Summaries of Final IFRIC Interpretations
The full official text of all Interpretations is included in the Bound Volume of IASB Standards and IAS on CD-ROM. The following unofficial summaries are, by their nature, incomplete.
SIC 1: Consistency - Different Cost Formulas for Inventories
SIC 2: Consistency - Capitalisation of Borrowing Costs
SIC 3: Elimination of Unrealised Profits and Losses on Transactions with Associates
SIC 5: Classification of Financial Instruments - Contingent Settlement Provisions
SIC 6: Costs of Modifying Existing Software
SIC 7: Introduction of the Euro
SIC 8: First-Time Application of IASs as the Primary Basis of Accounting
SIC 9: Business Combinations - Classification either as Acquisitions or Unitings of Interests
SIC 10: Government Assistance - No Specific Relation to Operating Activities
SIC 11: Foreign Exchange - Capitalisation of Losses Resulting from Severe Currency Devaluations
SIC 12: Consolidation - Special Purpose Entities
SIC 13: Jointly Controlled Entities - Non-Monetary Contributions by Venturers
SIC 14: Property, Plant and Equipment - Compensation for the Impairment or Loss of Items
SIC 15: Operating Leases - Incentives
SIC 16: Share Capital - Reacquired Own Equity Instruments (Treasury Shares)
SIC 17: Equity - Costs of an Equity Transaction
SIC 18: Consistency - Alternative Methods
SIC 19: Reporting Currency - Measurement and Presentation of Financial Statements Under IAS 21 and IAS 29
SIC 20: Equity Accounting Method - Recognition of Losses
SIC 21: Income Taxes - Recovery of Revalued Non-Depreciable Assets
SIC 22: Business Combinations - Subsequent Adjustment of Fair Values and Goodwill Initially Reported
SIC 23: Property, Plant and Equipment - Major Inspection or Overhaul Costs
SIC 24: Earnings Per Share - Financial Instruments and Other Contracts that May Be Settled in Shares
SIC 25: Income Taxes - Changes in the Tax Status of an Enterprise or its Shareholders
SIC-27: Evaluating the Substance of Transactions in the Legal Form of a Lease
SIC-28: Business Combinations – “Date of Exchange” and Fair Value of Equity Instruments
SIC-29: Disclosure – Service Concession Arrangements
SIC-30: Reporting Currency – Translation from Measurement Currency to Presentation Currency
SIC-31: Revenue – Barter Transactions Involving Advertising Services
SIC-32 IntangibleAssets – Web Site Costs New - 25/03/2002
SIC-33: Consolidation and Equity Method – Potential Voting Rights and Allocation of Ownership Interests
SIC 1: Consistency - Different Cost Formulas for Inventories
Summary of SIC-1
SIC-1 Requires that under IAS 2, Inventories, paragraph 21 and IAS 2 paragraph 23 the same cost formula be used for inventories having the same characteristics. Where the nature or use of (groups of) items differs from others, the application of different methods is allowed.
Effective date:
Periods beginning on or after 1 January 1999.
SIC 2: Consistency - Capitalisation of Borrowing Costs
Summary of SIC-2
If an enterprise once has decided to apply the accounting policy permitted as Allowed Alternative in IAS 23: Borrowing Costs -- capitalising all borrowing costs described in IAS 23 paragraph 11 -- that policy should be applied consistently for all qualifying assets and periods.
Effective date:
Periods beginning on or after 1 January 1998.
SIC 3: Elimination of Unrealised Profits and Losses on Transactions with Associates
Summary of SIC-3
Under IAS 28: Investments in Associates, paragraph 16, unrealised gains and losses resulting from transactions with associates should be eliminated proportionately. This is consistent with the application of the equity method for joint ventures as required by IAS 31: Financial Reporting of Interests in Joint Ventures, paragraphs 39 and 40.
Effective date:
Periods beginning on or after 1 January 1998.
SIC 5: Classification of Financial Instruments - Contingent Settlement Provisions
Summary of SIC-5
The issue is how to classify a financial instrument when the manner of settlement (in cash or in equity instruments of the issuer) depends on the outcome of uncertain future events that are beyond the control of both the issuer and the holder.
