IFRIC November 2007

The IFRIC continued its discussion of how an entity should account for distributions of non-cash assets to its owners in their capacity as owners.

The IFRIC confirmed the following decisions made at its meeting in September 2007:

• all liabilities for distributions (dividends payable) should be measured in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, regardless of the type of assets to be distributed. IAS 37 requires an entity to measure a liability at the best estimate of the expenditure required to settle the present obligation. The IFRIC concluded that, to apply the requirements in IAS 37 to measure dividends payable, an entity should consider the fair value of the assets to be distributed.
• when an entity makes the distribution that settles the dividend payable and loses control over the assets distributed, any difference between the carrying amount of the dividend payable and the carrying amount of the assets distributed should be recognised in comprehensive income. The IFRIC noted that, at the time of settlement, the carrying amounts of the assets distributed would not normally be greater than the carrying amount of the dividend payable because of the recognition of impairment losses required by other applicable standards. Therefore, any difference between the carrying amount of the dividend payable and the carrying amount of the assets distributed will always be a credit balance.

In September the IFRIC had asked the staff to prepare a Draft Interpretation and a draft of potential amendments to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations that the IFRIC could recommend to the Board.

At this meeting, the IFRIC considered the Draft Interpretation. In particular, it discussed where the credit balance should be recognised when the entity settled the dividend payable.

The staff recommended that the credit balance should be recognised in profit or loss. The IFRIC concluded that the Draft Interpretation should reflect the staff’s recommendation as the consensus. The IFRIC acknowledged that an asset distribution was a transaction between an entity and its owners. However, the credit balance did not arise from the distribution transaction. The credit balance represents the cumulative unrecognised gain associated with the asset distributed. In other words, it reflects the performance of the entity during the period from when the asset was acquired until it was distributed.

In addition, it was noted that such an accounting treatment was consistent with the following requirements in IFRSs and the Framework for the Preparation and Presentation of Financial Statements:

• Gains are recognised when assets are derecognised. IFRSs (eg IAS 16 Property, Plant and Equipment, IAS 38 Intangible Assets, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 5) require the entity to recognise such gains in profit or loss.
• Paragraph 92 of the Framework states ‘Income is recognised in the income statement when an increase in future economic benefits related to an increase in asset or a decrease of a liability has arisen can be measured reliably’ (emphasis added). When an entity settles the dividend payable, there is clearly a decrease of a liability.
• IAS 1 Presentation of Financial Statements, as revised in September 2007, requires all non-owner changes in equity to be recognised in profit or loss unless an IFRS requires or permits them to be recognised elsewhere.

However, several IFRIC members expressed an alternative view that the credit balance should be recognised directly in equity. In their view, there is only one non-reciprocal transaction between an entity and its owners (despite the fact that an entity recognises an obligation to make the distribution and derecognises the liability at some stage).

The IFRIC concluded that the alternative view should also be presented in the Basis for Conclusions on the Draft Interpretation and that the Invitation to Comment on the Draft Interpretation should invite comment on both views.

In addition, the IFRIC decided that an amendment to IFRS 5 was needed. It concluded that the classification, presentation and measurement requirements in IFRS 5 applicable to non‑current assets (or disposal groups) classified as held for sale and to discontinued operations should also be applied to assets (or disposal groups) held for distribution to owners.

Subject to other drafting comments, the IFRIC directed the staff to ask the Board:

• whether it would object to the publication of the draft Interpretation; and
• to approve the draft of proposed amendments to IFRS 5 to be exposed for comment along with the draft Interpretation.