is held outside the group comprising Subsidiary B and
Subsidiary C.
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Where in a group can the hedging instrument be held
(paragraphs 14 and 15)?
AG7 As noted in paragraph AG5, the total change in value in respect of foreign
exchange risk of the US$300 million external borrowing in Subsidiary A would
be recorded in both profit or loss (USD/JPY spot risk) and other comprehensive
income (EUR/JPY spot risk) in Parent’s consolidated financial statements in the
absence of hedge accounting. Both amounts are included for the purpose of
assessing the effectiveness of the hedge designated in paragraph AG4 because
the change in value of both the hedging instrument and the hedged item are
computed by reference to the euro functional currency of Parent against the
US dollar functional currency of Subsidiary C, in accordance with the hedge
documentation. The method of consolidation (ie direct method or step-by-step
method) does not affect the assessment of the effectiveness of the hedge.
Amounts reclassified to profit or loss on disposal of a
foreign operation (paragraphs 16 and 17)
AG8 When Subsidiary C is disposed of, the amounts reclassified to profit or loss in
Parent’s consolidated financial statements from its foreign currency translation
reserve (FCTR) are:
(a) in respect of the US$300 million external borrowing of Subsidiary A, the
amount that IFRS 9 requires to be identified, ie the total change in value
in respect of foreign exchange risk that was recognised in other
comprehensive income as the effective portion of the hedge; and
(b) in respect of the US$300 million net investment in Subsidiary C, the
amount determined by the entity’s consolidation method. If Parent uses
the direct method, its FCTR in respect of Subsidiary C will be determined
directly by the EUR/USD foreign exchange rate. If Parent uses the
step-by-step method, its FCTR in respect of Subsidiary C will be
determined by the FCTR recognised by Subsidiary B reflecting the
GBP/USD foreign exchange rate, translated to Parent’s functional
currency using the EUR/GBP foreign exchange rate. Parent’s use of the
step-by-step method of consolidation in prior periods does not require it
to or preclude it from determining the amount of FCTR to be reclassified
when it disposes of Subsidiary C to be the amount that it would have
recognised if it had always used the direct method, depending on its
accounting policy.
Hedging more than one foreign operation
(paragraphs 11, 13 and 15)
AG9 The following examples illustrate that in the consolidated financial statements
of Parent, the risk that can be hedged is always the risk between its functional
currency (euro) and the functional currencies of Subsidiaries B and C. No matter
how the hedges are designated, the maximum amounts that can be effective
hedges to be included in the foreign currency translation reserve in Parent’s
consolidated financial statements when both foreign operations are hedged are
US$300 million for EUR/USD risk and £341 million for EUR/GBP risk. Other
changes in value due to changes in foreign exchange rates are included in
Parent’s consolidated profit or loss. Of course, it would be possible for Parent to
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designate US$300 million only for changes in the USD/GBP spot foreign
exchange rate or £500 million only for changes in the GBP/EUR spot foreign
exchange rate.
Parent holds both USD and GBP hedging instruments
AG10 Parent may wish to hedge the foreign exchange risk in relation to its net
investment in Subsidiary B as well as that in relation to Subsidiary C. Assume
that Parent holds suitable hedging instruments denominated in US dollars and
pounds sterling that it could designate as hedges of its net investments in
Subsidiary B and Subsidiary C. The designations Parent can make in its
consolidated financial statements include, but are not limited to, the following:
(a) US$300 million hedging instrument designated as a hedge of the
US$300 million of net investment in Subsidiary C with the risk being the
spot foreign exchange exposure (EUR/USD) between Parent and
Subsidiary C and up to £341 million hedging instrument designated as a
hedge of £341 million of the net investment in Subsidiary B with the risk
being the spot foreign exchange exposure (EUR/GBP) between Parent and
Subsidiary B.
(b) US$300 million hedging instrument designated as a hedge of the
US$300 million of net investment in Subsidiary C with the risk being the
spot foreign exchange exposure (GBP/USD) between Subsidiary B and
Subsidiary C and up to £500 million hedging instrument designated as a
hedge of £500 million of the net investment in Subsidiary B with the risk
being the spot foreign exchange exposure (EUR/GBP) between Parent and
Subsidiary B.
AG11 The EUR/USD risk from Parent’s net investment in Subsidiary C is a different risk
from the EUR/GBP risk from Parent’s net investment in Subsidiary B. However,
in the case described in paragraph AG10(a), by its designation of the USD
hedging instrument it holds, Parent has already fully hedged the EUR/USD risk
from its net investment in Subsidiary C. If Parent also designated a GBP
instrument it holds as a hedge of its £500 million net investment in
Subsidiary B, £159 million of that net investment, representing the GBP
equivalent of its USD net investment in Subsidiary C, would be hedged twice for
GBP/EUR risk in Parent’s consolidated financial statements.
