UITF issues Abstract 44

In January, the ASB issued UITF Abstract 44 ‘FRS 20 (IFRS 2) – Group and Treasury Share Transactions’.

The Abstract addresses how to apply FRS 20 ‘Share-based Payment’ to arrangements involving an entity’s own equity instruments or equity instruments of another entity in the same group. The Abstract requires a share-based payment arrangement in which an entity receives goods or services as consideration for its own equity-instruments to be accounted for as an equity-settled share-based payment transaction, regardless of how the equity instruments needed are obtained. The Abstract also provides guidance on whether sharebased payment arrangements, in which suppliers of goods or services of an entity are provided with equity instruments of the entity’s parent should be accounted for as cash-settled or equity-settled in the entity’s financial statements.

FRS 20 is a converged standard with IFRS 2 and so this Abstract is necessary to keep the accounting requirements of each standard the same. However, a number of UITF members have raised issues with the Abstract. These issues include the cash-settled treatment the Abstract requires for awards made by subsidiaries over the parent equity. This imposes a potential compliance burden on subsidiaries out of proportion to the benefit to the users of their accounts, thereby creating an entry which is simply reversed on consolidation. The ASB is minded to consider an amendment to FRS 20 to remove this burden and will invite UK constituents to comment on this matter.

The UITF is also concerned that further issues may need clarification. An example is the situation when a parent grants share options to the employees of its subsidiary and, on exercise of the option, the subsidiary is contractually obliged to pay its parent the difference between the exercise price and the market price of the share issued. The UITF will consider whether it is necessary to develop additional guidance.

Waste Electrical and Electronic Equipment (WEEE)

IFRIC 6 ‘Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment’ was issued in September 2005, giving guidance on accounting for liabilities for waste management costs under the European Union’s Directive on waste electrical and electronic equipment (the WEEE Directive). The WEEE Directive (published in 2003) requires producers to take responsibility for the environmental impact of their products when they become waste. It makes them responsible for funding the separate collection of WEEE, together with its subsequent treatment, reuse, recovery and environmentally sound disposal. In some cases producers’ responsibility relates to their current market share.

Following an exposure draft (issued in November 2004), the UITF previously decided that it should issue an Abstract based on IFRIC 6, but not until the applicable legislation in the UK had been published. The UK Regulations implementing the WEEE Directive (S.I. 2006 No.3289 ‘The Waste Electrical and Electronic Equipment Regulations 2006’) were laid before Parliament on 12 December 2006 and entered into force on 2 January 2007.

IFRIC 6 addresses a model of attributing waste management costs where an individual producer’s obligation arises from its participation in the market during each measurement period, i.e. a pay-asyou- go arrangement. The consensus is that the obligating event giving rise to a liability for waste management costs is participation in the market during a measurement period, i.e. a period in which market shares are determined for the purposes of allocating those costs. This model is applied in the UK Regulations in respect of waste from private households.

The ASB will consider the issue of an Abstract in February.

Costs on service contracts with contingent fees

The UITF has discussed a submission concerning the accounting treatment of costs incurred in the provision of a service where the fee is contingent and the contingent event takes place after the balance sheet date. The UITF was asked to consider whether an entity could recognise an asset of work-inprogress at the balance sheet date and whether the resolution of contingent event after the balance sheet date was an adjusting or non-adjusting event. The UITF is considering whether it is necessary to develop guidance.

Retirement benefit schemes with a promised return on contributions or notional contributions

A draft Abstract was published in July 2004, setting out the text of IFRIC D9 (a proposed interpretation of IAS 19), amended to reflect the requirements of FRS 17. The IFRIC decided at its meeting in November to remove this item from its agenda because the issues are expected to be addressed as part of the IASB’s project on employee benefits. Accordingly, the UITF will not be issuing an Abstract on this topic.

IFRIC issues interpretation on service concessions

On 30 November, IFRIC issued Interpretation IFRIC 12 ‘Service Concession Arrangements’. IFRIC has been working on service concession arrangements for a number of years, and IFRIC 12 has been developed following the issue of three draft Interpretations (D12-14) back in March 2005 (reported in Inside Track 43).

IFRIC 12 addresses the accounting by concession operators for publicto- private sector arrangements, in circumstances where the grantor (a public sector body) is deemed to have an asset of the infrastructure used in the concession, because:

• the grantor controls or regulates what service the operator must provide with the infrastructure, to whom it must provide them, and at what price; and
• the grantor controls – through ownership, beneficial entitlement or otherwise – any significant residual interest in the infrastructure at the end of the concession period.

IFRIC 12 does not specify the accounting by grantors.

In the arrangements covered by IFRIC 12 the operator recognises either a financial asset or an intangible asset. The operator recognises a financial asset where it has an unconditional contractual right to receive cash or other financial assets from the grantor and the grantor has little, if any, discretion to avoid payment. An operator recognises an intangible asset to the extent that it receives a right (a licence) to charge users for the public service.

IFRIC 12 is effective for accounting periods beginning on or after 1 January 2008 and requires retrospective application.

In the UK, the accounting for such arrangements is covered by FRS 5 Application Note F ‘Reporting the Substance of Transactions: The Private Finance Initiative and Similar Contracts’. The Board responded to the consultation on the draft Interpretations D12-14 and has made clear that it does not propose to adopt the Interpretation in the UK when it is issued.