International

This Comment Letter was sent by BDO Global Coordination B.V. on behalf of BDO International, to the International Accounting Standards Board in March 2008:

Dear Sir,

 

 

We are pleased to have the opportunity to comment on the above Exposure Draft issued by the International Accounting Standards Board (IASB), on behalf of BDO International1.  Our responses to your specific question are set out below.

 

We agree with the requirements set out for group cash-settled share-based payments. 

However, we have noted divergence in practice when preparing the separate accounts of the individual entities involved in these arrangements.  These involve questions over how to account for obligations imposed on one entity to reimburse other entities for obligations settled on its behalf in cash or equity.  There are also differences in the accounting adopted by the settling company, and the eventual reimbursement.

 

These reimbursement arrangements may involve fellow-subsidiaries or sub-subsidiaries and the question arises as to whether the investment and capital contribution trail should cascade through the group structure or merely apply to the two immediate parties involved.  We consider that it would be helpful if guidance were produced for these arrangements.  This guidance should cover equity-settled group share-based payment arrangements in the original IFRIC as well as the cash-settled arrangements in these proposals.

 

We also note that the guidance continues to concentrate on one particular form of expense allocation within a group (i.e. share based payments).  Does the Board intend that this approach should be applied by analogy to other forms of payment made by one group company on behalf of another?  We believe that this is an important area that needs specific guidance rather than being addressed by analogy from an interpretation.  In consequence, it may be appropriate to prohibit direct application of the requirements by analogy, in a similar manner to the approach set out in IFRIC 10 Interim Financial Reporting and Impairment.

 

 

We agree with the proposal for a subsidiary that has received goods or services as part of a cash-settled share-based payment to account for the transaction in accordance with IFRS 2 even when the obligation to transfer cash has been assumed by the parent, or by another group company.

 

The approach proposed is appropriate, in particular for the following reasons:
It will ensure consistency of treatment between the entities’ individual accounts and those of the group.

It will also ensure that an individual subsidiary will account for cash-settled share-based payment transactions in a consistent manner regardless of whether the obligation is settled by itself or by another group company. 

The recognition of liabilities and expenses outlined in the amendment is consistent with both the definitions in the Framework and the principles applied for group equity-settled share-based transactions in the current published version of IFRIC 11.  From the group perspective the recognition of the expense mirrors the liability incurred, and the expense is adjusted as the fair value of the liability varies.  In the individual entity accounts the liability is allocated to the entity that has incurred the obligation, reflected by an increase in the entity’s investment in the other company (although this enhanced value will obviously be subject to an impairment review).  The expense is recognised by the entity receiving the services, but because it does not have any obligation to pay for these services it is reflected by a capital contribution rather than a liability.

 

 

We agree with the requirement to apply this Interpretation retrospectively.  There are two possible alternatives to this which, for the reasons outlined below, would not be appropriate.
1. Only apply the amendment to grants made after this amendment’s effective date.  This will result in a long delay before consistency is achieved between different arrangements made by the same entities, and also before consistency is achieved between different entities.

2.  Apply the amendment prospectively to all arrangements existing at the amendment’s effective date.  However, because the charge is measured on a cumulative basis this would result in excessive charges being made in the year of adoption, distorting consistency between accounting periods.

 

As a result, the only way in which consistency can be achieved within a reasonable time frame is to apply it retrospectively to all arrangements outstanding at the effective date.

1. The proposed paragraph 3A of IFRIC 11 should make clear that the liability to make payments to the employees of a subsidiary is in respect of services rendered or goods supplied to that subsidiary, as is the case in the existing paragraph 2 of IFRIC 11. It may be that employees of subsidiary A are being remunerated by the parent for services to subsidiary B. In that case the expense should be within B’s profit or loss and not the profit or loss of subsidiary A.

2. The proposed paragraph 11B states that "Until the liability incurred by the parent is settled, the subsidiary shall recognise any changes in the fair value of the liability in profit or loss and in the subsidiary's equity as adjustments to contributions from the parent".  Further clarification is required on the parent’s accounting when it remeasures the liability in its entity accounts. In the absence of specific guidance in IFRIC 11 it might be interpreted that the parent recognises any adjustment in its profit and loss account as required by IAS 39 AG 8. The deemed additional investment in subsidiary would not be adjusted and this creates an inconsistency with subsidiary's treatment. 

3.  Paragraph BC7 requires the entity receiving the services to apply IFRS 2 to group share based payment arrangements. However, the paragraph appears to be contradictory. The penultimate sentence says “...regardless of whether the arrangements are equity-settled or cash-settled” and then in the final sentence it is stated that the subsidiary should treat these as cash-settled.  This is not the case.  If the arrangement falls within paragraph 8 of IFRIC 11 the subsidiary is required to recognise an equity-settled share based payment.

4. Guidance, similar to that in paragraph 10 of IFRIC 11 dealing with an employee transferring between group companies, would be helpful. In such cases we presume that each subsidiary should continue to adjust the cumulative charge based on changes in the fair value of the liability incurred by the parent. 

5. Under the proposed amendment to IFRIC 11.3A, it states that "... The amount of the cash payments are based on the price of the equity instruments of either the parent or the subsidiary...". While for the same issue under the proposed amendment to IFRS 2.3A, it states that "... The amount of the cash payments are based on the price (value) of the equity instruments of the entity, its parent, or another entity in the group." (emphasis underlined). For the avoidance of confusion, the wording should be standardised to that proposed for IFRS 2.3A. 

6. Under the existing Framework, the definition and related explanations for recognition of "expenses" under paragraph 70b, 78, 94-98 do not include the concept of recognition of an expense even if the entity does not have any obligation to make payments. Although the Framework does not override a standard, it would be preferable if this apparent conflict was reconciled. 

We hope that our comments and suggestions are helpful.  Should you wish to discuss any of the points we have raised please contact Helen Thomson of BDO Global Coordination B.V. on +32 2 778 01 30.

Yours faithfully,

BDO Global Coordination B.V.

¹BDO International is a world wide network of public accounting firms, called BDO Member Firms, serving international clients.  Each BDO Member Firm is an independent legal entity in its own country. 
 
The network is coordinated by BDO Global Coordination B.V., incorporated in the Netherlands, with an office in Brussels, Belgium, where the Global Coordination Office is located.