AG12 In the case described in paragraph AG10(b), if Parent designates the hedged risk
as the spot foreign exchange exposure (GBP/USD) between Subsidiary B and
Subsidiary C, only the GBP/USD part of the change in the value of its
US$300 million hedging instrument is included in Parent’s foreign currency
translation reserve relating to Subsidiary C. The remainder of the change
(equivalent to the GBP/EUR change on £159 million) is included in Parent’s
consolidated profit or loss, as in paragraph AG5. Because the designation of the
USD/GBP risk between Subsidiaries B and C does not include the GBP/EUR risk,
Parent is also able to designate up to £500 million of its net investment in
Subsidiary B with the risk being the spot foreign exchange exposure (GBP/EUR)
between Parent and Subsidiary B.
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Subsidiary B holds the USD hedging instrument
AG13 Assume that Subsidiary B holds US$300 million of external debt the proceeds of
which were transferred to Parent by an inter-company loan denominated in
pounds sterling. Because both its assets and liabilities increased by
£159 million, Subsidiary B’s net assets are unchanged. Subsidiary B could
designate the external debt as a hedge of the GBP/USD risk of its net investment
in Subsidiary C in its consolidated financial statements. Parent could maintain
Subsidiary B’s designation of that hedging instrument as a hedge of its
US$300 million net investment in Subsidiary C for the GBP/USD risk (see
paragraph 13) and Parent could designate the GBP hedging instrument it holds
as a hedge of its entire £500 million net investment in Subsidiary B. The first
hedge, designated by Subsidiary B, would be assessed by reference to
Subsidiary B’s functional currency (pounds sterling) and the second hedge,
designated by Parent, would be assessed by reference to Parent’s functional
currency (euro). In this case, only the GBP/USD risk from Parent’s net investment
in Subsidiary C has been hedged in Parent’s consolidated financial statements by
the USD hedging instrument, not the entire EUR/USD risk. Therefore, the entire
EUR/GBP risk from Parent’s £500 million net investment in Subsidiary B may be
hedged in the consolidated financial statements of Parent.
AG14 However, the accounting for Parent’s £159 million loan payable to Subsidiary B
must also be considered. If Parent’s loan payable is not considered part of its net
investment in Subsidiary B because it does not satisfy the conditions in IAS 21
paragraph 15, the GBP/EUR foreign exchange difference arising on translating it
would be included in Parent’s consolidated profit or loss. If the £159 million
loan payable to Subsidiary B is considered part of Parent’s net investment, that
net investment would be only £341 million and the amount Parent could
designate as the hedged item for GBP/EUR risk would be reduced from
£500 million to £341 million accordingly.
AG15 If Parent reversed the hedging relationship designated by Subsidiary B, Parent
could designate the US$300 million external borrowing held by Subsidiary B as a
hedge of its US$300 million net investment in Subsidiary C for the EUR/USD risk
and designate the GBP hedging instrument it holds itself as a hedge of only up to
£341 million of the net investment in Subsidiary B. In this case the effectiveness
of both hedges would be computed by reference to Parent’s functional currency
(euro). Consequently, both the USD/GBP change in value of the external
borrowing held by Subsidiary B and the GBP/EUR change in value of Parent’s
loan payable to Subsidiary B (equivalent to USD/EUR in total) would be included
in the foreign currency translation reserve in Parent’s consolidated financial
statements. Because Parent has already fully hedged the EUR/USD risk from its
net investment in Subsidiary C, it can hedge only up to £341 million for the
EUR/GBP risk of its net investment in Subsidiary B.
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IFRIC Interpretation 17
Distributions of Non-cash Assets to Owners
In November 2008 the International Accounting Standards Board issued IFRIC 17
Distributions of Non-cash Assets to Owners. It was developed by the Interpretations Committee.
The Basis for Conclusions on IFRIC 17 was amended to reflect IFRS 9Financial Instruments
(issued July 2014).
Other Standards have made minor consequential amendments to IFRIC 17. They include
IFRS 10Consolidated Financial Statements(issued May 2011) and IFRS 13 Fair Value Measurement
(issued May 2011).