The SIC agreed that such instruments should be classified in accordance with IAS 32: Financial Instruments: Disclosure and Presentation, paragraphs 5 and 18 as liabilities, regardless of their legal form unless the possibility of settlement in cash appears to be remote, in which case the instruments should be classified as equity.
Effective for instruments issued in periods beginning on or after 1 June 1998.
SIC 6: Costs of Modifying Existing Software
Summary of SIC-6
The issue is how expenditure such as those for modifications necessary to prepare existing software systems for the turn of the millennium (often referred to as "Year 2000 Costs") or the introduction of the euro should be accounted for.
The SIC agreed that in accordance with the Framework, paragraphs 89 and 90, (and applying IAS 16: Property, Plant and Equipment, paragraph 24, by analogy) expenditure incurred in order to restore or maintain the future economic benefits that an enterprise expected from the original standard of performance of existing software systems should not be capitalised. This solution is also in compliance with IAS 38: Intangible Assets.
In addition, the SIC agreed that expenditure should be recognised as incurred in accordance with paras. 94 - 98 of the Framework, i.e. for work undertaken "in house", as materials are used or labour time is consumed. For work undertaken by external contractors, expenditure should be recognised only as the work is carried out.
Effective date:
1 June 1998.
SIC 7: Introduction of the Euro
Summary of SIC-7
The issue is how the introduction of the Euro, resulting from the European Economic and Monetary Union (EMU) will affect the application of IAS 21: The Effects of Changes in Foreign Exchange Rates.
The SIC agreed that the requirements of IAS 21 should be strictly applied. This means that monetary assets and liabilities should continue to be translated at the spot rate. Where an enterprise has an existing accounting policy of deferring exchange gains and losses related to anticipatory hedges, an enterprise should continue to account for such deferred exchange gains and losses notwithstanding the changeover to the euro. Cumulative differences classified as equity relating to foreign entities should continue to be recognised as income or expenses only on the disposal of the foreign entity. The Allowed Alternative Treatment of IAS 21.21 regarding exchange differences resulting from severe devaluations does not apply to currencies participating in EMU.
Effective date:
1 June 1998.
SIC 8: First-Time Application of IASs as the Primary Basis of Accounting
Summary of SIC-8
SIC-8 is an Interpretation of IAS 8: Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies
The issues dealt with in this Interpretation are:
- how the financial statements of an enterprise should be prepared and presented in the period of first-time application of the full set of IAS; and
- how the specific transitional provisions set out in certain Standards and Interpretations are to be applied in the period of first-time application of IASs to balances of items that existed already at the Effective Date of those Standards and Interpretations.
The SIC agreed that in the period of first-time application of IAS as the primary accounting basis, the financial statements of an enterprise, including comparative information, should be prepared and presented as if the financial statements had always been prepared in accordance with the IAS effective for the period of first-time application. Therefore, the Standards and Interpretations should be applied retrospectively except when Standards or Interpretations require or permit a different transitional treatment or when the amount of the adjustment relating to prior periods cannot be reasonably determined. Adjustment amounts should be treated as an adjustment to the opening balance of retained earnings of the earliest period presented in accordance with IAS. If adjustments relating to prior periods or comparative information cannot be determined, the fact should be disclosed.
On the first-time application of IAS, an enterprise may apply the transitional provisions only for periods ending at the date prescribed in the respective Standards and Interpretations. The transitional treatment adopted should be disclosed. For example, goodwill may only be written off directly against equity when it was acquired in periods beginning prior to January 1995.
Effective date:
1 August 1998.
SIC 9: Business Combinations - Classification either as Acquisitions or Unitings of Interests
Summary of SIC-9
The issue resolved by this Interpretation is how the definitions in IAS 22: Business Combinations, paragraph 9, and the additional guidance in IAS 22, paragraphs 11 to 13, and in IAS 22, paragraphs 14 to 17, are to be interpreted and applied in classifying a business combination and whether a business combination under IAS 22 might be classified as neither an acquisition nor a uniting of interests.
