IFRIC 1 contains guidance on accounting for changes in decommissioning, restoration and similar liabilities that have previously been recognised both as part of the cost of an item of property, plant and equipment under IAS 16 and as a provision (liability) under IAS 37. An example would be a liability that was recognised by the operator of a nuclear power plant for costs that it expects to incur in the future when the plant is shut down (decommissioned). The interpretation addresses subsequent changes to the amount of the liability that may arise from (a) a revision in the timing or amount of the estimated decommissioning or restoration costs or from (b) a change in the current market-based discount rate.
IAS 37 requires the amount recognised as a provision to be the best estimate of the expenditure required to settle the obligation at the balance sheet date. This is measured at its present value, which IFRIC 1 confirms should be measured using a current market-based discount rate. The Interpretation deals with three kinds of change in an existing liability for such costs.
The two main kinds of change dealt with in the Interpretation are those that arise from:
the revision of estimated outflows of resources embodying economic benefits. For example, the estimated costs of decommissioning a nuclear power plant may vary significantly both in timing and amount revisions to the current market-based discount rate.
Most entities account for their property, plant and equipment using the cost model. Where this is so, these changes are required to be capitalised as part of the cost of the item and depreciated prospectively over the remaining life of the item to which they relate. This is consistent with the treatment under IAS 16 of other changes in estimate relating to property, plant and equipment.
In the spirit of convergence, the IFRIC considered the US GAAP approach in Statement of Financial Accounting Standards No. 143 Accounting for Asset Retirement Obligations. The Interpretation treats changes in estimated cash flows in a similar way to SFAS 143. However, SFAS 143 does not require any adjustment to the cost of the item, or to the provision, to reflect the effect of a change in the current market-based discount rate. The IFRIC did not choose this approach because IAS 37, unlike US GAAP, requires provisions to be measured at the current best estimate, which should reflect current discount rates. Also, the IFRIC considered it important that both kinds of change should be dealt with in the same way.
Where entities account for their property, plant and equipment using the fair value model, a change in the liability does not affect the valuation of the item for accounting purposes. Instead, it alters the revaluation surplus or deficit on the item, which is the difference between its valuation and what would be its carrying amount under the cost model. The effect of the change is treated consistently with other revaluation surpluses or deficits. Any cumulative deficit is taken to profit or loss, but any cumulative surplus is credited to equity.
The third kind of change dealt with by the Interpretation is an increase in the liability that reflects the passage of time - also referred to as the unwinding of the discount. This is recognised in profit or loss as a finance cost as it occurs. ACCOUNTING FOR CHANGE IN DECOMMISSIONING LIABILITY
A. A decrease in decommissioning liability is deducted from the cost of the asset.
B. An increase in decommissioning liability is added to the cost of the asset.
Summary of IFRIC 2
Members' shares in co-operative entities have some characteristics of equity. They also give the holder the right to request redemption for cash, although that right may be subject to certain limitations. IFRIC 2 gives guidance on how those redemption terms should be evaluated in determining whether the shares should be classified as financial liabilities or as equity.
Under IFRIC 2, shares for which the member has the right to request redemption are normally liabilities. However, they are equity if:
• the entity has an unconditional right to refuse redemption, or
• local law, regulation, or the entity's governing charter imposes prohibitions on redemption. But the mere existence of law, regulation, or charter provisions that would prohibit redemption only if conditions (such as liquidity constraints) are met, or are not met, does not result in members' shares being equity.
Summary of IFRIC 17
IFRIC 17 Distributions of Non-cash Assets to Owners applies to the entity making the distribution, not to the recipient. It applies when non-cash assets are distributed to owners or when the owner is given a choice of taking cash in lieu of the non-cash assets.
IFRIC 17 clarifies that:
• a dividend payable should be recognised when the dividend is appropriately authorised and is no longer at the discretion of the entity
• an entity should measure the dividend payable at the fair value of the net assets to be distributed
• an entity should remeasure the liability at each reporting date and at settlement, with changes recognised directly in equity
• an entity should recognise the difference between the dividend paid and the carrying amount of the net assets distributed in profit or loss, and should disclose it separately
• an entity should provide additional disclosures if the net assets being held for distribution to owners meet the definition of a discontinued operation
IFRIC 17 applies to pro rata distributions of non-cash assets (all owners are treated equally) but does not apply to common control transactions. Summary of IFRIC 19
• If a debtor issues equity instruments to a creditor to extinguish all or part of a financial
liability, those equity instruments are 'consideration paid' in accordance with IAS 39.41. Accordingly, the debtor should derecognise the financial liability fully or partly.
• The debtor should measure the equity instruments issued to the creditor at fair value, unless fair value is not reliably determinable, in which case the equity instruments issued are measured at the fair value of the liability extinguished.
• If only part of a liability is extinguished, the debtor must determine whether any part of the consideration paid relates to modification of the terms of the remaining liability. If it does, the debtor must allocate the fair value of the consideration paid between the liability extinguished and the liability retained.
• The debtor recognises in profit or loss the difference between the carrying amount of the financial liability (or part) extinguished and the measurement of the equity instruments issued.
• When only part of the liability is extinguished, the debtor must determine whether the terms of the remaining debt have been substantially modified (taking into account any portion of the consideration paid that was allocated to the remaining debt). If there has been a substantial modification, the debtor should account for an extinguishment of the old remaining liability and the recognition of a new liability (see IAS 39.40).
IFRIC 19 addresses only the accounting by the entity that issues equity instruments in order to settle, in full or in part, a financial liability. It does not address the accounting by the creditor (lender).
The following situations are explicitly excluded from the scope of IFRIC 19:
• the creditor is also a direct or indirect shareholder and is acting in its capacity as direct or indirect shareholder;
• 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
• extinguishing the financial liability by issuing equity shares is in accordance with the original terms of the financial liability.
IFRIC 19 must be applied in annual periods beginning on or after 1 July 2010. Earlier application is permitted. It must be applied retrospectively from the beginning of the earliest comparative period presented.