IFRIC 17
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CONTENTS
from paragraph
IFRIC INTERPRETATION 17
DISTRIBUTIONS OF NON-CASH ASSETS TO OWNERS
REFERENCES
BACKGROUND 1
SCOPE 3
ISSUES 9
CONSENSUS 10
When to recognise a dividend payable 10
Measurement of a dividend payable 11
Accounting for any difference between the carrying amount of the assets
distributed and the carrying amount of the dividend payable when an entity
settles the dividend payable 14
Presentation and disclosures 15
EFFECTIVE DATE 18
APPENDIX
Amendments to IFRS 5 and IAS 10
FOR  THE  ACCOMPANYING  DOCUMENTS  LISTED  BELOW, SEE  PART  B  OF  THIS
EDITION
ILLUSTRATIVE  EXAMPLES
BASIS  FOR  CONCLUSIONS
IFRIC 17
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IFRIC Interpretation 17 Distributions of Non-cash Assets to Owners(IFRIC 17) is set out in
paragraphs 1–20 and the Appendix. IFRIC 17 is accompanied by illustrative examples
and a Basis for Conclusions. The scope and authority of Interpretations are set out in
paragraphs 2 and 7–16 of thePreface to International Financial Reporting Standards.
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IFRIC Interpretation 17
Distributions of Non-cash Assets to Owners
References
● IFRS 3Business Combinations(as revised in 2008)
● IFRS 5Non-current Assets Held for Sale and Discontinued Operations
● IFRS 7Financial Instruments: Disclosures
● IFRS 10Consolidated Financial Statements
● IFRS 13Fair Value Measurement
● IAS 1Presentation of Financial Statements(as revised in 2007)
● IAS 10Events after the Reporting Period
Background
1 Sometimes an entity distributes assets other than cash (non-cash assets) as
dividends to its owners
1
acting in their capacity as owners. In those situations,
an entity may also give its owners a choice of receiving either non-cash assets or
a cash alternative. The IFRIC received requests for guidance on how an entity
should account for such distributions.
2 International Financial Reporting Standards (IFRSs) do not provide guidance on
how an entity should measure distributions to its owners (commonly referred to
as dividends). IAS 1 requires an entity to present details of dividends recognised
as distributions to owners either in the statement of changes in equity or in the
notes to the financial statements.
Scope
3 This Interpretation applies to the following types of non-reciprocal distributions
of assets by an entity to its owners acting in their capacity as owners:
(a) distributions of non-cash assets (eg items of property, plant and
equipment, businesses as defined in IFRS 3, ownership interests in
another entity or disposal groups as defined in IFRS 5); and
(b) distributions that give owners a choice of receiving either non-cash assets
or a cash alternative.
4 This Interpretation applies only to distributions in which all owners of the same
class of equity instruments are treated equally.
5 This Interpretation does not apply to a distribution of a non-cash asset that is
ultimately controlled by the same party or parties before and after the
distribution. This exclusion applies to the separate, individual and consolidated
financial statements of an entity that makes the distribution.
1 Paragraph 7 of IAS 1 defines owners as holders of instruments classified as equity.
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6 In accordance with paragraph 5, this Interpretation does not apply when the
non-cash asset is ultimately controlled by the same parties both before and after
the distribution. Paragraph B2 of IFRS 3 states that ‘A group of individuals shall
be regarded as controlling an entity when, as a result of contractual
arrangements, they collectively have the power to govern its financial and
operating policies so as to obtain benefits from its activities.’ Therefore, for a
distribution to be outside the scope of this Interpretation on the basis that the
same parties control the asset both before and after the distribution, a group of
individual shareholders receiving the distribution must have, as a result of
contractual arrangements, such ultimate collective power over the entity
making the distribution.
7 In accordance with paragraph 5, this Interpretation does not apply when an
entity distributes some of its ownership interests in a subsidiary but retains
control of the subsidiary. The entity making a distribution that results in the
entity recognising a non-controlling interest in its subsidiary accounts for the
distribution in accordance with IFRS 10.
8 This Interpretation addresses only the accounting by an entity that makes a
non-cash asset distribution. It does not address the accounting by shareholders
who receive such a distribution.
Issues
9 When an entity declares a distribution and has an obligation to distribute the
assets concerned to its owners, it must recognise a liability for the dividend
payable. Consequently, this Interpretation addresses the following issues:
(a) When should the entity recognise the dividend payable?
(b) How should an entity measure the dividend payable?
(c) When an entity settles the dividend payable, how should it account for
any difference between the carrying amount of the assets distributed and
the carrying amount of the dividend payable?
Consensus
When to recognise a dividend payable
10 The liability to pay a dividend shall be recognised when the dividend is
appropriately authorised and is no longer at the discretion of the entity, which
is the date:
(a) when declaration of the dividend, eg by management or the board of
directors, is approved by the relevant authority, eg the shareholders, if
the jurisdiction requires such approval, or
(b) when the dividend is declared, eg by management or the board of
directors, if the jurisdiction does not require further approval.
Measurement of a dividend payable
11 An entity shall measure a liability to distribute non-cash assets as a dividend to
its owners at the fair value of the assets to be distributed.