The SIC concluded that the overriding criterion to distinguish an acquisition from a uniting of interests is whether an acquirer can be identified, i.e. whether the shareholders of one of the combining enterprises obtain control over the combined enterprise. The classification of a business combination and the determination of whether control exists should be based on an overall evaluation of all relevant facts and circumstances of the transaction; the guidance given in IAS 22 provides examples of important factors to be considered, not a comprehensive set of conditions to be met.
In addition, the Interpretation clarifies that a business combination is to be classified as an acquisition, unless the criteria of IAS 22, paragrpah 16, are met (exchange or pooling of the substantial majority of the voting common shares of the combining enterprises, relative equality in fair values of the combining enterprises and continuance of substantially the same percentage in voting rights and interests of the shareholders of each of the combining enterprises in the combined enterprise). Even if all three criteria are met, a business combination is only to be classified as a uniting of interests if no acquirer can be identified.
Effective date:
Business combinations given initial accounting recognition in periods beginning on or after 1 August 1998.
SIC 10: Government Assistance - No Specific Relation to Operating Activities
Summary of SIC-10
In some countries government assistance to enterprises can be aimed at encouragement or long-term support of business activities either in certain regions or industry sectors. Conditions to receive such assistance may not be specifically related to the operating activities of the enterprise. The issue is whether such government assistance is "a government grant" within the scope of IAS 20: Accounting for Government Grants and Disclosure of Government Assistance and should therefore be accounted for in accordance with this Standard.
The SIC agreed that government assistance to enterprises that is aimed at encouragement or long-term support of business activities either in certain regions or industry sectors meets the definition of government grants in IAS 20. Such grants should therefore not be credited directly to shareholders' interests.
Effective date:
1 August 1998.
SIC 11: Foreign Exchange - Capitalisation of Losses Resulting from Severe Currency Devaluations
Summary of SIC-11
The Allowed Alternative Treatment in IAS 21: The Effects of Changes in Foreign Exchange Rates, paragraph 21, requires several conditions to be met cumulatively before an enterprise can include exchange losses on foreign currency liabilities in the carrying amount of related assets.
The issue is how the conditions of IAS 21, paragraph 21, should be interpreted that the liability "cannot be settled" and that there is "no practical means of hedging" against the foreign currency exchange risk and that the liability should arise on the "recent acquisition" of an asset.
The SIC agreed that foreign exchange losses on liabilities that result from the recent acquisition of assets should only be included in the carrying amount of the assets if those liabilities could not have been settled or if it was not practically feasible to hedge the foreign currency exposure before the severe devaluation or depreciation occurred. Only in these cases foreign exchange losses are unavoidable and therefore part of the asset's acquisition costs. "Recent" acquisitions of assets are acquisitions within twelve months prior to the severe devaluation or depreciation of the reporting currency.
Effective date:
1 August 1998.
SIC 12: Consolidation - Special Purpose Entities
Summary of SIC-12
This interpretation addresses the question of when a special purpose entity would be consolidated by a reporting enterprise. The SIC agreed that an enterprise should consolidate a special purpose entity ("SPE") when, in substance, the enterprise controls the SPE.
Examples of SPEs include entities set up to effect a lease, a securitisation of financial assets or R&D activities. The concept of control used in IAS 27: Consolidated Financial Statements requires having the ability to direct or dominate decision making accompanied by the objective of obtaining benefits from the SPE's activities. The Interpretation provides example indications of when control may exist in the context of an SPE. The examples involve activities of the SPE on behalf of the reporting enterprise, the reporting enterprise having decision-making powers over the SPE, and the reporting enterprise having rights to the majority of benefits and exposure to significant risks of the SPE.
Some enterprises may also need to evaluate separately the topic of derecognition of assets, for example, related to assets transferred to an SPE. In some circumstances, such a transfer of assets may result in those assets being derecognized and accounted for as a sale. Even if the transfer qualifies as a sale, the provisions of IAS 27 and SIC-12 may mean that the enterprise should consolidate the SPE. SIC-12 does not address the circumstances in which sale treatment should apply for the reporting enterprise or the elimination of the consequences of such a sale upon consolidation.
Effective date:
Annual financial periods beginning on or after 1 July 1999.
