Recent agenda decisions of the IFRS Interpretations Committee

IFRS Interpretations Committee (Committee) agenda decisions are those issues that the Committee decided not to take onto its agenda. Although not authoritative guidance, in practice they are regarded as being highly persuasive, and all entities reporting under IFRS should be aware of these decisions because they could impact the way particular transactions and balances are accounted for.

At its June 2019 meeting, the IFRS Interpretations Committee (Committee) issued four final agenda decisions dealing with questions on the appropriate accounting for:

  • Holdings of cryptocurrencies
  • Costs to fulfil a contract under IFRS 15 Revenue from Contracts with Customers
  • Subsurface rights under IFRS 16 Leases, and
  • The effect of a potential discount on plan classification under IAS 19 Employee Benefits.

A summary of the first three, more commonly encountered issues is included below. Please refer to the June 2019 IFRIC update for more information on the other issue mentioned above.

Issue 1: Holding of cryptocurrencies

Fact pattern

Cryptocurrencies have all the following characteristics:

  • They comprise a digital or virtual currency recorded in a distributed ledger that uses cryptography for security
  • They are not issued by a jurisdictional authority or other party, and
  • They do not give rise to a contract between the holder and another party.

Question:

Which standard applies to the holding of cryptocurrencies? 

Rationale for agenda decision:

  • IAS 38 Intangible Assets defines an intangible asset as ‘an identifiable non-monetary asset without physical substance’.
  • In order for an asset to be identifiable, it must be separable or arise from contractual or other legal rights (IAS 38, paragraph 12).
  • The essential feature of a non-monetary asset is the absence of a right to receive a fixed or determinable number of units of currency (IAS 21, paragraph 16).
  • Holdings of cryptocurrencies meet the definition of intangible assets because:
    • They can be separated from the holder and sold or transferred individually, and
    • They do not give the holder a right to receive a fixed or determinable number of units of currency.
  • IAS 38 applies to the accounting for all intangible assets except for: those within the scope of another standard; financial assets as defined in IAS 32 Financial Instruments: Presentation; exploration and evaluation assets; and expenditure for the development and extraction of minerals, oil, natural gas and similar non-regenerative resources.
  • In reaching its conclusion (refer below), the Committee laid out its rationale as to why it considered cryptocurrencies to be none of the items scoped out of IAS 38. Refer to the agenda decision for more information.
  • Entities holding cryptocurrencies also need to include the following disclosures where relevant:
    • IAS 2, paragraphs 36-39 if these are held for sale in the ordinary course of business (inventories)
    • IAS 38, paragraphs 118-128 if IAS 38 is applied
    • If cryptocurrencies are measured at fair value, IFRS 13 Fair Value Measurement, paragraphs 91-99, and
    • IAS 10 Events after the Reporting Period, paragraph 21 if there are any material non-adjusting events (e.g. significant fair value changes).

Conclusion:

IAS 38 applies unless cryptocurrencies are held for sale in the ordinary course of business, in which case, IAS 2 applies.

Issue 2: Costs to fulfil a contract under IFRS 15 Revenue from Contracts with Customers

Fact pattern

Local Building Co has identified a single performance obligation, being the construction of a house, that will be satisfied over time (i.e. one or more of the criteria for ‘over time’ revenue recognition in IFRS 15, paragraph 35, are met).

Local Building Co uses the ‘output method’ to measure its progress in satisfying the performance obligation.

Local Building Co incurs costs to complete the foundations and slab.

Question:

Is Local Building Co able to capitalise the costs incurred to lay the foundations and slab as a ‘fulfilment cost’ asset under IFRS 15, paragraph 95, i.e. the costs:

  • Relate directly to the contract
  • Generate or enhance resources of the entity that will be used in satisfying performance obligations in the future, and
  • The costs are expected to be recovered?  

Rationale for agenda decision:

  • The objective when measuring progress towards complete satisfaction of a performance obligation is to depict an entity’s performance in transferring control of goods or services promised to a customer (IFRS 15, paragraph 39).
  • When evaluating whether to use an ‘output method’, entities must consider whether the output selected would faithfully depict the entity’s performance towards complete satisfaction of the performance obligation.
  • IFRS 15, paragraph 98(c) requires costs relating to past performance to be recognised as an expense when incurred, i.e. ‘costs that relate to a satisfied performance obligation (or partially satisfied performance obligations) in the contract’.
  • Costs of the foundation and slab relate to the partially satisfied performance obligation in the contract, i.e. they relate to past performance of Local Building Co. These costs do not generate or enhance resources of Local Building Co that will be used in continuing to satisfy the performance obligation (delivery of a fully constructed house).

Conclusion:

Local Building Co cannot capitalise costs incurred to lay the foundation and slab as ‘costs to fulfil a contract’ because they relate to past performance and not for the satisfaction of a future performance obligation.

Issue 3: Subsurface rights under IFRS 16 Leases

Fact pattern

Pipeline Operator obtains the right to place an oil pipeline in underground space for 20 years in exchange for consideration.

The contract specifies the exact location and dimensions (path, width and depth) of the underground space within which the pipeline will be placed.

The landowner retains the right to use the surface of the land above the pipeline, but it has no right of access to the pipeline. Nor can it change the use of the specified underground space throughout the 20-year period of use.

Pipeline Operator has the right to perform inspections and repairs and maintenance work (including replacing damaged sections of the pipeline when necessary).

Question:

Should Pipeline Operator apply IFRS 16 Leases, IAS 38 Intangible Assets or another IFRS standard when accounting for this contract?

Rationale for agenda decision:

  • IFRS 16, paragraph 3 requires an entity to apply IFRS 16 to all leases, except for the following:
    • Exploration for or use of minerals, oil, natural gas and similar non-regenerative resources
    • Biological assets (IAS 41 Agriculture) held by a lessee
    • Service concession arrangements (Interpretation 12 Service Concession Arrangements)
    • Licences of intellectual property granted by a lessor (IFRS 15 Revenue from Contracts with Customers), and
    • Rights held by a lessee under licensing agreements (IAS 38 Intangible Assets) for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights.
  • For leases of intangible assets not scoped out above, IFRS 16, paragraph 4 gives lessees a choice to account for them under IFRS 16, but they are not required to do so. This means that lessees can effectively bypass capitalising all leases of intangible assets under IFRS 16.
  • The Committee noted that in this fact pattern, none of the scope exceptions applied, nor was this a lease of an intangible asset because the underground space was tangible.
  • Pipeline Operator would therefore first need to consider whether the contract contains a lease as defined in IFRS 16 (refer to Conclusion below).

Conclusion:

The contract contains a lease for a tangible asset which Pipeline Operator will need to capitalise under IFRS 16 because:

  • There is an identified asset – the specified underground space is physically distinct from the remainder of the land, and the owner does not have substitution rights
  • Pipeline Operator has the right to obtain substantially all the economic benefits from using the underground space throughout the period of use (20-year period)
  • Pipeline Operator also has the right to direct the use throughout the 20-year contract.