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12 If an entity gives its owners a choice of receiving either a non-cash asset or a cash
alternative, the entity shall estimate the dividend payable by considering both
the fair value of each alternative and the associated probability of owners
selecting each alternative.
13 At the end of each reporting period and at the date of settlement, the entity shall
review and adjust the carrying amount of the dividend payable, with any
changes in the carrying amount of the dividend payable recognised in equity as
adjustments to the amount of the distribution.
Accounting for any difference between the carrying
amount of the assets distributed and the carrying
amount of the dividend payable when an entity settles
the dividend payable
14 When an entity settles the dividend payable, it shall recognise the difference, if
any, between the carrying amount of the assets distributed and the carrying
amount of the dividend payable in profit or loss.
Presentation and disclosures
15 An entity shall present the difference described in paragraph 14 as a separate
line item in profit or loss.
16 An entity shall disclose the following information, if applicable:
(a) the carrying amount of the dividend payable at the beginning and end of
the period; and
(b) the increase or decrease in the carrying amount recognised in the period
in accordance with paragraph 13 as result of a change in the fair value of
the assets to be distributed.
17 If, after the end of a reporting period but before the financial statements are
authorised for issue, an entity declares a dividend to distribute a non-cash asset,
it shall disclose:
(a) the nature of the asset to be distributed;
(b) the carrying amount of the asset to be distributed as of the end of the
reporting period; and
(c) the fair value of the asset to be distributed as of the end of the reporting
period, if it is different from its carrying amount, and the information
about the method(s) used to measure that fair value required by
paragraphs 93(b), (d), (g) and (i) and 99 of IFRS 13.
Effective date
18 An entity shall apply this Interpretation prospectively for annual periods
beginning on or after 1 July 2009. Retrospective application is not permitted.
Earlier application is permitted. If an entity applies this Interpretation for a
period beginning before 1 July 2009, it shall disclose that fact and also apply
IFRS 3 (as revised in 2008), IAS 27 (as amended in May 2008) and IFRS 5 (as
amended by this Interpretation).
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19 IFRS 10, issued in May 2011, amended paragraph 7. An entity shall apply that
amendment when it applies IFRS 10.
20 IFRS 13, issued in May 2011, amended paragraph 17. An entity shall apply that
amendment when it applies IFRS 13.
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Appendix
Amendments to IFRS 5Non-current Assets Held for Sale
and Discontinued Operationsand IAS 10Events after the
Reporting Period
The amendments contained in this appendix when this Interpretation was issued in 2008 have been
incorporated into IFRS 5 and IAS 10 as published in this volume.
IFRIC 17
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IFRIC Interpretation 19
Extinguishing Financial Liabilities with
Equity Instruments
In November 2009 the International Accounting Standards Board issued IFRIC 19
Extinguishing Financial Liabilities with Equity Instruments. It was developed by the
Interpretations Committee.
Other Standards have made minor consequential amendments to IFRIC 19. They include
IFRS 13 Fair Value Measurement (issued May 2011), IFRS 9 Financial Instruments (Hedge
Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013) and
IFRS 9Financial Instruments(issued July 2014).
IFRIC 19
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CONTENTS
from paragraph
IFRIC INTERPRETATION 19
EXTINGUISHING FINANCIAL LIABILITIES WITH EQUITY
INSTRUMENTS
REFERENCES
BACKGROUND 1
SCOPE 2
ISSUES 4
CONSENSUS 5
EFFECTIVE DATE AND TRANSITION 12
APPENDIX
Amendment to IFRS 1First-time Adoption of International Financial
Reporting Standards
FOR  THE  ACCOMPANYING  DOCUMENT  LISTED  BELOW, SEE  PART  B  OF  THIS  EDITION
BASIS  FOR  CONCLUSIONS
IFRIC 19
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IFRIC Interpretation 19Extinguishing Financial Liabilities with Equity Instruments(IFRIC 19) is
set out in paragraphs 1–17 and the Appendix. IFRIC 19 is accompanied by a Basis for
Conclusions. The scope and authority of Interpretations are set out in paragraphs 2 and
7–16 of thePreface to International Financial Reporting Standards.
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IFRIC Interpretation 19
Extinguishing Financial Liabilities with Equity Instruments
References
● Framework for the Preparation and Presentation of Financial Statements
1
● IFRS 2Share-based Payment
● IFRS 3Business Combinations
● IFRS 9Financial Instruments
● IFRS 13Fair Value Measurement
● IAS 1Presentation of Financial Statements
● IAS 8Accounting Policies, Changes in Accounting Estimates and Errors
● IAS 32Financial Instruments: Presentation
Background
1 A debtor and creditor might renegotiate the terms of a financial liability with
the result that the debtor extinguishes the liability fully or partially by issuing
equity instruments to the creditor. These transactions are sometimes referred to
as ‘debt for equity swaps’. The IFRIC has received requests for guidance on the
accounting for such transactions.
