Extinguishing financial liabilities with equity instruments
The IFRIC completed its redeliberations of draft Interpretation D25 Extinguishing Financial Liabilities
with Equity Instruments at this meeting. The IFRIC considered a revised draft Interpretation and basis
for conclusions prepared by the staff that addressed the issues raised by respondents during the
comment letter process.
Redeliberations
During the meeting the IFRIC redeliberated the scope of the draft Interpretation, and the conclusions
reached in the IFRIC's consensus.
Scope
The IFRIC noted that in response to D25, certain respondents requested clarification of the scope in
the final Interpretation. In redeliberating at this meeting the IFRIC clarified that the scope excludes
transactions when:
- the creditor is also a direct or indirect shareholder, and is acting in its capacity as a direct or
indirect existing shareholder, or
- 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 from or
contribution to the entity, or
- the extinguishment of the financial liability by issuing equity shares is in accordance with the
original terms of the liability.
How should the equity instruments be measured?
In the draft Interpretation, the IFRIC proposed that equity instruments issued to extinguish a financial
liability should be measured initially at the fair value of the equity instruments issued or the fair value of
the liability extinguished, whichever is more reliably determinable. However, many respondents
proposed that a preferred measurement basis should be determined to avoid an 'accounting choice'
developing in practice.
In its redeliberations, the IFRIC noted that respondents had mixed views on whether the preferred
measurement basis should be the fair value of the equity instruments issued or the fair value of the
financial liability extinguished. The IFRIC concluded that the fair value of the equity instruments issued
should be the preferred measurement basis. This reflects the IFRIC's view that this measurement
basis:
- is consistent with the consensus that the issue of an entity's equity instruments is 'consideration
paid', and
- best reflects the measurement of consideration paid to extinguish the financial liability, which
often includes a premium that the holder requires to enter into the debt for equity swap.
The IFRIC concluded that if the fair value of the equity instruments issued is not reliably determinable,
measurement should reflect the fair value of the liability extinguished.
The IFRIC also clarified that:
- paragraph 49 of IAS 39 Financial Instruments: Recognition and Measurement is not applied in
measuring the fair value of all or part of a financial liability extinguished that includes a demand
feature, because the extinguishment transaction suggests that the demand feature is no longer
substantive.
- the fair value of the equity instruments issued should be measured at the transaction date,
consistent with the guidance in IFRS 3 Business Combinations.
Partial extinguishment
Many respondents requested clarification of the guidance on partial extinguishments included in the
draft Interpretation. During redeliberations, the IFRIC clarified that the issue of an entity's equity
instruments may reflect consideration paid for both the extinguishment of part of a financial liability and
the modification of the part of the liability that remains outstanding.
To reflect this, an entity shall allocate consideration paid between the part of the liability extinguished
and the part of the liability that remains outstanding. The entity shall consider this allocation in
determining the profit or loss to be recognised on the part of the liability extinguished and in its
assessment of whether the terms of the remaining liability have been substantially modified.
Respondents to the draft Interpretation also requested that additional guidance be provided on
determining whether the part of the financial liability that remains outstanding has been substantially
modified. The IFRIC concluded that such guidance is outside the scope of this Interpretation.
Vote to confirm consensus
The IFRIC considered whether the changes from the draft Interpretation were such that re-exposure
was required in accordance with the IFRIC Due Process Handbook. The IFRIC noted that these
changes provide clarification that the constituents requested, specifically in the scope, identifying a
preferred measurement basis and clarifying guidance on partial extinguishment situations.
However, the IFRIC concluded that the fundamental requirements of the Interpretation have not
changed from those exposed for comment and consequently decided that re-exposure was not
required.
The IFRIC decided that the Interpretation shall be applied for annual periods beginning on or after 1
April 2010 with earlier application permitted. Retrospective application is required only from the
beginning of the earliest comparative period presented.
