Commission Regulation (EC) No 1329/2006 of 8 September 2006 amending Regulation (EC) No 1725/2003 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council as regards the International Financial Reporting Interpretations Committee's (IFRIC's) Interpretations 8 and 9   (Text with EEA relevance)
Date: 2006-09-08
Institutions: European Commission
Subjects: accounting, capital market, financial transaction, information, international standard, single market, standardised accounting system

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COMMISSION REGULATION (EC) No 1329/2006

of 8 September 2006

amending Regulation (EC) No 1725/2003 adopting certain international accounting standards in
accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council
(IFRIC's)
as

Interpretations Committee's

Financial Reporting

International

regards

the

Interpretations 8 and 9

(Text with EEA relevance)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(5)

Regulation (EC) No 1725/2003 should therefore be
amended accordingly.

Having regard to the Treaty
Community,

establishing the European

(6)

The measures provided for in this Regulation are in
accordance with the opinion of the Accounting Regu-
latory Committee,

Having regard to Regulation (EC) No 1606/2002 of
the
European Parliament and of the Council of 19 July 2002 on
the application of international accounting standards (1), and in
particular Article 3(1) thereof,

HAS ADOPTED THIS REGULATION:

Whereas:

(1)

(2)

(3)

(4)

By Commission Regulation (EC) No 1725/2003 (2)
certain international standards and interpretations that
were extant at 14 September 2002 were adopted.

International

On 12 January 2006,
Financial
the
Reporting Interpretations Committee (IFRIC) published
IFRIC Interpretation 8 Scope of IFRS 2. IFRIC 8 clarifies
the accounting standard International Financial
that
Reporting Standard (IFRS) 2 Share-based Payment applies
to arrangements where an entity makes share-based
payments for apparently nil or inadequate consideration.

On 1 March 2006, IFRIC published IFRIC Interpretation
9 Reassessment of Embedded Derivatives. IFRIC 9 clarifies
certain aspects of the treatment of embedded derivatives
under
Instruments: Recognition and
Measurement.

IAS 39 Financial

The consultation with the Technical Expert Group (TEG)
of
the European Financial Reporting Advisory Group
(EFRAG) confirms that IFRIC 8 and IFRIC 9 meet the
technical criteria for adoption set out in Article 3(2) of
Regulation (EC) No 1606/2002.

(1) OJ L 243, 11.9.2002, p. 1.
(2) OJ L 261, 13.10.2003, p. 1. Regulation as last amended by Regu-

lation (EC) No 708/2006 (OJ L 122, 9.5.2006, p. 19).

Article 1

The Annex to Regulation (EC) No 1725/2003 is amended as
follows:

1. The

International

Interpretations
Committee’s (IFRIC's) Interpretation 8 Scope of IFRS 2 is
inserted as set out in the Annex to this Regulation;

Reporting

Financial

2. IFRIC's Interpretation 9 Reassessment of Embedded Deri-
vatives is inserted as set out in the Annex to this Regulation.

Article 2

(1)
Each company shall apply IFRIC 8 as set out in the
Annex to this Regulation as from the commencement date of
its 2006 financial year at the latest, except for companies with a
January, February, March or April commencement date which
shall apply IFRIC 8 as from the commencement date of the
2007 financial year at the latest.

Each company shall apply IFRIC 9 as set out in the
(2)
Annex to this Regulation as from the commencement date of
its 2006 financial year at the latest, except for companies with a
January, February, March, April or May commencement date
which shall apply IFRIC 9 as from the commencement date
of the 2007 financial year at the latest.

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This Regulation shall enter into force on the third day following its publication in the Official Journal of the
European Union.

Article 3

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels, 8 September 2006.