Scope
2 This Interpretation addresses the accounting by an entity when the terms of a
financial liability are renegotiated and result in the entity issuing equity
instruments to a creditor of the entity to extinguish all or part of the financial
liability. It does not address the accounting by the creditor.
3 An entity shall not apply this Interpretation to transactions in situations where:
(a) the creditor is also a direct or indirect shareholder and is acting in its
capacity as a direct or indirect existing shareholder.
(b) the creditor and the entity are controlled by the same party or parties
before and after the transaction and the substance of the transaction
includes an equity distribution by, or contribution to, the entity.
(c) extinguishing the financial liability by issuing equity shares is in
accordance with the original terms of the financial liability.
Issues
4 This Interpretation addresses the following issues:
1 In September 2010 the IASB replaced theFramework with theConceptual Framework for Financial
Reporting.
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(a) Are an entity’s equity instruments issued to extinguish all or part of a
financial liability ‘consideration paid’ in accordance with
paragraph 3.3.3 of IFRS 9?
(b) How should an entity initially measure the equity instruments issued to
extinguish such a financial liability?
(c) How should an entity account for any difference between the carrying
amount of the financial liability extinguished and the initial
measurement amount of the equity instruments issued?
Consensus
5 The issue of an entity’s equity instruments to a creditor to extinguish all or part
of a financial liability is consideration paid in accordance with paragraph 3.3.3
of IFRS 9. An entity shall remove a financial liability (or part of a financial
liability) from its statement of financial position when, and only when, it is
extinguished in accordance with paragraph 3.3.1 of IFRS 9.
6 When equity instruments issued to a creditor to extinguish all or part of a
financial liability are recognised initially, an entity shall measure them at the
fair value of the equity instruments issued, unless that fair value cannot be
reliably measured.
7 If the fair value of the equity instruments issued cannot be reliably measured
then the equity instruments shall be measured to reflect the fair value of the
financial liability extinguished. In measuring the fair value of a financial
liability extinguished that includes a demand feature (eg a demand deposit),
paragraph 47 of IFRS 13 is not applied.
8 If only part of the financial liability is extinguished, the entity shall assess
whether some of the consideration paid relates to a modification of the terms of
the liability that remains outstanding. If part of the consideration paid does
relate to a modification of the terms of the remaining part of the liability, the
entity shall allocate the consideration paid between the part of the liability
extinguished and the part of the liability that remains outstanding. The entity
shall consider all relevant facts and circumstances relating to the transaction in
making this allocation.
9 The difference between the carrying amount of the financial liability (or part of
a financial liability) extinguished, and the consideration paid, shall be
recognised in profit or loss, in accordance with paragraph 3.3.3 of IFRS 9. The
equity instruments issued shall be recognised initially and measured at the date
the financial liability (or part of that liability) is extinguished.
10 When only part of the financial liability is extinguished, consideration shall be
allocated in accordance with paragraph 8. The consideration allocated to the
remaining liability shall form part of the assessment of whether the terms of
that remaining liability have been substantially modified. If the remaining
liability has been substantially modified, the entity shall account for the
modification as the extinguishment of the original liability and the recognition
of a new liability as required by paragraph 3.3.2 of IFRS 9.
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11 An entity shall disclose a gain or loss recognised in accordance with
paragraphs 9 and 10 as a separate line item in profit or loss or in the notes.
Effective date and transition
12 An entity shall apply this Interpretation for annual periods beginning on or
after 1 July 2010. Earlier application is permitted. If an entity applies this
Interpretation for a period beginning before 1 July 2010, it shall disclose that
fact.
13 An entity shall apply a change in accounting policy in accordance with IAS 8
from the beginning of the earliest comparative period presented.
14 [Deleted]
15 IFRS 13, issued in May 2011, amended paragraph 7. An entity shall apply that
amendment when it applies IFRS 13.
16 [Deleted]
17 IFRS 9, as issued in July 2014, amended paragraphs 4, 5, 7, 9 and 10 and deleted
paragraphs 14 and 16. An entity shall apply those amendments when it applies
IFRS 9.
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Appendix
Amendment to IFRS 1First-time Adoption of International
Financial Reporting Standards
The amendment in this appendix shall be applied for annual periods beginning on or after 1 July
2010. If an entity applies this Interpretation for an earlier period, the amendment shall be applied
for that earlier period.