The IFRIC voted and confirmed the consensus, subject to its final review of drafting changes, and
submitted the Interpretation to the Board for ratification at the Board's meeting in November 2009.
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IFRIC Agenda decisions
The following explanation is published for information only and does not change existing IFRS requirements. IFRIC agenda decisions are not Interpretations. IFRIC Interpretations are determined only after extensive deliberation and due process, including a formal vote. IFRIC Interpretations become final only when approved by the IASB.
IFRS 3 Business Combinations - Measurement of NCI
The IFRIC received a request to clarify the classification and measurement of share-based payment transactions for which the manner of settlement is contingent on either:
- a future event that is outside the control of both the entity and the counterparty; or
- a future event that is within the control of the counterparty.
The IFRIC received requests to clarify whether an entity should apply the measurement choice in
paragraph 19 of IFRS 3 (as revised in 2008) to all components of non-controlling interest (NCI).
Paragraph 19 states that, for each business combination, the acquirer shall measure any NCI in the
acquiree either at fair value or at the non-controlling interest's proportionate share of the acquiree's
identifiable net assets.
In addition to minority interests as defined in IFRS 3 (issued in 2004), the definition of NCI includes,
for example, options or warrants over an acquiree's own shares that are classified as equity and the
equity component of a convertible instrument. Some believe that if an entity chooses to measure NCI
as a proportionate share of the acquiree's identifiable net assets, it should apply this measurement to
all components of the acquiree's equity. The consequence would be that instruments other than those
equivalent to minority interest would be measured at nil on acquisition.
The IFRIC noted that it would be appropriate that the measurement choice should apply only to
instruments currently entitled to a proportionate share of the acquiree's net assets. However, because
IFRSs do not provide sufficient guidance to resolve this issue an amendment to revised IFRS 3 is
required. Therefore, the IFRIC decided not to add the issue to its agenda but to recommend that the
Board amend IFRS 3 to address the issues identified as a part of the annual improvements project.
IFRS 3 Business Combinations - Unreplaced and voluntarily replaced share-based
payment awards
The IFRIC received requests to clarify the measurement of unreplaced and voluntarily replaced sharebased
payment awards of an acquiree in a business combination. IFRS 3 (as revised in 2008) contains
requirements for outstanding acquiree share-based payment awards that the acquirer is obliged to
replace or that expire as a consequence of the business combination. However, IFRSs do not provide
requirements for other acquiree share-based payment awards. As a consequence, divergent
interpretations have developed in practice as to how those awards should be accounted for.
The IFRIC noted that when an acquirer does not replace unexpired share-based payment awards of
the acquiree or voluntarily issues share-based payment awards to replace such awards, at least some
portion of the amount recognised for those awards should be regarded as part of the consideration
transferred in the business combination. However, because IFRSs do not provide sufficient guidance
to resolve this issue an amendment to IFRS 3 (as revised in 2008) is required. Therefore, the IFRIC
decided not to add the issue to its agenda. However, the IFRIC recommended that the Board amend
revised IFRS 3 to address the issues identified as a part of the annual improvements project.
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations - Write-down of a
disposal group
The IFRIC received a request for guidance on how a disposal group should be recognised at the lower
of its carrying amount and fair value less costs to sell when the difference between the carrying
amount and fair value less costs to sell exceeds the carrying amount of non-current assets.
The IFRIC noted paragraph 23 of IFRS 5 requires the impairment loss recognised for a disposal group
to be allocated to reduce the carrying amount of the non-current assets of the group that are within the
measurement requirements of IFRS 5. This can result in a conflict between IFRS 5's requirement to
recognise the disposal group at fair value less costs to sell and its limitation on the assets to which
that loss can be allocated. Consequently, the IFRIC noted that divergence could arise in practice.
The IFRIC also noted that the issue could be widespread in the current economic environment. The
IFRIC concluded that the issue relates to the basic requirements of IFRS 5 and therefore could not be
addressed by an interpretation. For this reason, the IFRIC decided not to add the issue to its agenda.
