CA Kamal Garg
The International Financial Reporting Interpretations Committee (IFRIC) issued IFRIC 17 Distributions of Non-cash Assets to Owners. IFRIC 17 is to be applied prospectively for annual periods beginning on or after 1 July 2009. This Interpretation provides guidance on the appropriate accounting treatment when an entity distributes assets other than cash as dividends to its shareholders. The specific questions addressed in the Interpretation are:
The most significant conclusion reached by the IFRIC is that the dividend should be measured at the fair value of the assets distributed, and that any difference between this amount and the previous carrying amount of the assets distributed should be recognised in profit or loss when the entity settles the dividend payable. This accounting treatment will result in a change in practice in many jurisdictions. Importantly, the Interpretation does not apply to distributions of non-cash assets where the asset is ultimately controlled by the same party or parties before and after the distribution (e.g. distributions of non-cash assets between entities under common control) which is the most common circumstance in which such distributions occur. The Interpretation has also resulted in consequential amendments to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations regarding the appropriate treatment of the non-cash assets held for distribution.
In general terms, the Interpretation applies to non-reciprocal distributions of non-cash assets made by an entity to its shareholders acting in their capacity as owners. This includes:
This Interpretation excludes the following from its scope:
Recognition of the dividend payable:
The Interpretation follows the general principle that an entity should recognise a liability when it has incurred an obligation to pay that liability. In the context of non-cash distributions, the point at which an obligation arises is the point at which the dividend is appropriately authorised (and is no longer at the discretion of the entity), which will vary according to the legal requirements in particular jurisdictions. IFRIC 17 concludes that the entity should recognise a liability for a non-cash distribution:
Measurement of the dividend payable
The liability should be measured at the fair value of the non-cash assets to be distributed. If shareholders have a choice of receiving either a non-cash asset or a cash alternative, the liability should be measured considering both the fair value of each alternative and management’s assessment of the probabilities for each outcome.
Accounting for any difference
When an entity settles the dividend payable, IFRIC 17 requires that it should recognise the difference, if any, between the carrying amount of the assets distributed and the carrying amount of the dividend payable in profit or loss.
Presentation and disclosure
Amounts recognised in profit or loss as a result of a non-cash distribution (as described in the example above) are required to be presented as a separate line item in profit or loss. For liabilities recognised in the statement of financial position at the end of the reporting period, the entity is required to disclose:
If, after the end of the reporting period but before the financial statements are authorised for issue, the entity declares a non-cash dividend, this is a non-adjusting event after the reporting period. In such circumstances, the entity is required to disclose:
Non-cash assets held for distribution (amendments to IFRS 5)
Non-cash assets held for distribution to owners are now specifically scoped in to IFRS 5 and should be treated in accordance with IFRS 5’s classification, presentation and measurement requirements.
Whether or not a non-cash asset is classified as ‘held for distribution to owners’ is determined using IFRS 5’s general principles regarding whether the transaction is highly probable. Reclassification under IFRS 5 can be triggered in advance of approval by shareholders, but it will be necessary to consider the probability of that approval being obtained (if required in the jurisdiction) as part of the assessment as to whether the transaction is highly probable.
When the non-cash asset is classified as held for distribution to owners, it is remeasured at the lower of its carrying amount and fair value less costs to distribute, with any adjustment to carrying amount recognised in accordance with the general principles of IFRS 5. Therefore, where the fair value less costs to distribute of an asset accounted for using the cost model is less than its carrying amount, an impairment loss should be recognised in profit or loss. Where the fair value less costs to distribute is higher than the carrying amount, no adjustment is made until the distribution is made.
The author is the Fellow Member of ICAI. He is engaged in IFRS – Audit and Advisory, FEMA, Valuation and XBRL Services. He can be approached at firstname.lastname@example.org