*****
The amendment contained in this appendix when this Interpretation was issued in 2009 has been
incorporated into the text of IFRS 1 as issued on or after 26 November 2009.
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IFRIC Interpretation 20
Stripping Costs in the Production Phase of
a Surface Mine
In October 2011 the International Accounting Standards Board issued IFRIC 20 Stripping
Costs in the Production Phase of a Surface Mine. It was developed by the Interpretations
Committee.
IFRIC 20
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CONTENTS
from paragraph
IFRIC INTERPRETATION 20
STRIPPING COSTS IN THE PRODUCTION PHASE OF A
SURFACE MINE
REFERENCES
BACKGROUND 1
SCOPE 6
ISSUES 7
CONSENSUS 8
APPENDICES
A Effective date and transition
B Amendment to IFRS 1First-time Adoption of International Financial
Reporting Standards(as revised in 2010)
FOR  THE  ACCOMPANYING  DOCUMENT  LISTED  BELOW, SEE  PART  B  OF  THIS  EDITION
BASIS  FOR  CONCLUSIONS
IFRIC 20
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IFRIC Interpretation 20 Stripping Costs in the Production Phase of a Surface Mine(IFRIC 20) is
set out in paragraphs 1–16 and appendices A–B. IFRIC 20 is accompanied by a Basis for
Conclusions. The scope and authority of Interpretations are set out in paragraphs 2 and
7–16 of thePreface to International Financial Reporting Standards.
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IFRIC Interpretation 20
Stripping Costs in the Production Phase of a Surface Mine
References
● Conceptual Framework for Financial Reporting
● IAS 1Presentation of Financial Statements
● IAS 2Inventories
● IAS 16Property, Plant and Equipment
● IAS 38Intangible Assets
Background
1 In surface mining operations, entities may find it necessary to remove mine
waste materials (‘overburden’) to gain access to mineral ore deposits. This waste
removal activity is known as ‘stripping’.
2 During the development phase of the mine (before production begins), stripping
costs are usually capitalised as part of the depreciable cost of building,
developing and constructing the mine. Those capitalised costs are depreciated
or amortised on a systematic basis, usually by using the units of production
method, once production begins.
3 A mining entity may continue to remove overburden and to incur stripping
costs during the production phase of the mine.
4 The material removed when stripping in the production phase will not
necessarily be 100 per cent waste; often it will be a combination of ore and
waste. The ratio of ore to waste can range from uneconomic low grade to
profitable high grade. Removal of material with a low ratio of ore to waste may
produce some usable material, which can be used to produce inventory. This
removal might also provide access to deeper levels of material that have a higher
ratio of ore to waste. There can therefore be two benefits accruing to the entity
from the stripping activity: usable ore that can be used to produce inventory and
improved access to further quantities of material that will be mined in future
periods.
5 This Interpretation considers when and how to account separately for these two
benefits arising from the stripping activity, as well as how to measure these
benefits both initially and subsequently.
Scope
6 This Interpretation applies to waste removal costs that are incurred in surface
mining activity during the production phase of the mine (‘production stripping
costs’).
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Issues
7 This Interpretation addresses the following issues:
(a) recognition of production stripping costs as an asset;
(b) initial measurement of the stripping activity asset; and
(c) subsequent measurement of the stripping activity asset.
Consensus
Recognition of production stripping costs as an asset
8 To the extent that the benefit from the stripping activity is realised in the form
of inventory produced, the entity shall account for the costs of that stripping
activity in accordance with the principles of IAS 2Inventories. To the extent the
benefit is improved access to ore, the entity shall recognise these costs as a
non-current asset, if the criteria in paragraph 9 below are met. This
Interpretation refers to the non-current asset as the ‘stripping activity asset’.
9 An entity shall recognise a stripping activity asset if, and only if, all of the
following are met:
(a) it is probable that the future economic benefit (improved access to the
ore body) associated with the stripping activity will flow to the entity;
(b) the entity can identify the component of the ore body for which access
has been improved; and
(c) the costs relating to the stripping activity associated with that
component can be measured reliably.
10 The stripping activity asset shall be accounted for as an addition to, or as an
enhancement of, an existing asset. In other words, the stripping activity asset
will be accounted for aspartof an existing asset.
11 The stripping activity asset’s classification as a tangible or intangible asset is the
same as the existing asset. In other words, the nature of this existing asset will
determine whether the entity shall classify the stripping activity asset as
tangible or intangible.
Initial measurement of the stripping activity asset
12 The entity shall initially measure the stripping activity asset at cost, this being
the accumulation of costs directly incurred to perform the stripping activity that
improves access to the identified component of ore, plus an allocation of directly
attributable overhead costs. Some incidental operations may take place at the
same time as the production stripping activity, but which are not necessary for
the production stripping activity to continue as planned. The costs associated
with these incidental operations shall not be included in the cost of the
stripping activity asset.