However, the IFRIC recommended that the Board considers an amendment to IFRS 5 to address this
issue.
IAS 23 Borrowing Costs - Meaning of 'general borrowings'
The IFRIC received a request for guidance on what borrowings comprise "general borrowings" for
purposes of capitalisation of borrowing costs in accordance with IAS 23. IAS 23 paragraph 14 states
that " To the extent that an entity borrows funds generally and uses them for the purpose of obtaining a
qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalisation by
applying a capitalisation rate to the expenditures on that asset. The capitalisation rate shall be the
weighted average of the borrowing costs applicable to the borrowings of the entity that are outstanding
during the period, other than borrowings made specifically for the purpose of obtaining a qualifying
asset" (emphasis added). The request asked for guidance on the treatment of general borrowings
used to purchase a specific asset other than a qualifying asset as defined in the standard.
The IFRIC noted that because paragraph 14 of IAS 23 refers only to qualifying assets, some conclude
that borrowings related to specific assets other than qualifying assets cannot be excluded from
determining the capitalisation rate for general borrowings. Others note the general principle in
paragraph 10 that the borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset are borrowing costs that would have been avoided if the expenditure
on the qualifying asset had not been made. The IFRIC noted that paragraph 11 of IAS 23 states 'the
determination of the amount of borrowing costs that are directly attributable to the acquisition of a
qualifying asset is difficult and the exercise of judgement is required.'
The IFRIC noted that the standard itself acknowledges that judgement will be required in its
application. In addition, the IFRIC concluded that any guidance it could provide would be in the nature
of application guidance rather than an interpretation. The IFRIC also noted that the Board will consider
whether to add this issue to the annual improvements project. At its meeting in July, the Board noted
that IAS 23 excludes only debt used to acquire qualifying assets from the determination of the
capitalisation rate. The Board decided not to include this issue in the annual improvements project.
Therefore, the IFRIC decided not to add the issue to its agenda.
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Tentative agenda decisions
The IFRIC reviewed the following matters and tentatively decided that they should not be added to the IFRIC agenda. These tentative decisions, including recommended reasons for not adding the items to the IFRIC agenda, will be reconsidered at the IFRIC meeting in March 2010. Constituents who disagree with the proposed reasons, or believe that the explanations may contribute to divergent practices, are encouraged to communicate those concerns by 13 February 2010 by email to: ifric@iasb.org. Communications will be placed on the public record unless the writer requests confidentiality, supported by good reasons, such as commercial confidence.
IFRS 2 Share-based Payment - Transactions in which the manner of settlement is
contingent on future events
The IFRIC received a request to clarify the classification and measurement of share-based payment
transactions for which the manner of settlement is contingent on either:
- a future event that is outside the control of the entity or the counterparty; or
- a future event that is within the control of the counterparty.
The IFRIC noted that paragraphs 34-43 of IFRS 2 provide guidance only on share-based payment
transactions in which the terms of the arrangement provide the counterparty or the entity with a choice
of settlement.
The IFRIC noted that IFRS 2 does not provide guidance on share-based payment transactions for
which the manner of settlement is contingent on a future event that is outside the control of either the
entity or the counterparty. The IFRIC noted that many other issues have been raised concerning the
classification and measurement of share based payments as cash settled or equity settled. The IFRIC
therefore noted that it would be more appropriate for these issues to be considered collectively as part
of a post implementation review of IFRS 2.
Therefore, the IFRIC [decided] not to add these issues to its agenda and recommended that those
issues be dealt with by the IASB in a post-implementation review of IFRS 2.
