|
Please click on the links below to view more:
In this newsletter, we look at the following topics:
IFRIC Agenda Decisions
IAS 18 Revenue - Customer Loyalty Programmes
At its meetings in May and July 2006, the IFRIC had reached a consensus on how entities should account for award credits (e.g., points or air miles) granted to customers in customer loyalty programmes.
Read more...... Expand / Collapse
It was concluded that:
- The award credits should be treated as a separate component of the sale in which they were granted. Hence, some of the consideration received for that sale should be allocated to the award credits.
- The amount of revenue allocated to the award credits should be an estimate of the fair value of the consideration received for them (not the cost of providing the awards).
- The amount of revenue allocated to the award credits may be estimated by reference to the relative fair values of each of the components, that is, the amount for which each component could be sold separately. While different measurement methods could be applied to estimate the fair value of the consideration received for the award credits, one method of estimating the fair value of the award credits could be by reference to the value of the awards for which the credits could be exchanged.
- If the amount of consideration allocated to the award credits were estimated by reference to the fair value of the awards, the nominal value of the awards should be reduced to take into account the proportion of award credits that were expected to be forfeited by customers.
- The consideration would be recognised as revenue when the customer redeems the credits for awards or a third party assumes the obligation to deliver the awards.
The IFRIC is currently fine-tuning a number of minor drafting changes and subject to those changes, the IFRIC intends to publish a draft interpretation for public comment.
IFRS 2 Share-based Payment
1. Share plans with cash alternatives at the discretion of the entity
The IFRIC considered whether an employee share plan in which the employer had the choice of settlement in cash or in shares, and the amount of the settlement did not vary with changes in the share price of the entity should be treated as a share-based payment transaction within the scope of IFRS 2.
Read more...... Expand / Collapse
At its meetings, the IFRIC noted that IFRS 2 defines a share-based payment transaction as a transaction in which the entity receives goods or services as consideration for equity instruments of the entity or amounts that are based on the price of equity instruments of the entity.
They went on to point out that the definition of a share-based payment transaction does not require the exposure of the entity to be linked to movements in the share price of the entity. This is made clear in IFRS 2 (paragraphs 41 - 43) which contemplates share-based payment transactions under which, the entity is presented with a choice of settlement. The IFRIC, therefore believed that, although the amount of the settlement did not vary with changes in the share price of the entity, such share plans are share-based payment transactions in accordance with IFRS 2 since the consideration may be equity instruments of the entity.
The IFRIC also believed that, even in the extreme circumstances in which the entity was given a choice of settlement and the value of the shares that would be delivered was a fixed monetary amount, those share plans were still within the scope of IFRS 2.
The IFRIC believed that, since the requirements of IFRS 2 are clear, the issue is not expected to create significant divergence in practice. The IFRIC, therefore decided not to take the issue onto the agenda.
The same concepts should also apply to HKFRS preparers given that there should not be divergence in application.
2. Share plans with cash alternatives at the discretion of the employees
The IFRIC considered an employee share plan in which employees were given a choice to have cash at one date or shares at a later date. On the date the transactions were made, the parties involved should be made aware of the terms and conditions of the plans including the formula that would be used to determine the amount of cash to be paid (or the number of shares to be delivered) to each individual employee. They should also be notified that the exact amount of cash or number of shares will only be known at a future date. As such, the IFRIC was asked to confirm the grant date and vesting period for such share plans.
Read more...... Expand / Collapse
The IFRIC noted that while IFRS 2 defines the grant date as the date when there is a shared understanding of the terms and conditions, it does not require the grant date to be the date when the exact amount of cash to be paid (or the exact number of shares to be delivered) is known to the parties involved.
The IFRIC further noted that share-based payment transactions with cash alternatives at the discretion of the counterparty are addressed in paragraphs 34 - 40 of IFRS 2. Paragraph 35 of IFRS 2 states that, if an entity has granted the counterparty the right to choose whether a share-based payment transaction is settled in cash or by issuing equity instruments, the entity has granted a compound financial instrument, which includes a debt component (i.e. the counterparty's right to demand cash payment) and an equity component (i.e. the counterparty's right to demand settlement in equity instruments). Paragraph 38 of IFRS 2 states that the entity shall account separately for goods or services received or acquired in respect of each component of the compound financial instrument. Based on these, the IFRIC, therefore agreed that the vesting period of the equity and debt components should be determined separately and that the vesting period of each component may be different.
Seeing that the 'grant date' is defined in IFRS 2 and its requirements set out in paragraphs 34 - 40 are clear, the IFRIC concluded that the issues are not expected to create significant divergence in practice. The IFRIC, therefore decided not to take the issues onto the agenda.
The same concepts should also apply to HKFRS preparers given that there should not be divergence in application.
Note: HKFRS has converged with IFRS effective from 1 January 2005. Contents contained in this newsletter are also relevant to IFRS preparers. Get Your Copy Here
Download our HKFRS News - Aug 2006 (pdf file, 438KB) for your reference.
Other Issues of HKFRS News
Accounting and Listing Rules Updates. |