13 When the costs of the stripping activity asset and the inventory produced are not
separately identifiable, the entity shall allocate the production stripping costs
between the inventory produced and the stripping activity asset by using an
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allocation basis that is based on a relevant production measure. This production
measure shall be calculated for the identified component of the ore body, and
shall be used as a benchmark to identify the extent to which the additional
activity of creating a future benefit has taken place. Examples of such measures
include:
(a) cost of inventory produced compared with expected cost;
(b) volume of waste extracted compared with expected volume, for a given
volume of ore production; and
(c) mineral content of the ore extracted compared with expected mineral
content to be extracted, for a given quantity of ore produced.
Subsequent measurement of the stripping activity asset
14 After initial recognition, the stripping activity asset shall be carried at either its
cost or its revalued amount less depreciation or amortisation and less
impairment losses, in the same way as the existing asset of which it is a part.
15 The stripping activity asset shall be depreciated or amortised on a systematic
basis, over the expected useful life of the identified component of the ore body
that becomes more accessible as a result of the stripping activity. The units of
production method shall be applied unless another method is more appropriate.
16 The expected useful life of the identified component of the ore body that is used
to depreciate or amortise the stripping activity asset will differ from the
expected useful life that is used to depreciate or amortise the mine itself and the
related life-of-mine assets. The exception to this are those limited circumstances
when the stripping activity provides improved access to the whole of the
remaining ore body. For example, this might occur towards the end of a mine’s
useful life when the identified component represents the final part of the ore
body to be extracted.
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Appendix A
Effective date and transition
This appendix is an integral part of the Interpretation and has the same authority as the other parts of
the Interpretation.
A1 An entity shall apply this Interpretation for annual periods beginning on or
after 1 January 2013. Earlier application is permitted. If an entity applies this
Interpretation for an earlier period, it shall disclose that fact.
A2 An entity shall apply this Interpretation to production stripping costs incurred
on or after the beginning of the earliest period presented.
A3 As at the beginning of the earliest period presented, any previously recognised
asset balance that resulted from stripping activity undertaken during the
production phase (‘predecessor stripping asset’) shall be reclassified as a part of
an existing asset to which the stripping activity related, to the extent that there
remains an identifiable component of the ore body with which the predecessor
stripping asset can be associated. Such balances shall be depreciated or
amortised over the remaining expected useful life of the identified component
of the ore body to which each predecessor stripping asset balance relates.
A4 If there is no identifiable component of the ore body to which that predecessor
stripping asset relates, it shall be recognised in opening retained earnings at the
beginning of the earliest period presented.
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Appendix B
Amendments to IFRS 1First-time Adoption of International
Financial Reporting Standards
The amendments in this appendix shall be applied for annual periods beginning on or after
1 January 2013. If an entity applies this Interpretation for an earlier period these amendments
shall be applied for that earlier period.
*****
The amendments contained in this appendix with this Interpretation was issued in 2011 have been
incorporated into IFRS 1 as issued on and after 27 May 2004. In November 2008 a revised version of
IFRS 1 was issued.
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IFRIC Interpretation 21
Levies
In May 2013 the International Accounting Standards Board issued IFRIC 21 Levies.Itwas
developed by the Interpretations Committee.
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CONTENTS
from paragraph
IFRIC INTERPRETATION 21 LEVIES
References
Background 1
Scope 2
Issues 7
Consensus 8
APPENDIX A
Effective date and transition
FOR  THE  ACCOMPANYING  DOCUMENTS  LISTED  BELOW, SEE  PART  B  OF  THIS
EDITION
ILLUSTRATIVE  EXAMPLES
BASIS  FOR  CONCLUSIONS  ON  IFRIC  INTERPRETATION  21  LEVIES
IFRIC 21
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IFRIC Interpretation 21 Levies(IFRIC 21) is set out in paragraphs 1–14 and Appendix A.
IFRIC 21 is accompanied by Illustrative Examples and a Basis for Conclusions. The scope
and authority of Interpretations are set out in paragraphs 2 and 7–14 of thePreface of
International Financial Reporting Standards.