For the Commission

Charlie McCREEVY
Member of the Commission

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ANNEX

INTERNATIONAL FINANCIAL REPORTING STANDARDS

IFRIC 8

IFRIC 9

IFRIC Interpretation 8 Scope of IFRS 2

IFRIC Interpretation 9 Reassessment of Embedded Derivatives

‘Reproduction allowed within the European Economic Area. All existing rights reserved outside the EEA, with
the exception of the right to reproduce for the purposes of personal use or other fair dealing. Further infor-
mation can be obtained from the IASB at www.iasb.org’

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IFRIC INTERPRETATION 8

Scope of IFRS 2

References
— IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
— IFRS 2 Share-based Payment

Background
1. IFRS 2 applies to share-based payment transactions in which the entity receives or acquires goods or services. ‘Goods’
includes inventories, consumables, property, plant and equipment, intangible assets and other non-financial assets
(IFRS 2, paragraph 5). Consequently, except for particular transactions excluded from its scope, IFRS 2 applies to all
transactions in which the entity receives non-financial assets or services as consideration for the issue of equity
instruments of the entity. IFRS 2 also applies to transactions in which the entity incurs liabilities, in respect of goods
or services received, that are based on the price (or value) of the entity’s shares or other equity instruments of the
entity.

2. In some cases, however, it might be difficult to demonstrate that goods or services have been (or will be) received.
For example, an entity may grant shares to a charitable organisation for nil consideration. It is usually not possible to
identify the specific goods or services received in return for such a transaction. A similar situation might arise in
transactions with other parties.

3. IFRS 2 requires transactions in which share-based payments are made to employees to be measured by reference to
the fair value of the share-based payments at grant date (IFRS 2, paragraph 11) (*). Hence, the entity is not required
to measure directly the fair value of the employee services received.

4. For transactions in which share-based payments are made to parties other than employees, IFRS 2 specifies a
rebuttable presumption that the fair value of the goods or services received can be estimated reliably. In these
situations, IFRS 2 requires the transaction to be measured at the fair value of the goods or services at the date the
entity obtains the goods or the counterparty renders service (IFRS 2, paragraph 13). Hence, there is an underlying
presumption that the entity is able to identify the goods or services received from parties other than employees. This
raises the question of whether the IFRS applies in the absence of identifiable goods or services. That in turn raises a
further question: if the entity has made a share-based payment and the identifiable consideration received (if any)
appears to be less than the fair value of the share-based payment, does this situation indicate that goods or services
have been received, even though they are not specifically identified, and therefore that IFRS 2 applies?

5. It should be noted that the phrase ‘the fair value of the share-based payment’ refers to the fair value of the particular
share-based payment concerned. For example, an entity might be required by government legislation to issue some
portion of its shares to nationals of a particular country, which may be transferred only to other nationals of that
country. Such a transfer restriction may affect the fair value of the shares concerned, and therefore those shares may
have a fair value that is less than the fair value of otherwise identical shares that do not carry such restrictions. In this
situation, if the question in paragraph 4 were to arise in the context of the restricted shares, the phrase ‘the fair value
of the share-based payment’ would refer to the fair value of the restricted shares, not the fair value of other,
unrestricted shares.

Scope
6. IFRS 2 applies to transactions in which an entity or an entity’s shareholders have granted equity instruments (**) or
incurred a liability to transfer cash or other assets for amounts that are based on the price (or value) of the entity’s
shares or other equity instruments of the entity. This Interpretation applies to such transactions when the identifiable
consideration received (or to be received) by the entity, including cash and the fair value of identifiable non-cash
consideration (if any), appears to be less than the fair value of the equity instruments granted or liability incurred.
However, this Interpretation does not apply to transactions excluded from the scope of IFRS 2 in accordance with
paragraphs 3 to 6 of that IFRS.

Issue

7. The issue addressed in the Interpretation is whether IFRS 2 applies to transactions in which the entity cannot identify

specifically some or all of the goods or services received.

(*) Under IFRS 2, all references to employees include others providing similar services.
(**) These include equity instruments of the entity, the entity’s parent and other entities in the same group as the entity.

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Consensus

8. IFRS 2 applies to particular transactions in which goods or services are received, such as transactions in which an
entity receives goods or services as consideration for equity instruments of the entity. This includes transactions in
which the entity cannot identify specifically some or all of the goods or services received.

