IFRS Interpretations Commitee Issue — Definition of the term ‘non-monetary asset’ in SIC-13 and IAS 28 (revised in 2011)
This meeting is a follow up to the IFRS Interpretations Committee’s meetings in January and March 2012. The IFRS Interpretations Committee (the Committee) received a request to clarify whether a business meets the definition of a non-monetary asset. The question was asked within the context of whether the requirements of SIC-13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers and IAS 28 Investments in Associates (revised in 2011) would apply when a business is contributed to a jointly controlled entity (JCE) as defined in IAS 31 Interests in Joint Ventures, a joint venture (JV) as defined in IFRS 11 Joint Arrangements or an associate. After the January 2012 meeting, the Committee noted that the submission was related to the issues arising from the inconsistency between the requirement in IAS 27 Consolidated and Separate Financial Statements and SIC-13 in dealing with the loss of control that is contributed to a JCE, a JV or an associate. IAS 27 requires full gain or loss recognition when there is a loss of control when a subsidiary is contributed to a JCE/JV or an associate in exchange for an equity interest in the JCE/JV or associate. SIC-13 only allows for a partial gain or loss arising from contributions of non-monetary assets to a JCE (i.e., the gain or loss is restricted to the extent of the interest attributable to the other equity holders in the JCE). The consequence is that the gain or loss (if any) accounted for under IAS 27 would be larger than that under SIC-13.
Because of such inconsistency, there is a diversity in practice on the accounting for a loss of a subsidiary when it is contributed to a JCE (entities have an accounting policy choice of applying either IAS 27 or SIC-13). The staff also noted that such an inconsistency would remain under IFRS 10 Consolidated Financial Statements and IAS 28 (revised in 2011).
As a result of the submission, the Committee thinks that the best course of action would be to address this matter as a part of the Board project; however, at the same time the Committee acknowledged that the timing for broader project would be uncertain. Therefore, the Committee decided to ask for the Board’s recommendation on how to proceed.
In today’s meeting, the IASB discussed the following topics:
- Alternatives preferred by the Committee to resolve the inconsistency between IAS 27 and SIC-13; and
- Next steps on how the Committee should proceed with this project.
Alternatives preferred by the Committee to solve the inconsistency between IAS 27 and SIC-13
The Committee asked the staff to perform preliminary analysis of what might be the alternatives by which the Board could resolve the inconsistency noted. Alternatives presented at the Committee’s March 2012 meeting included:
- Alternative 1: account for all contributions similarly in accordance with the rationale developed in IAS 27;
- Alternative 2: account for all contributions of businesses (whether housed in a subsidiary or not) under IAS 27 and account for all other contributions under SIC-13;
- Alternative 3: account for all contributions to JCE/JV or associate under SIC-13;
- Alternative 4: account for all direct contributions (whether they constitute a business or not) to JCE/JV or associate under SIC-13 and account for all indirect contributions under IAS 27.
Appendix A of the IASB Board paper memo shows the outcome of each alternative and details of each alternative can be found in Appendix B in memo 11.
A majority of the Committee members considered Alternative 1 to be the most robust but they acknowledged it would require addressing other cross-cutting issues. Alternative 1 would allow for full gain recognition on all contributions regardless of whether it is a business. The Committee also noted that Alternative 2 would be easier to implement, but put more focus on the definition of a business. Alternative 2 would allow for full gain recognition only when the contribution constitutes a business. Both Alternatives 1 and 2 would resolve the issue related to a contribution of a business as both would result in the same accounting (i.e., would allow for full gain recognition for a contribution that constitutes a business). The Committee rejected Alternative 3 as it is not consistent with decisions reached in IFRS 3 Business Combinations. The Committee also rejected Alternatives 4 as it could potentially create structuring opportunities.
The Board members discussed the Committee’s recommendations. Although some Board members prefer Alternative 1, they expressed concerns with proceeding with this alternative. In particular, the Board members expressed concerns related to the cross-cutting issues that Alternative 1 could present. Additionally, some Board members stated that Alternative 1 could impact the derecognition project (e.g., contribution of a subsidiary that does not constitute a business (only consists of financing receivables) – would this follow the derecognition principle in IAS 39 or because this is a subsidiary, would it follow IFRS 10 (IAS 27)?)
The Board members are also concerned that the cross cutting issues from Alternative 1 could lead to a major project and these ancillary issued would be very time consuming to address. They noted that such a project would have to be taken on by the Board and would be outside the scope of the Committee.
A majority of the Board members expressed support for Alternative 2. They believe that it would be easier and take a shorter period of time to implement and also would have minimal cross-cutting issues. One Board member however expressed concern that the definition of a business under IFRS 3 might be too broad and therefore many items could be scoped in as a business under Alternative 2. This Board member expressed support for Alternative 3 and would prefer that the Committee considers this alternative. The staff however cautioned the Board that the concepts in Alternative 3 are inconsistent with the Board’s decisions in IFRS 3 and if this alternative is selected, then the Board might have to reconsider decisions previously reached in IFRS 3. This Board member also rejected Alternative 1 because he did not support full gain recognition in all circumstances. One Board member supported either Alternative 2 or 3; however, if the Committee proceeds with Alternative 3, they would need to analyse how it will interact with the post-implementation review of IFRS 3.
Next steps on how the Committee should proceed with this project
The Board stated that it is hesitant about Alternative 1 due to the cross-cutting issues and the significant time that would be needed to address those. The Board is leaning towards Alternative 2. The Board didn’t directly address the question on whether the contributions made to joint operations (in the scope of IFRS 11) should be addressed as part of this project.