 Reporting Recognised Income and Expenses.
This is the new working title of the project on performance reporting. The Board was asked for initial reactions on the following specific issues identified by the IASC Performance Reporting Steering Committee:
- Changes in Estimates - No changes were proposed to the IAS 8 treatment, but the difference between a change in estimate, change in policy and error need to be more clearly defined.
- Changes in Accounting Policy - There was general agreement by the Board members that there should be only one method of accounting for changes in accounting policy, namely restatement of prior periods, unless impractical to do so.
- Corrections of Errors - There was general agreement that the distinction between fundamental errors and errors should be removed. All errors should be treated in the same way as changes in accounting policy.
- Extraordinary Items - The Steering Committee supports abolishing extraordinary items. While Board discussion seemed sympathetic with the steering committee view, the Board deferred a decision on this pending decisions on the format of the new reporting statement.
- Unusual Items - The Steering Committee supports the retention of this concept. However preliminary consensus is that they should not be separately classified on the face of the income statement (though possibly separately disclosed within a particular class of income or expense). Disclosures would also be made in the notes.
Banking Disclosure
Staff made a presentation on the progress of the steering committee on IAS 30. The IAS 30 Steering Committee believes that a separate Standard for banks and similar financial institutions should remain and that increased guidance will have big benefits. Reasons to revise IAS 30:
Eliminate redundancies with other IAS
- Offsetting requirements - IAS 32
- Fair value disclosure - IAS 32
- Related party disclosure - IAS 24
- Loan loss recognition - IAS 39
Update of IAS 30 disclosure guidance
- Balance sheet disclosures
- Income statement disclosures - including loan loss
- Off balance sheet exposure
- Trust activities
Raise Disclosure Level of Banking Activities Within IAS/IFRS
Two key disclosure areas are were discussed, based on suggestions from regulatory and user bodies. Note these requirements already exist in many countries:
- Risk management and exposure
- Regulatory capital adequacy
The Board debated the need for these disclosures in general purpose financial reports, in particular whether such items would be required of other entities. Although support exists for extended disclosure, Board members expressed concern about creating a long list of disclosures in the absence of demonstrated need. Areas for which expanded disclosure is considered necessary include:
- Credit risk exposure
- Other risk exposures
- Risk management policies
- Capital adequacy
The large number of responses received by the Basle Committee on their proposed disclosures indicates the high level of interest in the project. Therefore, the Board intends to continue with the project. It concluded that the Steering Committee should be reconstituted as an Advisory Group and expanded to include the involvement of analysts and users. They should continue to draft an Exposure Draft. The Board has asked that the Advisory Group consider the extent to which the proposed requirements apply to entities other than banks and the effect of dispersing the proposed requirements throughout other IAS standards. This would address concerns that some of the proposed requirements should relate to non-banking entities where there are significant lending activities. It would also avoid incremental guidance solely for banks that relates to many industries.
Measurement.
Two papers were discussed, one by Andrew Lennard, Deputy Technical Director of the UK ASB, and Geoff Whittington, and the other by Warren McGregor.
- The measurement project would seek a consistent approach related to selection of the appropriate measurement objective for items recognised in the financial statements. There was general agreement that the aim is to recognise assets at what they are worth, but the question 'value to whom?' remains.
- The Board discussed fair value, replacement cost, net selling price, and value in use as bases for measurement, including how to define them and difficulties in applying them.
- Some of the main issues to be resolved include:
- Valuations where there is no active market or, alternatively, multiple markets.
- Measuring fair value for assets, such as tangible plant and equipment, where separate cash flows do not exist.
- Measuring fair value when transaction costs are significant.
- One measurement attribute for all assets in all circumstances versus different attributes for different circumstances.
- Aggregation - at what level should the measurement take place.
- Measurement of specialised assets.
- The objective of measurement - is it recovery of cost incurred or reflection of some sort of current value.
- No decisions were reached during the meeting in respect of the above issues.
- Future of the project:
- This project will be all embracing as it has an effect not only on measurement of assets and liabilities but also on performance reporting (are changes in value are of a capital or income nature). Therefore the project will be a long-term one and would most likely result in a change to the Framework.
- However, convergence remains the key priority for the Board.
- The Board will try to improve consistency of some aspects of measurement as part of the improvements project.
- A paper will be prepared for the Board that will take an inventory of how assets and liabilities are currently measured under the existing standards.
