12-13 September 2001, London
On 13 September, IASB met in open session. Technical subjects discussed included the following:
 Share-Based Payments: [Project Summary]
The Board had decided at its July meeting that it would not issue a discussion paper on SBP but, rather, an exposure draft. That was because IASC had already published the G4+1 Paper on SBPs. The Board debated whether a decision to bypass normal due process was a good idea and decided the following:
- IASB will re-issue the G4+1 SBP discussion paper.
- The paper will explain why this is on the IASB agenda, the adoption of the G4+1 paper by the IASB, the fact that previous comment letters need not be re-submitted, and that the IASB is seeking comments specifically on measurement issued around SBPs.
- Comment deadline: 15 December 2001.
- The Board will continue to discuss the issues surrounding SBPs in the interim.
IASB staff presented a paper on SBPs to the Board:
- After discussing arguments for and against recognition of SBPs as an expense, the paper recommends that the payments are expenses that should be deducted in measuring net profit or loss.
- The Board tentatively agreed with this proposal, subject to comments received on the discussion paper.
- Four measurement bases were discussed:
- Historical cost
- Intrinsic value
- Minimum value
- Fair value
- Fair value appeared to receive the most support.
- The paper will be redrafted addressing concerns and comments by IASB members, including treatment for unlisted companies and the use of option pricing models.
- This will be tabled at a future IASB meeting.
Insurance: [Project Summary]
- IASB briefly addressed -- and accepted -- the Steering Committee proposal to carry out field visits with insurance companies in 2001 to discuss practical issues on the basis of the current proposals in the Draft Statement of Principles, particularly the measurement of insurance contracts at entity-specific or fair value.
- The aim is to cover companies in as many as possible of the liaison countries plus, most likely, several additional countries.
- The Steering Committee has also proposed that IASB also should carry out a more comprehensive field test of the proposals in 2002.
First Time Application of IFRS: [Project Summary]
IASB continued its discussion on possible directions for revising the requirements regarding the transition to IFRS (which include IAS) in cases of a first-time application.
At this preliminary stage, the Board did not discuss detailed requirements but tried to identify whether certain key principles could be established, which would be applicable over time and regardless of the location of the company adopting IFRS for the first time. Some tentative principles, to be explored at the next meeting in October, were discussed as follows:
- An IASB Standard should deal with the issues of first-time application of IFRS. This Standard would replace the current guidance in SIC 8 and would override the current transitional requirements in IFRS in cases of first-time application of IFRS. Some preferences were expressed that the underlying principles in this Standard should be such that the Standard need not be revised every time the IASB issues a new or revised Standard.
- When performing the exercise of adoption of IFRS for the first time, some key dates need to be distinguished:
- the date when an enterprise presents its financial statements under IFRS for the first time; and
- the date when an enterprise applies IFRS for the first time to transactions and balances. A tentative view is that this latter date would be the beginning of the earliest financial year presented in the first set of IFRS financial statements. For example, any transitional employee benefit obligation under IAS 19 might be calculated at that date.
- As for the number of comparative periods to be presented under IFRS, the Board tentatively supported the idea that a reference should be made to IAS 1, which requires that comparative information should be disclosed at least in respect of the previous period. The Board tentatively considered that it was not within its mandate to interfere with securities regulators' requirements for additional comparative periods.
- In restating balances and prior transactions, an enterprise would use the standards that are applicable in the year when the enterprise presents its financial statements under IFRS for the first time. It would not use superseded or amended standards that may have been applicable at the time a transaction prior to the adoption of IFRS took place.
- The Board did not discuss the extent to which opening balances at the beginning of the earliest year presented and prior transactions would be restated. However, there was some support that certain transactions occurring before the beginning of the earliest year presented need not be restated. A business combination accounted for as a pooling-of-interests under local GAAP, which might have been classified as an acquisition under IFRS, was one of the examples that was discussed.
- The Board discussed whether, if a significant transaction or event that took place during a "look back" period (that is, a period occurring before the beginning of the earliest year presented, the length of which would need to be determined) were not restated, disclosure would need to be made to indicate that this transaction or event was not restated and the accounting treatment that was applied under local GAAP. The Board did not reach a conclusion as to whether such a disclosure is needed.