IFRS 4 Insurance Contracts and IAS 32 Financial Instruments Presentation - Scope issue for investments in REITs
In some jurisdictions, a Real Estate Investment Trust (REIT) is a tax designation used for an entity
investing in real estate that meets certain criteria to attain preferential income tax status. In some of
these cases, the contractual terms of the ownership units of such REITs require it to distribute 90% of
the Total Distributable Income (TDI) to the investors. The remaining 10% of TDI may be distributed at
the discretion of management. The IFRIC received a request to provide guidance on whether the
discretion to distribute the remaining 10% of TDI met the definition of a Discretionary Participation
Feature (DPF) as defined in IFRS 4. If the DPF definition is met, IFRS 4 permits the ownership units to
be classified as a liability rather than classified into debt and equity components in accordance with
IAS 32.
The IFRIC noted that the objective of IFRS 4 is to specify the financial reporting for insurance
contracts. The IFRIC noted that the definition of DPF in Appendix A of IFRS 4 requires, amongst other
things, that the instrument provides the holder with guaranteed benefits and that the DPF benefits are
additional to those guaranteed benefits. Further, the IFRIC noted that there must be guaranteed
benefits to the holder for the definition to be met and that such guaranteed benefits referred to are
typically those present in insurance activities.
The IFRIC noted that providing guidance on this issue would be in the nature of application guidance,
rather than interpretative guidance. Therefore, the IFRIC [decided] not to add the issue to its agenda.
IAS 18 Revenue - Receipt of a dividend of equity instruments
The IFRIC received a request for guidance on the recognition as revenue of a dividend in the financial
statements of an investor when the dividend is in the form of an investee's own equity instruments.
The IFRIC noted that current IFRSs provide guidance on when revenue arising from dividends shall be
recognised. The IFRIC noted that when all ordinary shareholders are issued a dividend of an
investee's own equity instruments on a pro-rata basis there is no change in the financial position or
economic interest of any of the investors. In this situation, in accordance with paragraph 29(a) of IAS
18, the dividend is not recognised as revenue because it is not probable that there is an economic
benefit associated with the transaction that will flow to the investor.
The IFRIC concluded that any guidance it could provide would be in the form of application guidance.
Therefore, the IFRIC [decided] not to add this issue to its agenda.
IAS 27 Consolidated and Separate Financial Statements - Combined financial statements
and redefining the reporting entity
The IFRIC received a request for guidance on whether a reporting entity has the ability in accordance
with IFRS to present financial statements that include a selection of entities that are under common
control, rather than being restricted to a parent/subsidiary relationship defined by IAS 27.
The IFRIC noted that the ability to include entities within a set of IFRS financial statements depends
on the interpretation of 'reporting entity' in the context of common control transactions. The IFRIC
noted that in December 2007 the Board added a project to its research agenda to examine the
definition of common control and the methods of accounting for business combinations under common
control-in the acquirer's consolidated and separate financial statements. The IFRIC also noted that
describing the reporting entity is the objective of Phase D of the Board's Conceptual Framework
project.
The IFRIC also received a request for guidance on the ability in accordance with IFRS for a reporting
entity to be redefined to exclude from comparative periods entities/ businesses that have been carvedout
of a group. The IFRIC noted that the Board's common control project referred to above will also
consider the accounting for demergers, such as the spin-off of a subsidiary or business.
Therefore, the IFRIC [decided] not to add this issue to its agenda.
IAS 27 Consolidated and Separate Financial Statements - Presentation of comparatives
when applying the 'pooling of interests' method
The IFRIC received a request for guidance on the presentation of comparatives when applying the
'pooling of interests' method for business combinations between entities under common control when
preparing financial statements in accordance with IFRS.
The IFRIC noted that IFRS 3 Business Combinations (revised 2008) excludes from its scope 'a
combination of entities or businesses under common control'. The IFRIC noted that resolving the issue
would require interpreting the interaction of multiple IFRSs. The IFRIC also noted that in December
2007 the Board added a project to its research agenda to examine the definition of common control
and the methods of accounting for business combinations under common control-in the acquirer's
consolidated and separate financial statements. Therefore, the IFRIC [decided] not to add this issue to
its agenda
IAS 32 Financial Instruments: Presentation - Application of the 'fixed-for-fixed'
condition
The IFRIC received requests for guidance on the application of paragraph 22 of IAS 32 which states
that 'except as stated in paragraph 22A, a contract that will be settled by the entity (receiving or)
delivering a fixed number of its own equity instruments in exchange for a fixed amount of cash or
another financial asset is an equity instrument' (often referred to as the 'fixed-for-fixed' condition).