9. In the absence of specifically identifiable goods or services, other circumstances may indicate that goods or services
have been (or will be) received, in which case IFRS 2 applies. In particular, if the identifiable consideration received (if
any) appears to be less than the fair value of the equity instruments granted or liability incurred, typically this
circumstance indicates that other consideration (i.e. unidentifiable goods or services) has been (or will be) received.

10. The entity shall measure the identifiable goods or services received in accordance with IFRS 2.

11. The entity shall measure the unidentifiable goods or services received (or to be received) as the difference between the
fair value of the share-based payment and the fair value of any identifiable goods or services received (or to be
received).

12. The entity shall measure the unidentifiable goods or services received at the grant date. However, for cash-settled

transactions, the liability shall be remeasured at each reporting date until it is settled.

Effective date

13. An entity shall apply this Interpretation for annual periods beginning on or after 1 May 2006. Earlier application is
encouraged. If an entity applies this Interpretation to a period beginning before 1 May 2006, it shall disclose that
fact.

Transition

14. An entity shall apply this Interpretation retrospectively in accordance with the requirements of IAS 8, subject to the

transitional provisions of IFRS 2.

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IFRIC INTERPRETATION 9

Reassessment of Embedded Derivatives

References
— IAS 39 Financial Instruments: Recognition and Measurement
— IFRS 1 First-time Adoption of International Financial Reporting Standards
— IFRS 3 Business Combinations

Background
1. IAS 39 paragraph 10 describes an embedded derivative as ‘a component of a hybrid (combined) instrument that also
includes a non-derivative host contract — with the effect that some of the cash flows of the combined instrument vary
in a way similar to a stand-alone derivative.’

2. IAS 39 paragraph 11 requires an embedded derivative to be separated from the host contract and accounted for as a

derivative if, and only if:

(a)

the economic characteristics and risks of the embedded derivative are not closely related to the economic
characteristics and risks of the host contract;

(b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative;

and

(c)

the hybrid (combined) instrument is not measured at fair value with changes in fair value recognised in profit or
loss (ie a derivative that is embedded in a financial asset or financial liability at fair value through profit or loss is
not separated).

Scope

3. Subject to paragraphs 4 and 5 below, this Interpretation applies to all embedded derivatives within the scope of IAS

39.

4. This Interpretation does not address remeasurement issues arising from a reassessment of embedded derivatives.

5. This Interpretation does not address the acquisition of contracts with embedded derivatives in a business combination

nor their possible reassessment at the date of acquisition.

Issue

6. IAS 39 requires an entity, when it first becomes a party to a contract, to assess whether any embedded derivatives
contained in the contract are required to be separated from the host contract and accounted for as derivatives under
the Standard. This Interpretation addresses the following issues:

(a) Does IAS 39 require such an assessment to be made only when the entity first becomes a party to the contract, or

should the assessment be reconsidered throughout the life of the contract?

(b) Should a first-time adopter make its assessment on the basis of the conditions that existed when the entity first

became a party to the contract, or those prevailing when the entity adopts IFRSs for the first time?

Consensus

7. An entity shall assess whether an embedded derivative is required to be separated from the host contract and
accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is
prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that
otherwise would be required under the contract,
in which case reassessment is required. An entity determines
whether a modification to cash flows is significant by considering the extent to which the expected future cash
flows associated with the embedded derivative, the host contract or both have changed and whether the change is
significant relative to the previously expected cash flows on the contract.

8. A first-time adopter shall assess whether an embedded derivative is required to be separated from the host contract
and accounted for as a derivative on the basis of the conditions that existed at the later of the date it first became a
party to the contract and the date a reassessment is required by paragraph 7.

Effective date and transition

9. An entity shall apply this Interpretation for annual periods beginning on or after 1 June 2006. Earlier application is
encouraged. If an entity applies the Interpretation for a period beginning before 1 June 2006, it shall disclose that fact.
The Interpretation shall be applied retrospectively.