Summary
Developments, Key Differences & History
Compared to IFRS
Interpretations
Rejection Notices
Questions & Answers
Articles
AASB website
AASB/IFRIC Rejections and Guidance
- September 2008 - Accounting for trailing commissions
- December 2007 - Recognition of Franked Dividend Revenue
- September 2007 - Guidance on identifying agency relationships
- June 2006 - Subscriber Acquisition Costs in the Telecommunications Industry
- September 2005 - Direct Costs Affecting a Financial Instrument’s Effective Interest Rate
- July 2004 - Extended Payment terms
- July 2004 - Prompt settlement discounts
1. September 2008 - Accounting for trailing commissions
Issue:
The IFRIC received a request for guidance on how an entity should account for ongoing commission arrangements, referred to as trailing commissions, in the particular circumstances where the contractual obligation for the payment/receipt of the commission is not linked to the performance of any future service.
IFRIC Decision:
An example of the type of arrangement in question is when a financial adviser directs its client’s funds to an investment manager’s product. The adviser receives an initial commission for the placement of the business with the investment manager and a further ongoing (trailing) commission provided that the client remains invested in the product for a specified time. The issue focuses on the accounting treatment by the financial adviser to the client.
The IFRIC noted that similar arrangements are present in many industries. Consequently, the issue is widespread. In addition, the IFRIC is aware that practice in this area is diverse. Diversity arises in part because of difficulty in determining, considering all relevant circumstances including the terms of the contractual arrangement, whether the entity is required to provide any future service to be entitled to receive the commission. Diversity also arises because IAS 18 and IAS 39 have different recognition criteria and views differ on whether IAS 18 or IAS 39 is the relevant standard.
Given the complexity of the issues and the pervasive effect of any conclusions reached, the IFRIC concluded that it would not be able to reach a consensus on a timely basis. The IFRIC also noted that the Board was considering these issues in its projects on revenue recognition and liabilities. The IFRIC therefore decided not to add this issue to its agenda.
Top
2. December 2007 - Recognition of Franked Dividend Revenue
Issue:
Australian Accounting Standards do not presently specify whether an entity should recognise franked dividend revenue on a:
- net basis – that is, by recognising only the amount of the dividend as revenue (e.g. if a fully franked dividend of $70 is received, dividend revenue would be $70); or
- gross basis – that is, by recognising the sum of the dividend and any franking credit attached to the dividend as revenue (e.g. if a fully franked dividend of $70 is received, dividend revenue would be $100, being the sum of $70 and the franking credit of $30).
Because certain taxpayers are entitled to refunds for their excess imputation credits and other taxpayers are able to convert excess franking credits into tax losses rather than the excess being forgone, some constituents have suggested that the treatment of franked dividend revenue should be reconsidered. In addition, some constituents suggest that the treatment of franked dividend revenue should also be reconsidered in light of adopting IFRSs from 2005.
AASB Decision:
At its December 2007 meeting, the AASB decided not to add this issue to its agenda because:
- no diversity has been noted in practice on this matter at the current time; and
- the International Accounting Standards Board (IASB) is currently undertaking projects on revenue recognition and income taxes that may affect the accounting for franked dividends in the future.
Top
3. September 2007 - Guidance on identifying agency relationships
Issue:
The IFRIC received a request for an interpretation of how IAS 18 Revenue paragraph 8 should be applied to situations in which an entity employs another entity to meet the requirements of a customer under a sales contract. The request questioned whether there is a need for more general interpretative guidance in this area.
IFRIC Decision:
The IFRIC noted that IAS 18 specifies the accounting for agency relationships. Paragraph 8 states that ‘in an agency relationship, the gross inflows of economic benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity. The amounts collected on behalf of the principal are not revenue. Instead, revenue is the amount of commission.’ Paragraphs 6 and 18(d) of the Appendix to IAS 18 refer to the substance of the transaction to identify whether the entity is acting as agent or principal.
The IFRIC acknowledged that no detailed guidance was given in IFRSs on identifying agency relationships. However, the IFRIC believed that: - determining whether an entity is acting as a principal or as an agent depends on facts and circumstances and that judgement is required;
- any guidance beyond that given in IAS 18 would be more in the nature of implementation guidance than an Interpretation.
For these reasons the IFRIC decided not to develop an Interpretation and to remove this item from its agenda. The IFRIC also decided to recommend to the Board that guidance be included in the Appendix to IAS 18 to help constituents to determine whether an entity is acting as a principal or as an agent.
Top
4. June 2006 - Subscriber Acquisition Costs in the Telecommunications Industry
Issue:
How a provider of telecommunications services should account for telephone handsets it provides free of charge or at a reduced price to customers who subscribe to service contracts.