- In restating estimates at the end of the financial periods to be presented under IFRS for the first time, an enterprise would use the benefit of hindsight. That is, it would use the best information available at the time it presents its financial statements under IFRS for the first time. However, if a change in estimate can be associated with an identifiable discrete event (such as a change in a tax rate) that occurred before the enterprise presents its financial statements for the first time under IFRS, the financial statements would reflect the change in the estimate in the period when this discrete event took place.
On 12 September, IASB met in open session. Business combinations was the only technical subject discussed:
Business Combinations: [Project Summary]
Presentation by IASB Member Tatsumi Yamada
At its July meeting, the Board tentatively agreed that all business combinations should be accounted for as acquisitions using purchase accounting. Tatsumi Yamada (Japanese Liaison Member) felt that in Japan there were examples of transactions where it was not possible to identify an acquirer. He identified five examples.
In each of the cases, the pooling method was used. During discussion, Board members acknowledged that there are transactions that 'economic common-sense' suggests to be mergers and where fresh-start accounting would be appropriate; however, the Board previously agreed to leave this to phase two of the project.
The Board concluded that the five cases did not have any characteristics unique to Japan and that similar cases had been examined in reaching the conclusions implemented in the US and Canada.
The Board concluded that the position unique in Japan is a cultural one, where it is not acceptable to portray an acquiree and an acquirer. The Board hopes to address this by providing specific guidance for identifying an acquirer and to ask Mr. Yamada to provide wording making this more culturally acceptable in Japan.
Definitions and Scope
The definition of business combination from the previous meeting was discussed in draft format. It was felt necessary to tighten up exclusions, since those combinations scoped in would all be required to use purchase accounting. On this basis, it was felt appropriate to remove the word 'acquisitions' as it may result in misinterpretation. It was also felt that 'reporting entity' must be defined.
The Board will amend IAS22 rather than issue a new IFRS. Therefore, conclusions reached on presentation of standards issued by the new IASB will not apply.
The exposure draft should include the guidance that SIC has been developing on common control.
The Board discussed whether mergers by contract should be included in the scope of the standard or dealt with in phase two of the project. No decision was reached.
The Board discussed the linked subjects of step-acquisitions and presentation of minority interests. Discussion centred on whether step-acquisitions should be scoped in or put in to the consolidation project in phase two, and whether an increased holding in a subsidiary should be accounted for as a step-acquisition or as treasury stock. These issues will be discussed further in October.
The Board concluded that minority interest is an equity item, not a liability.
The Board discussed fresh-start accounting, particularly for circumstances in which an acquirer is clear but for tax/legal/practical reasons a new company is set-up to acquire both parties. In Australia, this transaction would be treated as if the new company were the acquirer (even if the substance is clearly to the contrary) with the combining parties both revalued to fair value. The Board had planned to consider fresh-start accounting in phase two, but it does not want amend IAS 22 in a way that stops countries already using the method from using it, only to re-introduce the method at a later date. Concerns were expressed about (1) the potential abuse of such a method if it was permitted without clear criteria for its use and (2) whether it is inconsistent with the guidance in IAS 22.12 on reverse acquisitions. The Board tentatively decided to remove IAS 22.12 from the exposure draft, to explain the discussion held, and to invite comment.
Intangibles other than goodwill and IPR&D
The illustrative list of potential acquired intangibles from FAS 141 will be included in the standard.
Accounting for intangibles with a finite useful economic life should follow IAS 38.
The Board agreed that intangible assets can have an indefinite (but not infinite) useful economic life, even if this requires subsequent actions. Guidance for identifying such assets will be included in the exposure draft. The Board concluded that such intangibles should be reviewed for impairment rather than amortised over an arbitrary period, but once the life of the asset becomes determinable, amortisation should commence. The IAS 36 impairment approach is to be used with an annual test for unamortised intangibles.
The Board agreed that revaluation should be allowed for intangible assets that (a) have an indefinite useful life and (b) are acquired in a business combination (using IAS 38 revaluation procedures) even if no active market exists for them. Otherwise this would be inconsistent with recognising the asset in the first place. IAS 38 may subsequently be amended to allow this for all acquired intangibles.
In-process research and development (IPR&D)
The Board's tentative view: both research and development acquired in an acquisition must be recognised as assets if they satisfy the normal acquired intangibles criteria -- even though an asset would not be recognised if such costs are incurred directly by the acquirer. Subsequent accounting will follow IAS 38.