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IFRIC Interpretation 21
Levies
References
● IAS 1Presentation of Financial Statements
● IAS 8Accounting Policies, Changes in Accounting Estimates and Errors
● IAS 12Income Taxes
● IAS 20Accounting for Governments Grants and Disclosures of Government Assistance
● IAS 24Related Party Disclosures
● IAS 34Interim Financial Reporting
● IAS 37Provisions, Contingent Liabilities and Contingent Assets
● IFRIC 6 Liabilities arising from Participating in a Specific Market—Waste Electrical and
Electronic Equipment
Background
1 A government may impose a levy on an entity. The IFRS Interpretations
Committee received requests for guidance on the accounting for levies in the
financial statements of the entity that is paying the levy. The question relates to
when to recognise a liability to pay a levy that is accounted for in accordance
with IAS 37Provisions, Contingent Liabilities and Contingent Assets.
Scope
2 This Interpretation addresses the accounting for a liability to pay a levy if that
liability is within the scope of IAS 37. It also addresses the accounting for a
liability to pay a levy whose timing and amount is certain.
3 This Interpretation does not address the accounting for the costs that arise from
recognising a liability to pay a levy. Entities should apply other Standards to
decide whether the recognition of a liability to pay a levy gives rise to an asset or
an expense.
4 For the purposes of this Interpretation, a levy is an outflow of resources
embodying economic benefits that is imposed by governments on entities in
accordance with legislation (ie laws and/or regulations), other than:
(a) those outflows of resources that are within the scope of other Standards
(such as income taxes that are within the scope of IAS 12 Income Taxes);
and
(b) fines or other penalties that are imposed for breaches of the legislation.
‘Government’ refers to government, government agencies and similar bodies
whether local, national or international.
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5 A payment made by an entity for the acquisition of an asset, or for the rendering
of services under a contractual agreement with a government, does not meet the
definition of a levy.
6 An entity is not required to apply this Interpretation to liabilities that arise from
emissions trading schemes.
Issues
7 To clarify the accounting for a liability to pay a levy, this Interpretation
addresses the following issues:
(a) what is the obligating event that gives rise to the recognition of a
liability to pay a levy?
(b) does economic compulsion to continue to operate in a future period
create a constructive obligation to pay a levy that will be triggered by
operating in that future period?
(c) does the going concern assumption imply that an entity has a present
obligation to pay a levy that will be triggered by operating in a future
period?
(d) does the recognition of a liability to pay a levy arise at a point in time or
does it, in some circumstances, arise progressively over time?
(e) what is the obligating event that gives rise to the recognition of a
liability to pay a levy that is triggered if a minimum threshold is
reached?
(f) are the principles for recognising in the annual financial statements and
in the interim financial report a liability to pay a levy the same?
Consensus
8 The obligating event that gives rise to a liability to pay a levy is the activity that
triggers the payment of the levy, as identified by the legislation. For example, if
the activity that triggers the payment of the levy is the generation of revenue in
the current period and the calculation of that levy is based on the revenue that
was generated in a previous period, the obligating event for that levy is the
generation of revenue in the current period. The generation of revenue in the
previous period is necessary, but not sufficient, to create a present obligation.
9 An entity does not have a constructive obligation to pay a levy that will be
triggered by operating in a future period as a result of the entity being
economically compelled to continue to operate in that future period.
10 The preparation of financial statements under the going concern assumption
does not imply that an entity has a present obligation to pay a levy that will be
triggered by operating in a future period.
11 The liability to pay a levy is recognised progressively if the obligating event
occurs over a period of time (ie if the activity that triggers the payment of the
levy, as identified by the legislation, occurs over a period of time). For example,
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if the obligating event is the generation of revenue over a period of time, the
corresponding liability is recognised as the entity generates that revenue.
12 If an obligation to pay a levy is triggered when a minimum threshold is reached,
the accounting for the liability that arises from that obligation shall be
consistent with the principles established in paragraphs 8–14 of this
Interpretation (in particular, paragraphs 8 and 11). For example, if the
obligating event is the reaching of a minimum activity threshold (such as a
minimum amount of revenue or sales generated or outputs produced), the
corresponding liability is recognised when that minimum activity threshold is
reached.
13 An entity shall apply the same recognition principles in the interim financial
report that it applies in the annual financial statements. As a result, in the
interim financial report, a liability to pay a levy:
(a) shall not be recognised if there is no present obligation to pay the levy at
the end of the interim reporting period; and
(b) shall be recognised if a present obligation to pay the levy exists at the
end of the interim reporting period.
14 An entity shall recognise an asset if it has prepaid a levy but does not yet have a
present obligation to pay that levy.
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Appendix A
Effective date and transition
This appendix is an integral part of the Interpretation and has the same authority as the other
parts of the Interpretation.
A1 An entity shall apply this Interpretation for annual periods beginning on or
after 1 January 2014. Earlier application is permitted. If an entity applies this
Interpretation for an earlier period, it shall disclose that fact.
A2 Changes in accounting policies resulting from the initial application of this
Interpretation shall be accounted for retrospectively in accordance with IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors.
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