The IFRIC identified that diversity may exist in practice in the application of the fixed-for-fixed
condition to other situations in addition to the specific situations identified in the requests.
The IFRIC noted that the Board is currently undertaking a project to improve and simplify the financial
reporting requirements for financial instruments with characteristics of equity. A key objective of this
project is to develop a better distinction between equity and non-equity instruments. This includes
consideration of the current fixed-for-fixed condition in IAS 32.
Consequently, the IFRIC concluded that the Board's current Financial Instruments with Characteristics
of Equity project is expected to address issues relating to the fixed-for-fixed condition on a timely
basis. Therefore, the IFRIC [decided] not to add this issue to its agenda.
IAS 38 Intangible Assets - Amortisation method
The IFRIC received requests for guidance on the meaning of 'consumption of economic benefits' when
determining the appropriate amortisation method for an intangible asset with a finite useful life. The
methods considered in the submissions are the straight-line method and the unit of production method
(including a revenue-based unit of production method).
The IFRIC noted that paragraph 98 of IAS 38 states that 'the method used is based on the expected
pattern of consumption of the expected future economic benefits embodied in the asset...' It also noted
that the determination of the amortisation method is therefore a matter of judgement. In addition, in
accordance with paragraph 122 of IAS 1 Presentation of Financial Statements, significant judgements
made in determining the amortisation methods should be disclosed in the notes to the financial
statements.
The IFRIC noted that any guidance it could give on making the judgements necessary to determine the
amortisation method would be in the nature of application guidance rather than an interpretation.
Therefore, the IFRIC [decided] not to add the issue to its agenda.
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IFRIC work in progress
IFRS 2 Share-based Payment - Classification of vesting conditions
The IFRIC received a status update on the requests for clarification on the classification of vesting
conditions in a share-based payment. The staff anticipates bringing this issue to the January 2010
meeting for further consideration by the IFRIC.
IAS 39 Financial Instruments Recognition and Measurement - Unit of account for forward
contracts with volumetric optionality
The IFRIC received a request to add an item to its agenda on providing guidance on whether a
contract that (a) obliges an entity to deliver (sell) at a fixed price a fixed number of units of a nonfinancial
item that is readily convertible to cash and (b) provides the counterparty with the option to
purchase also at a fixed price a fixed number of additional units of the same item can be assessed as
two separate contracts for the purpose of applying paragraphs 5-7 of IAS 39.
The IFRIC did not make any tentative decisions, but directed the staff to research the issue further.
IFRIC outstanding issues update
The IFRIC reviewed a summary of outstanding issues. With the exception of two issues, all requests
received and considered by the staff were discussed at this meeting, will be discussed at a future
IFRIC meeting or are being considered by the Board.
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Future IFRIC meetings 2010
7 and 8 January
4 and 5 March
6 and 7 May
8 and 9 July
2 and 3 September
4 and 5 November
In addition to the meetings listed above, the IFRIC may hold meetings for a preliminary discussion of
some staff papers. Attendance by IFRIC members at these meetings is voluntary and no decisions on
technical issues will be made. If the IFRIC holds a preliminary meeting, it will normally take place on
the Wednesday afternoon before the IFRIC meeting.
Meeting dates, tentative agendas and additional details about the next meeting will also be posted to
the IASB website before the meeting. Instructions for submitting requests for Interpretations are
given on the IASB website - click here.
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Past issues of IFRIC Update
Click here for archived copies of past issues of IFRIC Update on the IASB website.
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