SIC 13: Jointly Controlled Entities - Non-Monetary Contributions by Venturers
Summary of SIC-13
This Interpretation clarifies the circumstances in which the appropriate portion of gains or losses resulting from a contribution of a non-monetary asset to a jointly controlled entity (JCE) in exchange for an equity interest in the JCE should be recognised by the venturer in the income statement. The Interpretation indicates that under IAS 31: Financial Reporting of Interests in Joint Ventures, paragraph 39, recognition of gains or losses on contributions of non-monetary assets is appropriate unless:
- the significant risks and rewards related to the non-monetary asset are not transferred to the jointly controlled entity;
- the gain or loss cannot be measured reliably; or
- similar assets are contributed by the other venturers.
Non-monetary assets contributed by venturers are similar when they have a similar nature, a similar use in the same line of business and a similar fair value. A contribution meets the similarity test only if all significant component assets included in the contribution are similar to each of the significant component assets contributed by the other venturers. A gain should also be recognised if, in addition to the equity interest in the jointly controlled entity, the venturer receives consideration in the form of either cash or other assets which are dissimilar to the non-monetary assets contributed.
Effective date:
Annual financial periods beginning on or after 1 January 1999.
SIC 14: Property, Plant and Equipment - Compensation for the Impairment or Loss of Items
Summary of SIC-14
This SIC Interpretation is an interpretation of IAS 16: Property, Plant and Equipment.
This Interpretation addresses how an enterprise should account for impairments or losses of items of property, plant and equipment, the related compensation from third parties, and the subsequent restoration, purchase or construction of assets.
The Interpretation confirms that three separate economic events are involved and that each event should be accounted for separately. The three separate events are:
- the impairment or loss;
- the related compensation from third parties; and
- the subsequent restoration, purchase or construction of assets.
Compensation is to be included in the income statement when recognised. Recognising the compensation as deferred income or deducting it from the impairment or loss or from the cost of a new asset is not appropriate.
Effective date:
Annual financial periods beginning on or after 1 July 1999.
SIC 15: Operating Leases - Incentives
Summary of SIC-15
SIC-15 clarifies the recognition of incentives related to operating leases by both the lessee and lessor.
The Interpretation indicates that lease incentives (such as rent-free periods or contributions by the lessor to the lessee's relocation costs) should be considered an integral part of the consideration for the use of the leased asset. IAS 17: Leases, paragraphs 24 and 42 require an enterprise to treat incentives as a reduction of lease income or lease expense. As they are an integral part of the net consideration agreed for the use of the leased asset, incentives should be recognised by both the lessor and the lessee over the lease term, with each party using a single amortisation method applied to the net consideration.
Effective date:
Lease terms beginning on or after 1 January 1999.
SIC 16: Share Capital - Reacquired Own Equity Instruments (Treasury Shares)
Summary of SIC-16
This SIC Interpretation is an interpretation of IAS 32: Financial Instruments: Disclosure and Presentation
This Interpretation indicates that treasury shares should be presented in the balance sheet as a deduction from equity, and the acquisition of treasury shares should be presented in the financial statements as a change in equity. Additionally, no gain or loss should be recognised in the income statement on the sale, issuance, or cancellation of treasury shares, and consideration received should be presented in the financial statements as a change in equity.
Effective date:
Annual financial periods beginning on or after 1 July 1999.
SIC 17: Equity - Costs of an Equity Transaction
Summary of SIC-17
This SIC Interpretation is an interpretation of IAS 32: Financial Instruments: Disclosure and Presentation.
This Interpretation addresses the costs of issuing or acquiring an enterprise's own instruments classified as equity when the transaction results in a net increase or decrease to equity.
Costs of an equity transaction are only those incremental external costs directly attributable to the equity transaction that would otherwise have been avoided. The transaction costs of an equity transaction should be accounted for as a deduction from equity, net of any related income tax benefit. The costs of a transaction which fails to be completed should be expensed. Transaction costs that relate to the issuance of a compound instrument that contains both a liability and an equity element should be allocated to the component parts in proportion to the allocation of proceeds. Transaction costs that relate jointly to more than one transaction, for example, costs of a concurrent offering of some shares and stock exchange listing of other shares, should be allocated to those transactions using a basis of allocation which is rational and consistent with similar transactions.