- The Board will consider the measurement paper that was previously presented to the G4+1 as part of their discussion on impairment.
Preface.
The Board continued to discuss a draft Preface to International Financial Reporting Standards. It was agreed, among other things, that:
- IFRS where applicable, would apply to incorporated and unincorporated entities and encouragement is given for the use of IFRS by non-public entities
- IFRS would always include transitional provisions
- SIC reorganisation still to be incorporated
- Regarding due process leading to a final Standard, a Discussion Document may not always be issued but an exposure draft and basis for conclusions will always be published.
- It was agreed that the Preface would be exposed for public comment, subject to discussion with the Advisory Council.
- Comments will be sought regarding the black letter/grey letter distinction, the clarity of the scope and authority of IFRS, an approach to dealing with effective dates and transition, and due process.
Business Combinations.
Staff presented an overview of the issues in respect of Business Combinations. The focus was on comparative treatments in the liaison countries.
- The Board concluded that there should be two phases to this project.
- Phase one would address:
- Whether there should be one or two methods of accounting for business combinations. Board member comments suggest substantial support for purchase accounting and prohibition of the pooling of interests method. There was general consensus that true mergers do not exist and having only one method will avoid ongoing definitional issues. The Board also discussed the fresh start method as an alternative to uniting of interests. While deciding to investigate this approach further, the Board noted that by recording fair values and possibly goodwill for both entities, this method is likely to have little acceptance.
- Definition of business combinations.
- Definition of transactions between enterprises under common control so that these can be scoped out of accounting for business combinations.
- Business combinations involving more than two entities.
- Goodwill and intangibles: subsequent measurement, impairment testing, and amortisation.
- Negative goodwill.
- Phase two would include:
- Accounting for interests in joint ventures.
- Joint venture financial statements.
- Accounting for transactions between entities under common control.
- Other related projects include:
- Acquisition provisions: To be included in either the improvements project or phase one of the business combinations project.
- Purchased research and development in a business combination to be dealt with in the research and development project.
- Reverse acquisitions: Practical guidance is needed, perhaps to be issued by the SIC.
- The Board accepted that this was a high priority project but that it could not commit to the project before consultation with the Standards Advisory Council.
SIC.
The Board confirmed its policy that the Board will have an opportunity to comment on draft SIC Interpretations before they are exposed publicly, if there are no objections. Five new draft Interpretations will be released to the Board for a one-week comment period on Monday 2 July. It is expected that these will be issued for public comment a week later.
IAS 39 Implementation Guidance Committee.
Batch 5 of the IGC Q&A's has been finalised and a consolidated IAS 39 guidance publication incorporating Batches 1-5 is expected to be issued shortly. [It Was Published 2 July.] IASB will publish a consolidated publication incorporating IAS 32, IAS 39, SIC interpretations on financial instruments, IGC final Q&A's Batches 1 to 5, and the draft Batch 6 Q&A's.
Improvements Project.
The Improvements Project subcommittee has met and will present a series of papers at the July IASB meeting. The papers will set out a roadmap for amending individual Standards. The summary of the comment letters is around 600 pages long.
Liaison.
Liaison arrangements with national standard setters were discussed, and a paper addressing those relationships will be submitted to the Board in July.
Board Agenda.
The Board discussed the potential agenda items to be submitted to the SAC at its 23-24 July meeting. The following is based on that discussion:
The projects that the Board seems to consider of high priority are:
- Improvements (including transition)
- Preface
- Reporting financial performance
- Measurement
- Share-based payments
- Measurement of financial instruments at fair value
- Business combinations
- Consolidation policy
- Derecognition
- Banking activities: disclosure and presentation
- Insurance contracts
- Limited amendments to IAS 39
Second level projects are:
- Definitions of elements of financial statements in the framework
- Intangible assets
- Leases
- Extractive industries
- Impairment
- Revaluation of non-financial assets
On the Board's meeting agendas for July and September are tentatively:
July
- Board agenda
- Working procedures with national standard setters
- Share based payments
- Business combinations
- Preface
- Improvements
- Transition
September
- Business combinations
- Reporting recognised income and expense (performance reporting)
- Insurance contracts
- Meeting with national liaison standard setters
This summary is based on notes taken by observers at the IASB meeting and should not be regarded as an official or final summary.
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