The Board debated whether subsequent R&D expenditure relating to acquired IPR&D should be treated under paragraphs 42 and 45 of IAS 38 (no capitalisation of any research and capitalisation of development only after strict commercial viability criteria are met) or whether paragraph 60 (all subsequent expenditure adds to the original IPR&D asset, subject to impairment) should apply. The concern expressed with the second option is if a minimal amount, say $20, of research is acquired and capitalised, then a further expenditure of $20 billion can be capitalised. The $20 billion would not have been capitalised if the initial $20 not been acquired. The Board saw this as a potential abuse and concluded that paragraphs 42 and 45 should apply.
Goodwill
Initial discussion considered whether goodwill is an asset. Most standard-setters say that it is (although not UK or Germany, although they still capitalise the cost). Under IAS it is considered an asset although it does not appear to meet the criteria in the Framework. The Board concluded that it is an asset, because the purchase price was paid for a reason, although it is not a separately measurable asset.
The Board concluded that non-amortisation was the correct treatment for goodwill, with an impairment test that is stringent but does not create an onerous implementation workload. The Board noted that this conflicted with the 4th EU Directive.
Issues relating to the impairment test were debated, with Board conclusions noted:
- Level at which the test should be applied: The existing definition of 'cash-generating unit' should be strengthened to mean the lowest level possible within the existing management structure, to minimise the cost of performing the exercise.
- The value-in-use measure in IAS 36 will be retained.
- The IAS 36 guidance on the assumptions permitted in assessing the worth of goodwill (budgets, growth rates, etc.) will also be retained, but the expected value notion will now be required, not just permitted.
- The comparison should include assets and liabilities that were unrecognised at the date of acquisition but that would be recognised if the purchase took place on the date the test is being performed. However, this is necessary only if an initial review at the unit level has indicated impairment. This effectively means a two-step test.
- Where detailed calculations have been necessary for the company to illustrate that there is no impairment or what the level of impairment is, these should be reviewed in subsequent periods to ensure that they are comparable with the actual results achieved. The frequency of such tests is to be further debated at the next meeting.
Summary of the 10-11 September 2001 Meeting with National Standard Setters
Business combinations: The Japanese standard-setter presented a paper stating that they believe that there are transactions where an acquirer cannot be identified. They accept that these situations may be rare but believe that there does need to be a standard for these situations. They believe that the 'fresh start' approach is not appropriate for these true merger situations. The treatment adopted affects the Japanese taxation system. The matter was discussed and issues such as the definition of these special circumstances were considered.
Share based payments: IASB staff presented a paper on share based payments. The key points are as follows:
- The only existing standard is FAS 123, but this requires recognition only in limited circumstances.
- The German standards board hopes to issue a draft standard soon that will require recognition and expensing of the payments.
- The Danish standards board is issuing a similar draft standard and will continue to monitor international developments.
- US analysts are not content with the information provided by FAS 123, and FASB recognises that something further needs to be done to provide transparent, comparable and high quality information in relation to share based payments.
- All standard setters voiced concerns about being seen to 'go it alone', that is, they all want to pursue the project on an international basis.
- The project will cover all SBP issues: recognition, timing and methodology for measurement, and other issues such as lapsed/forfeited options.
- The Canadian ASB expects to issue a final standard strongly encouraging the FAS 123 approach in the near future.
- UK ASB reported considerable support for the G4+1 paper from the user community, but there remains a huge difference of opinion on how the payments should be measured.
- Concern was raised in relation to the communication process and the fact that IASB intends to go straight to an exposure draft as opposed to issuing a discussion paper. The Board will discuss this further later this week.
- Australian ASB reported that they are happy to put this on their agenda and to work with the IASB on this project. They also reported that there is currently significant legislative pressure in relation to disclosure of directors remuneration in Australia.
- Japan reported that this is not now on their agenda, but the issue should be pursued. They are concerned about the process and made the comment that the G4+1 paper is not a substitute for an IASB discussion paper.
