UITF issues Abstract 43 on equivalence

UITF Abstract 43 'The interpretation of equivalence for the purposes of section 228A of the Companies Act 1985' was issued on 23 October.

The Abstract applies to intermediate parent undertakings whose parents are not established under the law of an EEA state. The Companies Act was recently changed to make available to such companies an exemption from preparing consolidated accounts. The exemption is conditional on compliance with various conditions, including that the intermediate parent and all of its subsidiaries are included in consolidated accounts for a larger group drawn up in accordance with the provisions of the Seventh Directive or in an equivalent manner.

The UITF developed the Abstract in response to requests for guidance on how companies should judge whether they can use the exemption. In particular questions have been raised as to whether financial statements drawn up in accordance with IFRS, US GAAP and other GAAPs meet the requirement for equivalence with the Seventh Directive.

The guidance in Abstract 43 reflects the deregulatory nature of the exemption. It therefore focuses on the consideration of whether consolidated accounts of a higher parent meet the basic requirements of the Directives and in particular the requirement to give a true and fair view. This means that those accounts do not need to conform with the detailed requirements of the Directives in order for the UK intermediate parent to meet the relevant condition for the exemption.

IFRIC draft Interpretation on minimum funding requirements

The IFRIC issued a draft Interpretation, IFRIC D19 'IAS 19-The Asset Ceiling: Availability of Economic Benefits and Minimum Funding Requirements' on 24 August, with a comment period that closed on 30 October.

Regulators around the world (including the UK) have set frameworks for funding defined benefit pension schemes that may result in funding levels either above or below the level of scheme liabilities as calculated for financial reporting purposes under IAS 19 (or FRS 17). In some jurisdictions, the funding requirements would be expected to result mostly in higher funding levels than the IAS 19 measure of liabilities.

An issue addressed by D19 is how obligations to pay contributions that exceed any liability recognised under IAS 19 should be accounted for - in particular when the additional contributions will give rise to (or increase) an accounting surplus in the fund. D19 proposes that if the sponsoring employer has, at the balance sheet date, an obligation to make a payment to the fund that will not be recoverable, an additional loss should be recognised for the amount that will not be recovered. The additional loss should be recognised when the obligation is incurred rather than when the payment is made.

D19 also addresses the more general issue of when an accounting surplus is treated as being recoverable, i.e. when potential refunds or contribution reductions should be treated as available to the entity for the purpose of applying the asset ceiling test in IAS 19.

The UITF response to the IFRIC proposals can be accessed on the ASB's website (in the 'Other Downloads' section on the Publications page).

IFRIC draft Interpretation on customer loyalty programmes

The IFRIC issued a draft Interpretation, IFRIC D20 'Customer Loyalty Programmes' on 7 September, with a comment period closing on 6 November. Customer loyalty programmes are used by entities to provide customers with incentives to buy their products. Each time a customer buys goods or services, the entity grants the customer award credits. The customer can redeem the award credits for awards such as free or discounted goods or services.

When award credits are granted by an entity to their customers in customer loyalty programmes, the entity enters into an obligation. The issues addressed in D20 are whether such award credits should be accounted for either:

•  By recognising all revenue on the initial sale immediately and recognising a provision for any costs of fulfilling the obligation under the award credits (the 'cost/provision' approach); or
• By allocating some of the consideration received from the customer to the award credits and deferring it as a liability until the entity fulfils its obligations to deliver awards to customers (the 'deferred revenue' approach).

D20 proposes the second approach, which is consistent with the guidance in Application Note G: 'Revenue Recognition' of FRS 5.

The UITF response to the IFRIC proposals can be accessed on the ASB's website.