The question was whether:
(a) the contracts should be treated as comprising two separately identifiable components, i.e. the sale of a telephone and the rendering of telecommunication services, as discussed in paragraph 13 of AASB 118 Revenue. Revenue would be attributed to each component; or
(b) the telephones should be treated as a cost of acquiring the new customer, with no revenue being attributed to them.
In Australia, Urgent Issues Group Interpretation 1042 Subscriber Acquisition Costs in the Telecommunications Industry (December 2004) addresses the recognition of incremental subscriber acquisition costs as assets. It specifies that subscriber acquisition costs do not include the cost of telephones provided to subscribers: the provision of a telephone to subscribers is accounted for as a sale under AASB 118 Revenue, as a separately identifiable
component of the transaction.
IFRIC/AASB Decision:
The issue was referred to the IFRIC for consideration, given the relevance of the issue to telecommunications entities around the world. The IFRIC acknowledged that the question is of widespread relevance, both across the telecommunications industry and, more generally, in other sectors.
The IFRIC noted that IAS 18 Revenue does not give guidance on what it means by ‘separately identifiable components’ and practices diverge. The IFRIC also noted that the terms of subscriber contracts vary widely and stated that any guidance on accounting for discounted handsets would need to be principles-based to accommodate the diverse range of contract terms that arise in practice. The IASB is at
present developing principles for identifying separable components within revenue contracts.
In these circumstances, the IFRIC does not believe it could reach a consensus on a timely basis. The IFRIC, therefore, decided not to take the topic onto its agenda.
At its June 2006 meeting, the AASB decided not to add this project to the Urgent Issues Group’s agenda on the grounds that the Australian requirements are clearly stated in UIG
Interpretation 1042, with the result that divergent practices were not expected in Australia.
Top
5. September 2005 - Direct Costs Affecting a Financial Instrument’s Effective Interest Rate
Issue:
Accounting Standard AASB 139 "Financial Instruments: Recognition and Measurement" (paragraph 43) requires that the initial measurement of a financial asset not at fair value through profit or loss is at its fair value plus transaction costs that are directly attributable to the acquisition of the financial asset. AASB 139.9 defines “transaction costs” as incremental costs that are directly attributable to the acquisition of a financial asset, and states that an incremental cost is one that would not have been incurred if the entity had not acquired, issued or disposed of the financial instrument.
The subsequent measurement of loans and receivables and held-to-maturity investments is at amortised cost, using the effective interest method (AASB 139.46). This method is defined in AASB 139.9. The calculation of the amortised cost includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts.
Origination fees are dealt with in AASB 118 "Revenue", Appendix paragraph 14(a)(i). Origination fees received by an entity relating to the creation or acquisition of a financial asset (not at fair value through profit or loss) are an integral part of generating an involvement with the resulting financial instrument and, together with the related direct costs, are deferred and recognised as an adjustment to the effective interest rate.
The issue is whether a “related direct cost” can be deferred and recognised as an adjustment to the effective interest rate when that direct cost is not incremental. Is the deferral of non-incremental related direct costs as an adjustment to the effective interest rate inconsistent with the requirements of AASB 139 relating to transaction costs?
AASB Decision:
The AASB decided not to add this project to the Urgent Issues Group’s agenda on the grounds that:
(a) AASB 139 allows only costs that are incremental to be included in determining the effective interest rate; other costs that are not incremental are excluded, even if they are related to the origination fee
(b) the Appendix guidance in AASB 118 does not override the specific requirements of AASB 139.
Top
6. July 2004 - Extended Payment terms
Issue:
How should accounting for extended payment terms, such as six-month’s interest-free credit be treated.
IFRIC Decision:
IAS 39 Financial Instruments: Recognition and Measurement applies to the receivable in such circumstances, and that the effect of the time value of money should be reflected when this is material (IAS 39 paragraphs AG69-AG82). IFRIC Members agreed not to add this issue to the agenda.
Top
7. July 2004 - Prompt settlement discounts
Issue:
How should prompt settlement discounts be treated.
IFRIC Decision:
Prompt settlement discounts should be estimated at the time of sale, and presented as a reduction in revenues. IFRIC members agreed that it should not provide guidance on making such estimates, and declined to add the issue to the agenda.
Top |
The Institute’s education and training pathway is the preferred choice for industry professionals.
Considering a career as a Chartered Accountant? Looking for the next step in your professional life?
The Institute is leading the debate in the areas that matter most to business and the accounting profession. 
The Institute produces an invaluable suite of tools, guidance, products and services to help members in their work. 
Print this Article
Email this Article