Improvements project: The IASB project leader reviewed the background to this project and asked liaison standard setters for their comments on the proposals to eliminate choices within existing IASs:
FIFO/LIFO - IAS 2 Inventories: The Sub-committee proposes that the LIFO alternative be prohibited. Comments: Many of the standard setters reported tax complications that would arise if LIFO were banned. The possibility of using IASs only for group accounts and allowing individual entities to use LIFO was discussed.
Fundamental errors - IAS 8: The Sub-committee proposes that all errors (whether or not fundamental) should be corrected by restating prior period financial statements Comments: The Japanese commercial code does not permit restatement of financial statements; and UK ASB reported adverse reaction in the UK to trying to drop the 'fundamental' element of the requirement.
Change in accounting policy: The Sub-committee proposes a requirement to restate prior period financial statements for all changes in accounting policy. No comments were raised.
Leases - IAS 17: The Sub-committee proposes to prohibit allocating initial direct costs over the lease period. Comments: Japan commented that it was expensing that should be prohibited; and the UK commented that were many more fundamental issues that should be addressed in relation to IAS 17 and that it could send out the wrong signals to issue a minimally revised standard. Canada supported these comments.
Translation of goodwill and fair value adjustments - IAS 21: The Sub-committee proposes the use of the closing rate. It was suggested that there were many other issues that needed to be dealt with in IAS 21.
Borrowing costs - IAS 23: The Sub-committee proposes the prohibition of capitalisation. Comments: Australia commented that this is a big question and not really suitable for a quick fix, as there are likely to be diverse views; and
FASB commented that if capitalisation is allowed to remain that it is important that there be adequate guidance on how to capitalise.
Investments in subsidiaries and associates - IAS 27 and 28: The Sub-committee proposes the use of the equity method only. Many comments were made in relation to whether or not IASs should be applied to group accounts or individual entities. This will be discussed further by the Board.
Joint ventures - IAS 31: The Sub-committee proposes the use of the equity method only. The UK commented that the committee need to think carefully about joint ventures in all circumstances, including those in which the joint venture is not an entity.
IAS 39 excluding derecognition: IASB staff plans to present proposed revisions to IAS 39 to the Implementation Guidance Committee in September and then to the Board in November.
Derecognition (financial instruments): IASB staff has identified the differences between FAS 125/140 and IAS 39 and is developing a proposal for convergence. Plans to report to the Board in November.
Banking activities: The IASB advisory committee has been broadened to include non-bankers. Expanded committee will meet later this month.
Performance reporting: IASB staff hopes to present a draft statement of principles and a project plan to the November meeting.
Insurance contracts: IASB discussions will take place later this week.
Business combinations phase two: FASB has put this on its agenda. The principal focus is purchase accounting procedures and purchase price allocation. The Canadian ASB is working with the IASB and FASB toward a converged standard.
Consolidation policy: UK ASB sent out a questionnaire in August requesting data on six consolidation issues.
Derecognition (other than financial instruments): UK ASB is developing a project plan.
Financial instruments Joint Working Group proposal: IASB has received many responses to date and an analysis is underway. Staff hopes to report to the Board in January.
Leasing: UK ASB hopes to be able to share its project plan with IASB soon.
Small businesses/emerging economies: The Board was challenged as to why these projects had been combined.
Management's discussion and analysis: UK ASB is currently updating its statement on operating and financial reviews and is liasing with the FASB.
Discontinuing operations: FASB has completed its deliberations and a new statement (FAS 144) will be issued later this month, effective 15 Dec. 2001.
Agriculture: The Australian standard is very similar to IAS 41 and AASB has been monitoring implementation experience with a view to reporting back to the IASB on findings.
First-time application of International Financial Reporting Standards: [Project Summary]
The IASB working group has concluded that SIC-8 needs modification to provide true comparability. The proposals for a new standard are as follows:
-- On first-time application entities should apply the standards that are in existence at that time;
-- Should be applied both to the current year and a required number of prior years;
-- The date of adoption is the commencement of the first year of presentation;
-- There will be a 'look back' period (length to be determined) for which significant events should be disclosed, but not restated; and
-- Impracticability exemption permitted by SIC-8 will be removed.
Initial proposals also suggest that this new standard should replace all transitional rules provided in IFRSs. This proposal raised some concerns among the Board and further discussion is expected. In addition, consideration is required in respect of the use of hindsight when applying standards retrospectively, for instance, knowing that a provision should have been recognised at a particular point.
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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